Ethereum currently works on a Proof of Work model (consensus mechanism). The highly anticipated merge will transform this model to Proof of Stake, which is more environmentally friendly set-up.
In Proof of Work world, the miners contest to solve a complex mathematic tasks to validate transactions and get rewarded. The miner that is able to solve it first will get a reward for the hard work that he has put in. This process is very energetically demanding.
Mechanics behind P-o-W are extremely reliable, resistent, resilient and safe, but energy intensive.
In Proof of Stake world, transactions are validated by those who stake their ETH and this way contribute to the network. This is supposed to be a more eco-friendly (up to 98% reduction in energy consuption), efficient, faster and cheper approach.
Ethereum network is the most widely used blockchain. The number of developers on ethereum is growing every day. There are approx. 30 mil. active wallets on Ethereum network (the most popular wallet being metamask).
10% of all ETH in circulation are staked, with 390K validators, this makes it the most decentralized blockchain. Solo validators need at least 33 ETH, otherwise the liquidity pools must be used.
The amount of staked ETH is bigger than the total market capitalization of the 2nd biggest PoS blockchain – Solana (SOL).
What does the upgrade/merge of ETH mean?
The consensus layer, Beacon chain, a parallel blockchain (serving as a test for PoS) will merger with execution layer ETH (based on PoW), the result will be Ethereum working on PoS model (also called ETH 2.0).
This should allow the bigger adoption, cheaper and faster transactions (lower gas fees – if the network doesn’t have so many transactions the gas fees go down but in case there’s a traffic jam, there are many transactions, the gas fees go up).
There will be no difference from the user perspective.
The merge has 3 phases:
1. Beacon chain – PoS ETH chain, the very first stage, this is the test phase, testing of PoS concensus
2. The merge – existing ETH blockchain will merge with beacon chain and this will become ETH 2.0 (ETH 2.0 – this name caused confusion, hence this terminology has been changed)
3. Shard chains – scalability solutions on ETH (ETH at this moment can handle 15 transactions per second), sidechains and rollups (64 blockchians in parallel, up to 100 transactions per second). Sharding process is breaking large amounts of data into smaller pieces allowing the network work at faster speed. I will be covering sidechains and rollups in a different post.
Will the gas fees go down ?
The merge is not going to completely solve the gas fees, the gas fees are should be solved with the implementation of the shard chains in 2023.
Price potential for ETH
1. 4% – at this moment, the rewards for validators is 4%. After the merger, reward will go up to 10%, this will make staking more attractive and much more people staking = higher demand = upward pressure
2. ETH will be more ECO-friendly and this can attract ore institutionl investors
3. At this moment, ETH is inflationary, the merge will lead to deflationary behavior = more scarce
4. Network adoption = higher demand (Mark Cuban sees ETH at $10K)
Miro Suchy 