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Ethereum: The Merge

The Merge is finally complete. Energy consumption is expected to drop by 99.95%. It will not reduce gas fees or increase transaction speeds. More upgrades are incoming.

Sep 19, 2022
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Executive Summary

  • The Merge was finally completed on 15 September 2022. It is Ethereum’s transition to a Proof-of-Stake consensus mechanism and proponents expect it to set the stage for significant improvements in scalability.
  • Ethereum’s energy consumption is expected to drop by ~99.95% after The Merge, as the conditions for a computational power arms race are removed.
  • Some common misconceptions about The Merge are that it will reduce gas fees and significantly increase transaction speeds. But it is the first step toward potential future upgrades and scaling activities that will address these issues.
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  • The Merge will greatly reduce ETH issuance. Before The Merge, approximately 13,000 ETH is issued daily for miner rewards, while 1,600 ETH is issued for staking rewards. In other words, the total daily issuance is 14,600 ETH.
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  • After The Merge, only the 1,600 ETH issuance for staking rewards (rewards for validators who attest to and propose blocks) will remain. Thus, the total new ETH issuance will decrease by around 90% after The Merge. The burn mechanism introduced by EIP-1559 would burn at least 1,600 ETH daily, assuming an average gas price of at least 16 gwei. This would effectively result in zero net ETH inflation or less (i.e., deflationary ETH) after The Merge.
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  • There have been some concerns on whether layer-2 solutions are still relevant after The Merge. Since it has been clarified by the Ethereum Foundation that The Merge would not lower Ethereum’s gas fees, layer-2s can still continue to play an important role because of their lower gas fees.
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  • According to Vitalik Buterin, Ethereum is only ‘40% complete’. Even after The Merge, Ethereum will only be approximately 55% complete. After The Merge, Ethereum will still undergo upgrades such as the Surge, Verge, Purge, and Splurge. These upgrades are expected to happen in parallel, according to Vitalik.
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  • The Surge refers to sharding, which splits a database horizontally to spread the load. Sharding will help Ethereum to scale while still maintaining decentralisation. With sharding, validators no longer need to store the entire database, which helps to reduce costs of storage, as well as lower hardware requirements.
  • The Verge is a technical upgrade that proposes to transition from Merkle trees to Verkle trees. Its purpose is to solve the problem of the Ethereum blockchain getting larger in size as time goes by. Switching to Verkle trees will only require block proposers to store state, and allow all other nodes to verify blocks statelessly. This would help to maintain the scalability and sustainability of Ethereum.
  • After The Purge upgrade, not all nodes have to permanently store all of the historical blocks. Clients can stop storing history that is older than one year. This would help to reduce the hardware requirements for nodes, as well as the bandwidth of the network.
  • Finally, The Splurge consists of various miscellaneous upgrades that help to simplify the use of Ethereum for average users. It will also help to check network performance after implementing the above upgrades.

Read the full report: Ethereum: The Merge


Authors

Andrew Ho (Senior Research Analyst)

William Wu (Senior Research Analyst)


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