Fourteen Key Points You Should Know About the Ethereum Merge

Author: domotheus

Original Title: 《ethereum should know: Proof of Stake edition》

Compiled by: eth-future.eth

As the Merge approaches, more news and articles from crypto journalists will emerge, signaling to more people that it is indeed close. This will bring about more questions and discussions related to Proof of Stake, revisiting the same topics and misunderstandings. I have already seen this to some extent; last week, the Kiln testnet announced a successful merge, and I expect to see more of the same in the future. So here are some common questions/views I have observed, summarized in quick points, just like I did in my previous article about Ethereum.

1. What is the Merge?

More information about the Merge can be found at ethmerge.com, so I will try to simplify this part.

1. When the Merge occurs, Ethereum will be secured by PoS (Proof of Stake) instead of PoW (Proof of Work).

2. The Merge is not "ETH 2.0"; there is no ETH 2.0, as it is an outdated term.

3. If you currently hold ETH, you do not need to do anything. After the Merge, you will still hold the same amount of ETH, with no "ETH 2.0 coins," and there is no need to migrate anything, etc. Everything remains exactly the same, with only the consensus mechanism undergoing some changes.

4. It is called the "Merge" because it merges the consensus layer with the execution layer and discards the Proof of Work part of the execution layer.

5. "Consensus" is just a fancy term. Its essential meaning is some basic rules for transactions, and it ensures that these rules can be collectively followed and enforced through some incentives and disincentives. PoW (Proof of Work) and PoS (Proof of Stake) achieve this "rule consensus" through different means: PoW: "The cost of disrupting the block order is too high; following the rules is more profitable." PoS: "The cost of disrupting the block order is too high because if I do so, I will lose all my staked amount."

6. Since it is merely a change in the consensus mechanism, Proof of Stake itself will not significantly reduce gas fees.

2. Why the Merge?

1. To reduce security costs, as the energy required to reach consensus will decrease.

For PoW: Miners need to at least cover the costs of all the hardware and energy they use; otherwise, no one will want to mine. This requires a large issuance and rapid selling to exchange for fiat to pay the bills.

For PoS: There are no other significant expenses besides a regular computer and an internet connection to participate in validation. Thus, costs and risks are greatly reduced, making people more willing to invest.

2. ETH will become more environmentally friendly. The security of a blockchain is essentially proportional to its value. This is true for both PoW (more valuable coin rewards = more incentive to follow the rules = more miners = harder to disrupt consensus) and PoS (more valuable staked coins = more incentive to follow the rules to avoid losing staked coins).

Newly issued ETH essentially takes value from all coin holders and redistributes it to others. Under the same conditions, selling the coin for fiat can extract value from the network.

It opens the door for many future scaling solutions, such as sharding, global citizen, light clients, etc.

By distinguishing the issues concerning the execution layer and the consensus layer, it helps reduce some complexities in future code.

Beneficial for environmental protection and providing better solutions for participants, these are certainly good improvements. However, they are not the main reasons behind the switch to PoS, as it primarily concerns external factors over which Ethereum as a protocol has little control (energy production sources, GPU supply chains, etc.).

3. When will the Merge happen?

1. No official date has been announced yet. For various reasons, cautious and optimistic developers and the community hope to merge around mid-June.

2. Testing is still ongoing, and the merge will not be executed until developers are fully confident that there will be no errors.

3. Personally, I do not pin my hopes on June, but I certainly hope for a release in the summer, with the caveat "unless extreme errors occur during testing" (e.g., critical bugs that take weeks to fix, vulnerabilities in the specification itself that may take months to address and re-implement).

4. Some accumulated difficulties in Ethereum are expected to erupt in June. So whether or not the merge occurs, there will be a hard fork at that time.

5. I recommend bookmarking wenmerge.com for quick access to the latest estimates for each testnet merge, as these estimates will lead to the mainnet merge based on past announcements.

4. You fool, they will delay the merge like before. They promised years ago, but it still hasn't happened.

1. First, some useless arguments: No official date has been announced yet, and it has never been announced. You cannot delay on a deadline that does not exist.

2. The statement "Ethereum will switch to Proof of Stake in 2018" came from an extremely optimistic place and underestimated not only the complexity of a secure PoS design but also the safe transition from PoW to PoS. The work done at that time was equivalent to partially completing the Casper FFG specification, a hybrid PoW-PoS mechanism that was ultimately abandoned. But today, many things are different. What did not apply then applies now.

• There is a complete protocol specification that has undergone years of research, analysis, and refinement of potential attack vectors.

• Client implementations have been completed, and only testing remains.

