Ethereum Merge Hub

The Merge ultimately ties together Ethereum’s current Proof-of-Work execution layer (formerly “ETH1”) and its current Proof-of-Stake consensus layer (formerly “ETH2”). Transactions and applications take place on the execution layer which is currently secured by miners (PoW). The consensus layer consists of validators currently validating empty blocks. They are empty because transactions still happen on the execution layer today. With the Merge, the two layers connect and there will finally be a unified Ethereum secured by the PoS validators.

While there is no hard date set, current estimations tend towards sometime in September 2022.

You will not have to do anything as the changes happen “under the hood”.

Nothing changes with the staked ETH. They will still be staked and remain locked. Withdrawals will only come with a later update months after the Merge.

DeFi protocols will need to prepare for the transition in a timely manner. If they do so, these protocols will start working on the PoS chain and malfunction on the PoW chain. On the PoS chain, the popular DeFi protocols will only slightly be affected and thus their codebase will continue working. Some changes for DeFi protocols on the PoS chain might affect DAO governance as future block slots will have a fixed duration of 12 seconds (except for missed blocks) instead of the variable slot time of around 13.5 seconds today. Hence, depending on the protocol, this change might have implications for DAO governance. One can expect that most web front ends will be connected to the PoS chain and thus one would need to directly interact with the smart contracts in order to communicate with today’s PoW chain. DeFi protocols that rely on a centralized element, such as the off-chain collateral of a stablecoin, might break depending on the choices made by the entity controlling the off-chain dependency. Indirect effects of the point above might reveal surprising dependencies and break the entire DeFi ecosystem on that chain.

ETH that has been staked on the Beacon Chain will not be available to withdraw from staking immediately after the Merge. Withdrawals are planned to be enabled in the Shanghai/Capella upgrade which is tentatively planned for 6-12 months after the Merge.

The current PoW chain will cease to exist. However, there could be a fork or even multiple forks which give new life to a PoW Ethereum chain.

While most likely all dApps on Ethereum and in general the whole ecosystem will switch to the PoS chain, some miners may be incentivized to participate in a hard fork. In that sense, if you hold Ethereum you might receive PoW ETH on such a chain. Note, however, that this does not mean that: a) the ETH on the PoW chain will have the same value as ETH on the PoS chain or b) it will have value at all. It is also not known for how long such ETH would have value. Looking at the influence of a fork on DeFi, some DeFi protocols rely on oracles and external liquidity. So far it seems like most of these stakeholders will move to the PoS chain and thus the DeFi protocols would stop functioning on the PoW chain. Moreover, issuers of centralized stablecoins, such as USDC, will only acknowledge the assets running on the PoS chain. Likewise, Bitcoin Suisse as the issuer of the XCHF stablecoin, has decided to only support the PoS chain following the Merge.

Some validators may take more time to switch but there should not be a prolonged downtime. As a result, the chain might not finalize transactions and blocks for a certain amount of time – see also below. Users are advised to temporarily abstain from transacting and/or using smart contracts during the period around the Merge to avoid increased risks associated with the transition to the PoS consensus protocol.

Depending on how one defines failure, this may differ. One definition of failure may be that not enough validators switch to the new protocol. The network would need at least 2/3 of validators to finalize. In case 2/3 is not reached, validators that did not switch would have a penalty that increases quadratically. However, since there is money involved or the loss thereof one would assume that most validators will switch promptly. Another reason for failure would be a bug in the software that validators run. Although this is an unlikely scenario as there would need to be a bug across different client implementations, some clients have larger market shares and thus a software bug may negatively affect the Merge. However, the entire software system has been battle-tested over the last years on various testnets.

Since the execution layer is now secured by validators, validators may also receive “tips” from user transactions. This new set of rewards is liquid and not staked. Current estimations state that the new Annual Percentage Yield (APY) would be approximately between 5-9%. However, it may fluctuate strongly as the tips from transactions are not deterministic. Moreover, validators can outsource parts of the block production process to third parties. This would mean that someone else would find MEV (Maximal Extractable Value) opportunities, order the transactions for the validator, bundle them together to a block and finally check them for validity (before the validator signs it). In return, validators may receive additional rewards resulting in staking rewards at the higher end of the APY range stated above. Note that the APY range stated is an estimation and not guaranteed.

The transition from PoW to PoS comes with a reduction of energy consumption by ~99.95% as PoS requires no resources to solve mathematical problems for block production. This cut in energy consumption is accompanied by a significant decrease in issuance, which varies based on the amount staked. As of writing, the issuance is expected to drop down to 0.6m ETH per year post-merge from 5.5m ETH per year pre-Merge and thus by ~89%. Similar to a Bitcoin halving, the Merge reduces the overall network inflation, and with that, sell pressure linked to network issuance might decrease on the supply side and might thus impact the price. Moreover, all post-merge issuance rewards will be locked until the next upgrade which then enables withdrawals. To withdraw, validators will then need to enter an exit queue with batchwise unstaking as only a limited number of active validators can exit per epoch. This mechanism is similar to the current daily limits for new stake being deposited to the Beacon chain. Hence, there will likely be a sustained period of increased yet limited liquid supply entering the market. Finally, it should be kept in mind that the Merge does not happen in isolation and, therefore, macro conditions and regulatory risks may affect the Ethereum ecosystem as well.

For more information on the Merge, please refer to the official Ethereum Foundation website.