Preparing for the Ethereum Merge

CRYPTODAY 093

We’re one month away from the biggest scheduled milestone in the history of crypto: the Ethereum Merge. Over the next 4 weekends, I’ll be discussing several angles on the Merge, and I’ll start with what you need to know to properly prepare for it.

1. What is the Merge? Ethereum is going to transition from the electricity-intensive “proof-of-work” (PoW) consensus protocol to a “proof-of-stake” (PoS) consensus protocol. Main difference: PoW uses electricity as its primary unit of security, whereas PoS uses cash positions. (Read more here.) This transition event is called “the Merge.” Amongst other things, the Merge will mean a 99.95% decrease in the network’s electricity consumption, as well as an end to the Ethereum mining industry.

2. When is the Merge Happening? The current target is September 15th for the main Merge, but this will occur in two stages. The first is the “Bellatrix” upgrade which is scheduled for Sept 6th at 7:30pm Manila time. This upgrade will set the stage for the “Paris” upgrade which will occur approximately 10 days later. There’s no specific time for the Paris upgrade, because the network needs to wait for an agreed Proof-of-Work difficulty level before it will transition into the new consensus protocol. In other words, the Merge could happen later than September 15th, but it would still be considered a successful launch.

3. How Do I Prepare for the Merge? If you hold any ETH, or ETH-based tokens like USDC, or any NFTs on the Ethereum network, you will need to update your wallet in order to transact using the new protocol. Every wallet is currently readying for the new change, and if you’re using a mobile or desktop app, you will have new software updates to download in September. If you’re using Metamask as a Chrome extension, it will auto-update the next time a new version is available, so you will probably not have to do anything. Note that your assets will be safe regardless of whether you upgrade or not, although it’s always wiser to keep your software up-to-date. My only other suggestion would be not to do any transactions on the day of the merge, but that’s just me being overly cautious. The Ethereum Foundation is aiming for zero downtime with this event, so theoretically, you could even do trades or transactions on the day itself, and you’d be fine.

4. Will the Merge Save Humanity from Climate Change? The biggest improvement that the mainstream media will latch on to is the fact that the Merge will reduce electricity consumption by 112 terawatt hours. That’s the same amount as the entire Republic of the Philippines, but it’s incorrect to say that we are saving power. Remember that the electricity that goes to powering the Ethereum network is consumed by the miners that are devoting their computers to protect it. These same miners become redundant after the Merge because PoS doesn’t rely on mining for its security. So what will they do instead? Most likely they will mine other blockchains — $ETC comes to mind. They have to do this because the only alternative is to sell off all their equipment and quit the industry. So the most likely scenario here is that the electricity would just go towards mining something else, and unfortunately, it will probably be something far less interesting than Ethereum.

5. What’s This I’m Hearing about an Ethereum Fork? Will I Get Free Tokens? Miners have a lot of expensive equipment and infrastructure that they want to continue earning from, so a few of them have formed an alliance to maintain the old PoW version of Ethereum. In order to pull this off, all they need to do is NOT update their software to Bellatrix. If there are enough miners running the older software version, we will get a chain fork, with two versions of Ethereum running on two newly-separated blockchains. This is when things get messy: users would have two versions of their wallets, one on the old PoW network and one on the new PoS. Effectively that means your ETH holdings have doubled, because you could spend on one chain and it would not affect your account balance in the other. Of course, now each of those blockchains will need to find its own respective market price, kind of like a stock split in the traditional markets. We’ve seen this happen many times in the past — the most well-known ones are Ethereum vs Ethereum Classic in 2016 and Bitcoin vs Bitcoin Cash in 2017 — and it always creates some temporary market chaos. (It was so prevalent in 2018 that some unscrupulous new projects started to use it as a fundraising instrument, called an “Initial Fork Offering.”)

6. Ok, NOW I’m Worried. If Ethereum Does Fork, Do I Have to Do Anything? In 99% of cases, no. All you need to do is sit back and let the industry sort itself out first. Your Binance account will show an extra Ethereum balance with a slightly different name within a day or two. If you’re using a decentralized wallet like Metamask, you’d just need to connect to a different mainnet in order to see your balances on the other chain. Once you have access to your new forked Ethereum (the symbol is $ETHW), it would be like free money that you could trade on any exchange that supports it. The Poloniex exchange is already trying to trade the potential future value of $ETHW, but thus far it's not looking promising. Let’s be honest here: that forked ETH would probably be worth very little even with all the miners supporting it. Why? Because there’s at least $100B in stablecoins sitting in the Ethereum network right now, and the issuers of those stables can only support ONE version of Ethereum. If they didn’t, then they would be liable for double the fiat. That same issue would force NFT platforms to choose only one version of Ethereum — you can’t have two versions of every Bored Ape and Cryptopunk running around after all — and that version is likely to be PoS.

7. Will the Ethereum Merge Save Us from High Gas Fees? Unfortunately, this is a misconception that most people (including myself) have repeated a lot about the Merge. Moving from PoW to PoS does not reduce the gas fees, because high gas results from high network traffic and limited block space. Ethereum gas fees are low these days because traffic is low, and if the network becomes busy again, then those high gas fees will return. The long-term vision for achieving low gas fees on Ethereum relies on second-layer protocols like Arbitrum, Polygon, etc., so don’t hold your breath for cheaper gas fees on the base layer.

   That’s it for this week, cryptofam! I’ll continue next week with thoughts on how the Merge will affect the markets and trading, as well as answers to any questions I get in the comments :)