What to expect after the Merge? Ethereum's roadmap
A recap, initial overview, and what is coming up next.
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15th of September, 2022, 06:42:42 UTC.
The historic moment the Merge finally happened.
Many people refer to it as the most important event for the crypto industry to date (after the creation of Bitcoin, as well as Ethereum of course).
Regardless if you agree, there is no denying that it is an impressive achievement. Why, you ask? Because Ethereum essentially merged two individual blockchains into one, transitioning fully to a new consensus mechanism which is the core design of how a blockchain functions.
This is the reason why many compare this Merge to changing the engine of a rocket ship in the middle of the flight. And it was executed pretty much flawlessly.
Let’s first do a recap of the Merge
Ethereum had 2 chains - the Mainnet, and the Beacon Chain. The Merge simply refers to when these two chains come together, merging into one (hence, the name “merge).
The main output of this is the full transition of Ethereum’s network from a Proof of Work (PoW) blockchain, to a Proof of Stake (PoS) consensus mechanism.
PoS requires significantly less energy to run a node and validate transactions. Based on research by Carl Beekuizen, it is estimated that Ethereum’s energy usage can decrease by 99.95%.
From an economic standpoint, the Merge also puts ETH on track to becoming a deflationary asset by introducing the fee burn mechanism, as well as the considerable issuance drop of ETH.
Lastly, it is important to highlight that this upgrade will have no immediate impact on lowering the gas fee. It is, nevertheless, a step closer to a lower gas fee reality, which will happen with the next milestone in the roadmap with the introduction of Sharding.
If you want to learn more about the Merge, here is an article with a comprehensive overview.
So to summarize, there are three key things here:
Merging the 2 chains into 1, delivered the transition to a Proof of Stake consensus mechanism.
The successful transition to PoS by definition achieves the energy decrease goal.
Putting ETH on the right path to becoming a deflationary asset.
Let’s deep-dive a bit further into this last point.
Impact on the Economics - is ETH on track to becoming deflationary?
We all understand that printing more money leads to inflation because of the excessive supply.
This is the same for cryptocurrency, and by definition, ETH.
So let’s take a step back and understand what are the 2 key drivers that contribute to the supply of ETH, and what changed with the Merge:
1. Issuance
Before the Merge, ETH was issued in both chains:
PoW: ETH was issued as mining rewards.
PoS: ETH was issued as staking rewards.
After the Merge, we no longer need to provide mining rewards, so the total new ETH issuance will drop by ~90%.
The validator rewards are significantly less than the miner rewards issued on proof-of-work, as operating a validating node is not an economically intense activity and thus does not require or warrant as high a reward.
2. Burn
The opposite force to issuance is the rate at which ETH is burned.
For a transaction to execute on Ethereum, a minimum fee must be paid, which fluctuates continuously depending on network activity.
The fee is paid in ETH, and this fee gets burned during the transaction process, removing it from circulation.
If we take a look at the above graph, we can see that the current ETH’s inflation rate is almost touching 0, at a 0.19% / year, compared to the +3.78%/year had we stayed on PoW. Quite on track to becoming a deflationary asset*.
Of course, as we established that there are 2 driving forces here, the overall balance will be determined by the amount staked and the amount burned.
This latter is driven by the number of transactions. Overall, we can be relatively confident that given that the next phases of Ethereum’s roadmap are focused on scalability, as well as the multiple Layer 2s contributing to this, we can expect transactions to increase.
*It is good to call out that currently BTC is at a +1.72%/year of inflation rate (expected to reduce with the programmed halvings every 4 years).
Some other FAQs post Merge I hear a lot…
1. Why hasn’t the price of ETH surged if it was such a significant event?
Well, it was never expected for the Merge to have an immediate impact on the price of ETH.
The key changes that came with this event were focused on Ethereum’s fundamentals, both from a technological perspective, as well as an economic aspect.
Profound changes like these are expected to be reflected in the longer run.
Think about it… when you go on a diet and start working out, do you lose weight immediately, and do your muscles build up over night? No, you need to set up the foundation and give it time to mature.