• Currently, everyone is focused on the merge, with almost no other work being done outside of it. All necessary steps leading to the merge have been completed. This is not even "they have completed complex implementations like EIP1559, so now they can focus more on the merge," but rather, "all attention is focused on the merge." It is impossible for the merge to be "delayed again" while developers start working on other tasks. There is nothing else to do until the merge is completed.

• PoS has been running in the form of the Beacon Chain since December 2020. This means that Ethereum's PoS has been undergoing over a year of battle testing (to some extent), with over 10 million ETH currently in operation. It just hasn't produced blocks for the execution layer yet.

5. Those who staked millions of ETH will crash the moment they unlock it, LOL.

It is certain that many stakers will want to profit in the end, especially those who locked ETH when 32 ETH was worth $10,000. But on the other side of the equation, there are still many issues to consider:

1. The merge will not unlock any ETH. Withdrawals will occur in the first hard fork after the merge, possibly 6-8 months after the merge. During these months, there will be no PoW issuance (approximately 13 ETH/day) sold, nor will there be PoS issuance entering circulation.

2. Just as depositing ETH requires a queue, withdrawing ETH will also require a queue. Assuming a massive sell-off occurs, with everyone in line and the daily validator limit at 1,125, there will be no so-called "opening the floodgates" moment, as everyone un-staking will actually take over a year. In a year, approximately 38,000 ETH/day will re-enter circulation (or about 1% of the daily trading volume).

3. After the merge, validators will also begin to earn fee rewards, effectively doubling their earnings. There are currently thousands of people waiting to stake, and they are accepting a 5% yield on ETH; I do not think they will sell their ETH the moment it turns into 10%.

4. So far, the biggest risk involved in staking is the merge. Catastrophic events could occur, and despite these risks and the fact that ETH is locked for an unknown floating date, people have continued to stake and lock their ETH for over a year. How many individuals/institutions are waiting for this risk to disappear before joining?

5. Don't forget that fewer validators mean less competition among stakers, which means that those who do not exit can earn higher rewards. This also means that there will be more incentives for those who have not yet started staking to do so.

6. But of course, this is cryptocurrency, and cryptocurrency will be more volatile. The merge will bring more excitement and volatility, and it may also lead to news-driven speculation; no one can predict what will happen. I will not pretend to know the future, but in my view, more ETH is likely to flow into staking rather than out.

6. If PoS is so good, why didn't Ethereum do it from the beginning?

1. PoW (Proof of Work) is easy to conceptualize and implement, while PoS (Proof of Stake) is not, especially in 2014, when it was primarily a theoretical concept still under research, with some blockchains implementing some version of it.

2. Before considering implementing PoS, several fundamental issues with PoS need to be overcome from a research perspective.

3. PoS is not a panacea. Each PoS blockchain has its own PoS specifications, with pros and cons in various aspects, so it is not as simple as "but another blockchain did it, why can't Ethereum do the same?"

4. The benefit of starting with a PoW chain is that anyone can mine (mint coins) without permission, which helps distribute the coins better than those that started as PoS and had to decide how to distribute them (which cannot actually be done without permission).

5. Related to the above: Yes, Ethereum still has pre-mined/pre-sold situations, but after years of mining and multiple bull/bear market cycles, ETH has been diluted to half its supply, and its distribution is much closer to Bitcoin. Therefore, by 2022, when Ethereum is a highly liquid and easily accessible asset, it is not surprising.

7. No, this is actually a trick to deceive miners again after years of hard work.

1. PoS has been the ultimate goal from day one; every miner knows it will eventually end. There is no pulling or unfairness here.

2. Economic factors outweigh any miner's loyalty to the blockchain. You can think of the blockchain as a business and miners as employees:

• Miners/employees have been compensated for their services (i.e., securing consensus) through block rewards. Salaries are paid by the employer, which comes from diluting the value of existing coins held by holders (see above "Why the Merge?").
• Miners go where the highest rewards are; if another GPU-mineable coin offers more rewards, most of them will immediately abandon Ethereum.
• Similarly, if stakers can provide services more cheaply, Ethereum will pay less for the services it needs.

1. But this is not entirely exclusive. Miners can also be holders of tokens and users of the blockchain. Nothing prevents them from holding rewards and becoming stakers.

8. If you don't spend real-world energy to mine it, then the coin no longer has intrinsic value.

I really disagree with this viewpoint. Repeatedly calculating hashes is not magical until you find a hash that meets arbitrary requirements. I mean, you could have a PoW blockchain where the work is done by solving Sudoku puzzles; it works exactly the same way: NP-complete problems are hard to compute in one way, but once a solution is found, it is easy to verify. This does not mean that solving Sudoku itself brings value to the world. Increasing the difficulty of mining a coin does not magically make everyone richer; it only reduces mining profits—unless demand also rises, which so far has not been a major issue in the cryptocurrency world.

