Ethereum Merge

What Was the Ethereum Merge?

The Ethereum Merge was the joining of Ethereum’s proof-of-stake (PoS) Beacon Chain with the Ethereum Mainnet to transition the Ethereum blockchain from its legacy proof-of-work (PoW) system.

With the completion of The Merge on Sept. 15, 2022, Ethereum switched to a PoS model. A new version of Ethereum emerged, with the noteworthy expectation of reducing network energy consumption by about 99.95%. It also introduced changes to help the Ethereum ecosystem scale further.

Understanding the Ethereum Merge

From its inception to The Merge, Ethereum used PoW validation, which required large amounts of processing power to solve a cryptographic puzzle. All miners competed to generate a solution, propose a new block, and receive an ETH reward.

The transition to PoS removed the need for mining nodes to compete for block rewards; instead, it required node operators to stake 32 ether (ETH) as collateral to become network validators and earn rewards.

There were driving factors behind the move to a PoS consensus mechanism, including:

• More decentralization by lowering the hardware requirements for node operators
• Faster transaction confirmations (though overall speed is about the same)
• A 99%+ reduction in energy consumption by node validators
• Ability to add more scaling solutions
• Increased security through client diversity
• Making ETH a more deflationary asset

The issuance of Ethereum as block rewards was also significantly reduced. Using PoW mining, about 13,000 ether were mined per day. After The Merge, that number dropped to about 1,600 ether rewarded per day. This is a 90% reduction in ether issues, slowing the inflationary growth of ether.

While The Merge combined the Beacon Chain and the Ethereum mainnet, it was designed differently than just merging them. The Beacon Chain became the consensus layer (handling consensus tasks such as validator attestation, block choice, rewards, and penalties). The old Ethereum mainnet became the execution layer, which processes transactions and handles smart contracts. The layers communicate through an application programming interface (API).

How Does Ether Staking Work?

To be eligible for block rewards after the Ethereum Merge, node validators must stake (or lock up) 32 ETH into a smart contract as collateral. This ether was locked until the Shanghai Upgrade in March 2023 enabled withdrawals.

While some PoS blockchains give a greater chance of rewards to users who stake a larger amount of crypto, Ethereum chooses validators randomly to propose a new block to be added to the blockchain. Users' rewards are then based on how much ether they have staked.

Those who don't own 32 ether or don't wish to run a validator node but wish to stake ether can still do so by joining a staking pool. A staking pool combines the deposits of multiple individuals to stake the required 32 ETH for an Ethereum validator node. The block rewards from that node are then shared with the staking pool in proportion to the deposited ETH per individual account.

Crypto exchanges also offer a version of this, allowing users to stake small amounts in return for a fixed reward amount.

Concerns About the Ethereum Merge

The Merge, as it was a significant update to the cryptocurrency blockchain, introduced one looming concern when it was released. There is a possibility that the Ethereum blockchain and network would become more centralized because of the staking requirement.

As of May 24, 2024, validator centralization isn't much of a concern—there were more than one million validators on the network. More than 32 million ether were staked, somewhat decreasing the cryptocurrency's liquidity as there is a daily limit on how much can be unstacked.

However, there is a remote possibility that a significant amount of validators could withdraw their stakes, creating a centralized network of fewer validators. But as long as Ethereum remains popular and validators receive payment for their stake and work, the chances of a mass validator exodus are very low.

The Bottom Line

The Ethereum Merge was a significant update to the Ethereum blockchain because, along with other small adjustments, it transitioned the blockchain to the long-awaited proof-of-stake mechanism. This update reduced the network's energy requirement by more than 99%, removed block rewards, and introduced staking—offering ether as collateral for the privilege of validating transactions, proposing new blocks, and receiving rewards.

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