Ethereum Merge 2022 | Switch to Proof-of-Stake EIP-1559 | ETH Price Surge and Deflationary Asset Potential

6 min read

Ethereum Updating to Proof-of-Stake

Crypto Briefing spoke to Trent Van Epps of the Ethereum Foundation about the top smart contract network’s highly anticipated move to Proof-of-Stake.

Photo: Trent Van Epps

Key Takeaways

  • Ethereum is expected to complete “the Merge” to Proof-of-Stake in the coming months.
  • The Ethereum Foundation’s Trent Van Epps explained to Crypto Briefing why the update is such an important milestone for the number two blockchain.
  • Proof-of-Stake will make Ethereum up to 99.95% more energy efficient and significantly reduce ETH emissions.

2022 is set to be Ethereum’s most important year yet. Though the date is still unknown, the world’s most used blockchain is preparing to complete “the Merge” from a Proof-of-Work to a Proof-of-Stake consensus mechanism. Crypto Briefing caught up with the Ethereum Foundation’s Trent Van Epps to get some insight into what the cryptocurrency community can expect in the Ethereum ecosystem over the months ahead.

Ethereum Prepares for the Merge – Proof-of-Stake

Ethereum’s move to Proof-of-Stake has been a long time coming. Though the top smart contract blockchain currently uses a Proof-of-Work consensus mechanism, Vitalik Buterin was talking about the benefits of using Proof-of-Stake as early as 2014. He memorably predicted that Ethereum would be ready to move to a new consensus mechanism years ago, but the update has faced delays thanks in part to its magnitude and difficulty.

Said to be the “most complicated upgrade” in Ethereum’s history, the so-called “Merge” between Ethereum’s Proof-of-Work execution layer and the Proof-of-Stake consensus layer is expected to ship sometime in 2022. Ethereum recently completed its Kiln testnet, which included a move to Proof-of-Stake. Kiln was the final Merge testnet before public testnets upgrade, then the main event should follow soon after.

Ethereum currently relies on miners to compete to solve complex computational problems to earn the right to add blocks to the chain. In exchange, miners earn ETH rewards. While Proof-of-Work has served Ethereum well, it has its drawbacks, perhaps most notably the intense energy demands and high barriers to entry due to the expense of mining hardware.

With Proof-of-Stake, Ethereum validators who stake their ETH will be responsible for committing new blocks to the chain. ETH holders interested in staking are required to send 32 ETH to the Beacon Chain to become a validator (or otherwise join a staking pool). There are currently over 300,000 validators staking 11 million ETH.

Ethereum’s transition to Proof-of-Stake is highly anticipated partly because it is expected to reduce the network’s energy consumption by up to 99.95%. The upgrade will also significantly reduce ETH issurance. Thanks to the reduced emissions and Ethereum’s EIP-1559 burning mechanism, ETH could in turn become a deflationary asset.

To learn more about the Merge and its timeline, Crypto Briefing caught up with Trent Van Epps, the “Ecosystem Person” (his actual title) at the Ethereum Foundation. In a series of private messages, Van Epps spoke about the significance of the upgrade, the associated risks, and his long-term hopes for Ethereum.

Crypto Briefing: Ethereum fans have been waiting for the Merge for a long time. Why is the update so important?

Trent Van Epps: The Merge represents the culmination of a long journey for the Ethereum community, finally moving us from Proof-of-Work to Proof-of-Stake. The concept was written about and discussed with the community even before the Proof-of-Work chain launched in 2015!

Looking from the big picture, the Merge gives the community the satisfaction of seeing groundbreaking research and engineering problems resolved after setbacks, and restarts now implemented in robust, battle-tested code. For community members and external observers, this affirms that Ethereum is not satisfied with the status quo and that better worlds are possible. From a code and governance perspective, it brings the two existing groups of Ethereum client implementers closer together into the same processes: the execution (formerly known as ETH1.0) and consensus (formerly known as ETH2.0) clients. It may have been a grinding, arduous path to get there, but when the Merge arrives, Ethereum will be more secure, scalable, and sustainable than ever before.