Additionally, the macro environment plays a very significant role in the crypto space, which is still considered a high risk asset.
Here is an article explaining the different factors that are contributing to crypto’s dipping prices.
2. What’s next?
The most immediate upgrade coming up post Merge is the “Shanghai Upgrade”, which is estimated to happen in the next 6 to 12 months.
The main functionality everyone is expecting for is around the feature to withdraw staked ETH. Currently, it’s a one-way street: you can stake ETH but you cannot withdraw yet.
However, the exact scope of the Shanghai Upgrade is not clear yet as it needs to be discussed and aligned among Ethereum’s core developers.
3. Are there any specific concerns?
The biggest concern so far is around validators centralization.
So far, 42% of the network seems to be within the control of 2 entities.
However, it is important to call out that Lido is a group of around 28 independent nodes.
On top of this, before the Merge the majority of Ethereum’s hash power was controlled by the top 3 mining pools. Even though not ideal, there seems to not have been a big change in terms of how centralized or decentralized the network is.
The direction it is taking though is better than before: arguably it is easier to keep staking pools in check than getting mining pools in check. At the same time, the entry barrier is much easier, as running a validator node is much easier than mining.
However, the concern of having the decision-making power concentrated in a few is real
, particularly due to the recent regulatory crackdown on Tornado Cash, which originated distress around the possibility of censorship of transactions, or even protocol-level censorship.
A look into Ethereum’s Long Term Roadmap
The Merge is the 1st out of 5 “-rges”.
It is a really significant milestone that sets out the right foundation required to continue to build Ethereum towards the vision of being the world’s decentralized super computer.
Let’s have a look at what the next stages are:
- The Surge: Massive Scalability Increase through Sharding.
We previously established that the Merge has no direct impact on the gas fee. This is because the Merge focuses on the Consensus layer, but the execution of the transactions happens on the Execution layer.
The Surge is the upgrade that will bring most of the scaling benefits to the Ethereum network.
The way it is aiming to achieve this is via sharding.
Sharding which will allow the majority of the network to split across a number of different blockchains known as shard chains, which will enable computation to be done in parallel as each of the individual shard chains will handle their own computation, that will be settled on the main chain at a later stage.
This will also help Layer 2 roll-ups to be even cheaper
and make nodes easier to operate, as they will not need to store the entire blockchain no more.
In terms of timeline, it is aimed at 2023, but no definite confirmation yet.
- The Verge
The Verge aims to optimize data storage and node size by alleviating the burden of state on the network by replacing the current Merkle-Patricia state tree with a Verkle Tree, which are ways to structure data.
Without going into the technical details, the main goal here is to optimize data storage which will contribute to a decrease in hardware requirements of validator nodes.
This is achieved by introducing stateless clients that can verify blocks without downloading a local copy of Ethereum’s state, which requires an increasingly large amount of solid-state storage to maintain.
This way, we can also expect further decentralization in validator nodes.
- The Purge
This phase aims to remove spare historical data and the purging of irrelevant data, streamlining storage and helping to further reduce network congestion.
- The Splurge
The current last milestone in Ethereum’s roadmap.
It looks at small but important “miscellaneous” upgrades that will ensure that the network is able to run smoothly while incorporating the previous upgrades.
What are my thoughts?
Many were disappointed about the lack of fireworks in the price of ETH, but this was always expected, particularly in today’s macro environment.
As we always say in this forum, we are here for the longer term, and for this, we need to focus on the fundamentals, and my takeaway with the Merge is that it successfully delivered the goals it set out to achieve, without disrupting the functioning of the blockchain. It was just like any other day, if you had not heard of the Merge at all, you probably wouldn’t have noticed anything.
There are many factors that contribute to the success or failure of a project. But without the ability to build and execute, there is no possibility of succeeding at all.
Still a long way to go, but it’s definitely reassuring to witness the world-class execution the Ethereum’s core developers pulled off.
What do you think?
Here is a list of topics in my idea bank coming up next, in no particular order:
Projects Deep-dive:
Helium
Filecoin
The Graph
Gala
What is technical analysis
An overview of “The Network State” by Balaji Srinivasan.
Social Tokens
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