A few months left before the long-awaited The Merge update, which will be an important milestone in the development of Ethereum. Not only the consensus algorithm will change, but Ethereum will become more environmentally friendly and deflationary, which can positively affect its price in the medium and long term.
A journey of seven years
The transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) is the most important and complex upgrade in the history of Ethereum. The process, which has been going on for seven years, has reached the finish line. In the past, the upgrade has been referred to by various names: Serenity, Casper, Shasper, Ethereum 2.0, and finally The Merge. The update will change the consensus mechanism that determines the principles for validating transactions and issuing blocks.
Since 2014, developers have been exploring the possibilities of PoS as an alternative to PoW systems. Due to the novelty and insufficient knowledge of the then-new algorithm, Ethereum was launched in 2015 based on Ethash technology based on Proof-of-Work. In the same year, the developers presented an ambitious roadmap, where the final stage of development was called Serenity. He assumed a complete transition from Ethash to a stable PoS algorithm.
From inflation to deflation
Currently, most of the new Ethereum issuance takes place in the traditional PoW blockchain - the execution layer. Miners receive 2 ETH per mined block, for a total of over 12,000 ETH per day. With a current 12.7M ETH in staking (about 10% of the Ether market supply) and a daily burn rate of 7900 ETH, inflation would be 2.1%. In other words, the annual volume of new emission will be approximately 5.4 million ETH.
After activation of The Merge, the emission mechanism no longer implies a fixed reward for miners per block. The amount of ETH in the form of a reward to validators will change dynamically, every epoch lasting 6.4 minutes.
When is The Merge activated?
Testing of The Merge is in full swing: on June 8, Ethereum developers switched the Ropsten network to PoS. Goerli and Sepoila testnets are expected to transition within a few weeks.
In May 2022, one of the lead developers, Preston Van Loon, announced that the mainnet transition to PoS would take place in August. Vitalik Buterin also called the last month of summer the most likely date, but allowed the event to be postponed to September-October in case of “potential risks”.
Analysts expressed confidence that after the upgrade, Ethereum would no longer be perceived as a “utopian experiment”. On the contrary, cryptocurrency will attract long-term investors.
After The Merge is activated, the Shanghai hard fork will be an important event. It is designed to increase the scalability of the network, make the withdrawal of staked funds available, and upgrade the Ethereum virtual machine (EVM).
“While The Merge is the most complex upgrade in the history of Ethereum, this is not the last upgrade of the network,” Galaxy Digital Research emphasized.
After that, the researchers are sure, developers will focus on other pressing issues that have been developed over the years, such as scalability and statelessness.
According to optimistic forecasts, the activation of The Merge is expected in August. However, given the technical complexity of the merger process and the tendency of developers to delay upgrades, this event may take place in late autumn.
One of the most significant consequences of the transition to PoS will be the elimination of miners from the game. This can significantly affect market conditions in the short term. Selling pressure is likely to decrease and hashrates for altcoins like Ethereum Classic will rise.
In the medium and long term, Ethereum may become a more investment-attractive cryptocurrency. Finally, deflation will certainly do its job. However, its level will depend on the activity of users.