On a technical level, when the upgrade goes live, the chain will become more secure. Blocks will become “finalized” after a certain point, introducing slashing disincentives for chain reorganizations by validators. Proof-of-Stake also removes the immense energy consumption and hardware waste associated with Proof-of-Work. Researchers estimate that Ethereum’s energy use will drop by up to 99.95%. A tiny fraction of regular commodity hardware will replace the current set of ASICs and GPUs that currently run Ethereum consensus. These two effects will lead to a more energy-efficient, diverse, geographically distributed, and anti-fragile set of consensus participants. It also sets the stage for sharding, a similarly significant protocol change that will separate the chain into many concurrent threads. Sharding will supercharge Layer 2 scaling efforts by increasing the block space available for data availability and settlement. With Proof-of-Stake, ETH priority fees that currently go to miners will instead go to a validator-controlled address on the execution layer. This means the ETH is immediately liquid. Given that full withdrawals of staked ETH will only go live in the Shanghai upgrade, this is a significant improvement for validators with locked-up capital. Finally, the upgrade will reduce annual ETH issuance from the current net-3.5% to roughly net-0%.

CB: Other than shifting to Proof-of-Stake, what alternatives were considered for Ethereum and its future?

TVE: There have been different designs for Ethereum Proof-of-Stake, including a hybrid Proof-of-Work and Proof-of-Stake approach detailed in EIP-1011, which had a minimum staking requirement of 1550 ETH! However, staying on Proof-of-Work exclusively was never considered.

CB: What is the biggest risk with the Merge?

TVE: The moment of transition is obviously crucial. That said, it has been tested many times and will continue to be until everyone is comfortable. However, there are new challenges that move to the forefront now that the execution and consensus layers are tightly coupled. Previously, the Beacon Chain (Proof-of-Stake) was only concerned with its internal state: the balances of validators, attestations, and finalizing empty blocks. At the Merge, blocks will hold the execution payload of transactions from users, protocols that are handling significant value today. This means the consequences for a client bug become much higher—these users will expect the same uptime guarantees that they’ve come to expect with Proof-of-Work over the past seven years.

Along those lines, client diversity on both layers is incredibly important, and something that the validator community needs to continue to improve. There are risks inherent in having any one client (Prysm) with over 67% of the network because this client can have a bug and finalize the chain at the expense of other minority client validators (Lighthouse, Teku, Nimbus, Lodestar). The good thing is that this effort has been slowly gathering steam over the past year, led by community members such as superphiz and a whole host of other contributors. After a lot of work, Coinbase and Kraken have both publicly committed to move away from their Prysm reliance.

“Ethereum is not satisfied with the status quo and better worlds are possible.”

CB: What are you looking out for with the Merge testnets?

TVE: The goal with testnets is to identify issues and fix them early to prevent them from happening on mainnet. We run through several testnets (and devnets, which don’t typically get advertised to the broader community) of increasing complexity to ensure that code is robust across all possible scenarios. In December, we launched Kintsugi, which was our first new public testnet. At that point, we expected the specification to be mostly in good shape and wanted to start getting real applications to deploy on it. We found some issues on the network during times of non-finalization, and got initial data points about applications working as expected.

We recently launched Kiln, our second public testnet, with these fixes. Now, we are looking for implementation and application or tooling-level issues. We’ve already found a few of the former and are working on fixes. This is the time for the community to try the network and make sure their projects work on post-Merge Ethereum.

Once we are confident that things are stable, we will move to upgrade Ethereum’s existing public testnets and monitor them afterwards. Once all testnets have been upgraded and are stable, The Merge will happen on mainnet!

CB: Several signs point to a June launch. Can you give any indication of a date, and when it’s likely to be confirmed?

TVE: [I] can’t really give a date, even a rough one, as much as we want to signal our excitement. The important thing is that this goes onto mainnet only after being tested in many different configurations, including with public participants. A good indicator will be when there are client releases with the intended moment of transition baked in. (Readers can follow the Merge Mainnet Readiness Checklist here.)

CB: How do you see the Merge changing Ethereum in the long term?

TVE: Having the Merge complete is a major milestone not just for Ethereum, but for the entire crypto space: a robust Proof-of-Stake protocol without relying on delegation, the largest number of validators of any chain, securing the activity of the most important execution layer.

When this milestone is complete, we can shift our focus to the next set of challenges. In fact, this has already started to happen! Shanghai is the next upgrade expected for the protocol at the end of 2022, and true to form, the community has a ton of ideas for what should be included. A big priority will be enabling withdrawals for current stakers. Beyond that, there are other Ethereum Improvement Proposals related to helping rollups scale and improving the EVM.

 

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