In my view, the value of a coin ultimately comes from supply and demand, and demand comes from the value of block space. People need ETH to purchase block space, regardless of whether ETH is generated by miners or stakers. Of course, the more miners there are, the higher the security/decentralization, which further increases the value proposition of block space in the positive feedback loop. However, there is also a feedback loop in Ethereum's PoS, and they are also very cool.

9. Is PoS (Proof of Stake) the secret to complete centralization?

It is basically the same as PoW (Proof of Work) but slightly different. Whether it is "better" or "worse" really depends on your perspective. In my view, PoW is actually just PoS with additional steps.

The Ethereum community places a high value on decentralization, and any potential centralization vectors will be addressed by research teams proposing any mitigations, even at the cost of other important things like scalability (such as keeping gas fees low so that more nodes can participate in decentralization, even if it leads to congestion and high fees).

Currently, there are some drawbacks; decentralization is like a spectrum and a process, and we are not there yet. There are still many centralized crutches (the term "crutches" here refers to the current need for many centralized measures to support and advance Ethereum). However, in the long run, these centralized elements need to disappear. That said, these crutches (centralized elements) do not represent risks to the network's existence, especially any claims about "it is centralized because of X," with proposals listed on the roadmap indicating plans to address X. Personally, I find it much more appealing to come up with a bunch of ways to solve X than to give up and say "it can't be done because of X."

Ethereum's PoS design has some interesting aspects that are often overlooked: quadratic penalties. A single validator being incapacitated, disruptive, or directly attacking the network will not face severe penalties. However, if a thousand validators do this simultaneously, they will face much harsher penalties. This means that if you are a whale with thousands of validators, for your own benefit, you should spread them out, avoid using cloud hosting, use different clients, etc. Of course, capital is still centralized, but at least the failure points are decentralized, which is beneficial for the overall health of the network.

Compared to large mining operations that rely on central locations to amortize costs, relevant authorities can identify issues with energy usage and shut down if they do not like it. Moreover, mining equipment is difficult to move globally, but PoS staking only relies on private/public keys, rather than any actual hardware beyond consumer-grade computers.

10. Is PoS really just "whoever has money earns more money"?

Yes. Unfortunately, we live in a world of extreme wealth inequality. Blockchains do not solve this problem. This is also true for PoW (Proof of Work). Whoever has money can buy more mining machines and earn more money. Beyond mining, returns on investment improve with economies of scale. Centralized miners can use large amounts of capital to obtain bulk/discount rates on hardware and can move to places with cheaper electricity.

Individual miners cannot compete with large miners in reality. With PoS, everyone can earn proportional returns, whether they stake $10 or $10 million. "They may be centralized, but those large mining operations have no reason to attack the network and weaken it because they have poured millions into the infrastructure." … So you are saying you have no issue with the existence of large centralized actors as long as they have some significant stake in the network?

11. Do your deposits earn passive interest? Is it money printed out of thin air? This is just the second part of central banks and fiat currency.

You have to expand it to this case, but I have seen people do this. These views often start with "PoS is not new." Validators are still doing "work": creating blocks and validating other blocks. The work done is just the actual useful work required for the blockchain to reach consensus, rather than repeatedly calculating hashes until one meets arbitrary requirements. So, this is not so-called "free money printed out of thin air," because staking capital still incurs costs; they are just more abstract and less direct than energy bills.

Opportunity cost—if another investment can yield better returns, why stake?

Liquidity issues—once you stake, your funds are locked, waiting for your validator to activate, and then you have to queue again to withdraw.

Potential risks—this is still a relatively new thing, and things could go wrong; there could be a critical bug, the network could be attacked, your staking hardware could be damaged, etc.

Volatility—throughout, it remains a volatile asset, and if you are the type of investor who values your returns in your local fiat currency, then earning a 5% yield on an asset that could drop 30% overnight is not that great (however, the upside potential for an asset with a 5% yield to double is quite large, turning 100% returns into 110%).

Maintenance—you still need to maintain and protect your validator, ensuring 100% uptime, updating software, etc. Here is where it gets interesting. The more stakers there are, the lower the individual rewards.

This basically means that all these costs will be priced by the market itself. It is easy to see why: if staking yields are too low, then the rewards cannot justify the costs, and people will withdraw and invest elsewhere, causing yields to rise. Similarly, if yields are too high, it will attract more capital, causing them to fall. In terms of inflation: suppose the entire market decides that 5% is the ideal yield, with 3% coming from issuance.

