The Ideal and Reality of Ethereum's Merge

"This is equivalent to changing the engine while the plane is still in flight."

Authors: Jessie, Edmond
Editor: Li Yuting

Since adopting the Proof-of-Work (PoW) consensus algorithm, Ethereum has sought a more efficient alternative to create a decentralized, scalable, secure, and energy-efficient network. In 2017, Ethereum settled on a hybrid PoW/PoS system—Casper the Friendly Finality Gadget.

Years of delays eroded community confidence until June 8, 2022, when Ethereum successfully rehearsed its first Merge on the Ropsten testnet. Barring unforeseen issues, the Merge is expected to complete in 2022.

Why the Merge Matters

The Merge will reshape Ethereum’s ecosystem and the broader blockchain landscape. This article explores:

• The mechanics and pros/cons of the Merge.
• Its far-reaching implications.
• Investment opportunities post-Merge.

Despite controversies like wealth centralization and MEV risks, PoS enhances Ethereum’s security, decentralization, and energy efficiency. Combined with sharding and Layer2 solutions, Ethereum will become more scalable, offering a superior user experience.

Post-Merge, ETH issuance drops 90%, drastically reducing inflation. Coupled with EIP-1559, ETH could become deflationary, boosting its value. Crypto quant trader Ryan Allis argues that PoS transforms ETH into an asset with cash flow, potentially valuing it at $10,000+ via DCF models. The staking mechanism also unlocks opportunities in the质押 (staking) sector.

Table of Contents

1. What Is the Merge?
2. How Does the Merge Happen?
3. Development Progress
4. PoS Design Philosophy
5. PoS Advantages
6. PoS Risks
7. Merge’s Impact
8. Post-Merge Investment Perspectives

01. What Is the Merge?

Ethereum’s 2015 PoW consensus aimed to transition to PoS for energy efficiency. After years of R&D, the Casper FFG hybrid system emerged in 2017.

The Merge integrates Ethereum’s PoW mainnet with the parallel PoS Beacon Chain, replacing PoW entirely. Validators (not miners) will produce blocks, securing the network via staked ETH.

Challenge: Transitioning a live ecosystem with billions in assets is akin to mid-flight engine replacement—requiring extreme caution.

02. How Does the Merge Happen?

Three Phases:

1. Parallel Chains: Beacon Chain runs alongside PoW.
2. Merge: PoW consensus layer replaced by PoS.
3. Replacement: PoW deprecated; PoS governs execution.

Safety Mechanisms:

• Staking: Validators lock 32 ETH to participate.
• Slashing: Malicious actors lose staked ETH (e.g., 51% attacks cost millions).
• Difficulty Bomb: Discourages PoW mining pre-Merge.

03. Development Progress

Timeline:

• 2022: Ropsten testnet Merge (June), mainnet Merge (Q3–Q4).
• 2023: The Surge (scaling via sharding).
• Beyond: The Verge, Purge, and Splurge upgrades for efficiency.

👉 Explore Ethereum’s roadmap

04. PoS Design Philosophy

Vitalik’s insights:

• Security via penalties, not energy burn.
• Economic consensus reduces reliance on hardware.
• Asymmetric defense: Attack costs exceed rewards.

05. PoS Advantages

• Energy Efficiency: 99%+ reduction vs. PoW.
• Higher Security: Slashing deters attacks.
• Decentralization: Lowers hardware barriers.

06. PoS Risks

• Wealth Centralization: Staking rewards may favor large holders.
• Weak Subjectivity: New nodes need trusted checkpoints.

07. Merge’s Impact

On ETH:

• Supply Shock: Issuance drops to 0.3–0.4% annually.
• Staking Rewards: APR could hit 8.5–11.5%.
• Liquidity: Gradual unlock prevents mass sell-offs.

On Ecosystem:

• Miners: Shift to PoS chains or staking.
• MEV Risks: Validators may exploit multi-block strategies (mitigated by Flashbots’ MEV-Geth).

Regulatory Shift:

PoS aligns ETH with “Internet bonds,” appealing to institutional investors.

👉 Learn about staking opportunities

08. Post-Merge Investments

Key Themes:

1. ETH as Deflationary Asset: DCF models suggest $10K+ valuations.
2. Staking Services: Lido, Rocket Pool, and SSVNetwork dominate.
3. Layer2 & Sharding: Scalability boosts adoption.

FAQ:
Q: Will unlocked ETH crash the market?
A: Daily unlocks are capped (30K ETH/day), and long-term stakers are less likely to sell.

Q: Is PoS truly decentralized?
A: Lower hardware requirements democratize participation but require vigilance against centralization.

Q: How does MEV change post-Merge?
A: Validators replace miners, but solutions like MEV-Geth aim to curb exploitation.

Acknowledgments: Frank, Junchen, Web3 Navigators Community.

References:

• Vitalik’s PoS FAQs.
• Delphi Digital’s Merge Report.
• Lido on Liquid Staking.

Disclaimer: Not financial advice. Compliance with local regulations is essential.