Calculating this, approximately 30 million ETH are staked annually, printing 900,000 new ETH. With a total supply of 120 million ETH, the inflation rate is 0.75%. This inflation rate surpasses the EIP1559 burn (as long as gas fees are at least 23 gwei). (I cannot emphasize this enough: Ethereum assets will soon become a yield-bearing deflationary asset.) "Sounds good, but with no supply cap, they keep changing monetary policy." For years, our goal has been to "ensure the minimum viable issuance to secure the network," placing network security above any arbitrary supply cap.

Any updates to monetary policy have not increased supply inflation. From day one, a low inflation rate (especially the inflation rate) has been the goal. Once the burn rate of EIP1559 matches the issuance rate, there will be a balance point acting as an effective supply cap—again determined by market forces valuing Ethereum's block space.

If you ask me, this is fantastic. So yes, there is no "central Ethereum bank" arbitrarily adjusting interest rates and printing money for cronies. The market itself determines how much inflation/deflation there is, and no entity can control it like a central bank controls fiat inflation rates.

12. The big players have all the money they need; they take over and change the rules, cutting out honest stakers.

Wrong. This is precisely why Ethereum has no form of on-chain governance. Protocol updates are a community effort (Layer 0), and you do not need to stake any funds to voice bad ideas and participate in the governance process.

This is exactly like Proof of Work: even if one person owns 99% of the hash power, they cannot steal others' funds in invalid transactions without private keys. Additionally, they cannot change protocol rules or do anything meaningful other than reorganizing blocks. 1% of honest nodes will reject any blocks that do not comply with the rules, leading to mining activities on an invalid or useless chain. Now replace hash power/mining with stake/proof of stake, and it is the same (the difference is that if someone is caught reorganizing blocks, their entire stake will be destroyed, while mining equipment cannot be completely destroyed).

In short, this involves a lot of ETH. At least 10 million, and the number is increasing, and this is still data before the merge. At current prices, that is about $30 billion. It is estimated that both the "amount of staked ETH" and the "value of ETH" will rise, making attacks increasingly unlikely due to the absolute economic cost involved in conducting an attack, and acquiring that much ETH is also very difficult. If the attack comes from external participants (where can you buy 10 million ETH to have 51% of the stake? 20 million?).

13. 32 ETH is already a lot; the average person simply does not have that many.

I agree; that number is indeed quite high. There are some ideas on how to lower it (better signature aggregation or limits on the rotation of active validators), but they do not seem to be high on the priority list compared to ensuring the true security of the base layer.
The reason for such a high number is that it must fall into the technically optimal position.

In short, it must be low enough to facilitate access and have enough validators to secure the blockchain. However, it must also be high enough to prevent too many validators and overhead from bloating the chain. Setting a fixed number for each validator and ensuring that each validator has the same weight in the distributed random process of who generates each block can significantly reduce complexity.

From a technical perspective, achieving 32 ETH requires a lot of mathematical calculations; at that time, 32 ETH was worth about $7,000. Early calculations in 2017 even suggested at least over 1,000 ETH.

Fortunately, just as there are mining pools, there are also staking pools that allow for smaller stakes. With things like RocketPool and Secret Shared Validators (not yet launched) using smart contracts to achieve permissionless, decentralized, and non-custodial solutions, it does not necessarily contradict the mantra "not your keys, not your coins." Moreover, based on the aforementioned quadratic penalties, I believe that decentralized staking operations will outperform centralized ones in the long run. I recommend superphiz's staking guide for more information. Of course, if you value decentralization, I would also acknowledge that staking through exchanges is a terrible idea.

Related to the above, things like Rocket Pool are best viewed as a higher-level abstraction of basic staking rather than "just a staking pool." For readers interested in these topics, I have elaborated on this here. (There are many links in this long paragraph; if you are interested, you can check the original text.)

14. PoS has not been proven, while we know PoW works.

This is actually completely fair, and there is clearly no real rebuttal. Only time will tell. I just think that in the context of Ethereum transitioning to PoS and having been doing so, this is actually irrelevant. If you do not believe in it, do not participate or invest in it. Personally, I do believe in a long-term sustainable PoS Ethereum, but even so, I am happy to see Bitcoin continue to showcase Proof of Work in its robust, old, and boring way.

These are all part of the great crypto experiment of our lifetime. It may just be a fad and gradually fade into obscurity, which would certainly be disappointing. It is also possible that we will successfully create a powerful network that transcends humanity. Prioritizing decentralization is crucial to achieving this goal. These are mainly the things I see in both Bitcoin and Ethereum, despite their vastly different philosophies. That is why I am glad to see both Bitcoin and Ethereum genuinely looking at the long-term picture.

Thanks to the following four friends on Twitter for collaborating on the translation of this quite excellent content related to the ETH merge: @INOVASTECHNFT, @0xFIREhorse, @Evelyn27880498, @Moon1ightSt.