The Merge Explained
Since first being mooted in the Ethereum white paper back in 2014, there has long been the intention within the Ethereum development community to transition away from a proof-of-work based consensus mechanism, to introduce validation via proof-of-stake to ensure the viability of longer term scalability solutions and associated energy use reductions.
With (what was once known as) Ethereum 2.0 now set to launch within the next 2 weeks, it feels like an important moment to outline how we got here and what the future looks like for the Ethereum network and wider ecosystem.
What is The Merge?
The Merge refers to the moment (or more accurately, process) via which the current Ethereum mainnet (execution layer) will “merge” with the Beacon Chain proof-of-stake system (consensus layer), such that mining is no longer needed to secure the network. The Beacon Chain has been live and actively proving its viability since December 2020 with over 10% of ether staked thus far. This goes some way to show the overall level of support and faith in the planned network upgrade, as staked ETH has been effectively locked until post-merge.
The Merge consists of two final stages - the first being a hard-fork of the beacon chain consensus layer as part of an upgrade dubbed “Bellatrix” which successfully occurred at epoch 144896 (11:34:47am UTC on Sept 6, 2022). This upgrade gives the beacon chain the required logic to ensure it’s monitoring the mainnet and ready take over from proof-of-work consensus at the merge transition point.
The second and final stage of The Merge is an upgrade referred to as “Paris” which is a consensus upgrade including changes to the block structure, block processing, fork choice rule and network interface, as outlined in EIP3675. This step serves to ensure that a final or “terminal” proof-of-work (PoW) block will be defined, after which no subsequent PoW block can be valid in the canonical chain, and every new block will need to be validated via the proof-of-stake consensus layer. Put simply, this is the point at which Ethereum has finally transitioned to what was previously known as “Ethereum 2.0”, proof-of-stake is live and the consensus and execution layers have been “merged”.
The date for the “Paris” upgrade is defined in the code by a mechanism called “terminal total difficulty” which defines the cumulative difficulty on the existing proof-of-work chain, which when reached or exceeded will trigger the subsequent block to be marked as the terminal PoW block. After this terminal block is mined, any subsequent (child) blocks mined will be invalid and the chain will continue with proof-of-stake block production as per the beacon chain mechanism. The exact time for this upgrade will depend on hash rate, but is anticipated to fall somewhere between 10-20th September.
There has been some speculation in the community around the viability of a continued PoW ETH forked chain that would ignore the new consensus rules and continue to rely on the mining model. Unsurprisingly the only major support for this is primarily found within the mining community who are incentivised to find a way to keep their machines making money. Implied value from September futures contract trading puts a price in the region of no more than $20 on a theoretical ETHPoW token. At the time of writing, the public codebase for a non-merge node client is essentially a Geth fork with minimal additional development and is still a fair way from offering a safe and functional PoW network, but may well have been additional behind the scenes development ongoing within the mining community.
The overwhelming majority of service providers in the space such as stablecoin operators, have pledged to exclusively follow the upgraded PoS Ethereum network, so an alternative PoW Ethereum chain is likely to be valued considerably less by the market, along with all of the assets (including NFTs) on that network. As with previous cases of hard forks that create a chain split, the best thing to do in the first instance is not use the forked chain, or wait until the dust settles to avoid the risk of replay attacks.
What are the benefits
The move to proof-of-stake consensus is an important step in the long process of improving the scalability of the Ethereum network by enabling further steps such as sharding further down the line. Whilst the protocol changes through the move to PoS do not offer any scaling improvements in isolation, the architectural changes are part of the longer term development plan that will facilitate future protocol improvements offering significant scaling potential.
The largest short-term gain for Ethereum post-merge will be in relation to the network's environmental footprint and energy usage, with the energy intensity of proof-of-stake being orders of magnitude less than that of proof-of-work. When the merge is complete, the energy required to validate Ethereum transactions and handle block production is estimated to decrease by over 99.9%, which is significant in a world of increasing scrutiny towards energy usage and facing substantial challenges surrounding the cost of fossil fuel energy sources.
Whilst the debate around the tradeoffs between proof-of-work and proof-of-stake is not straightforward, the Ethereum community has long since committed to moving away from the power hungry PoW mechanism in its path towards becoming the dominant global compute layer. In a world of increasing net-zero commitments, it is hard to see a future in which regulatory scrutiny of energy-use will subside, making this a potentially important step in keeping on the right side of governmental and institutional opinion.
Will I have to move my NFTs to a new blockchain?
As a user of Ethereum and holder of NFTs, you won’t need to do anything - your NFTs will stay on the Ethereum network and the service providers (such as KnownOrigin) will make sure all the technical changes are handled behind the scenes.
Please ignore any requests to move any tokens to a new blockchain, these are most likely scams designed to transfer your tokens out of your control.
Will The Merge Change How KO Works ?
No, KO will not change for artists or collectors, there will be no changes to the minting process, or how a collector purchases art on the marketplace.
How does The Merge affect gas prices?
Ethereum.org updated misconceptions about the merge in August: The Merge is a transition from proof of work, to proof of stake (POS) consensus, this initial improvement to the Ethereum blockchain does not directly expand network capacity, or throughput to lower gas fees, however, the transition to POS will increase scalability in the surge phase through use to sharding and rollups which will reduce gas fees.
Will I have NFTs on 2 networks?
Strictly speaking, if a proportion of the Ethereum mining community doesn’t choose to follow these updates and opts to run non-compatible node software, then they will no longer follow the post-merge Ethereum network, resulting in a chain split and the creation of a new chain for proof-of-work Ethereum. There is no certainty on precisely how this will play out, but a new forked Ethereum proof-of-work network is likely to be valued considerably lower than the successfully upgraded Ethereum proof-of-stake network, and the overwhelming majority of large industry players have publicly stated their intention to exclusively follow the “merged” Ethereum network. As with all cases of hard forks, less technical users would do well to “wait and see” before attempting to perform any activity on a theoretical proof-of-work chain.
Most NFT marketplaces including KnownOrigin have committed to not support any POW chains.
Are there any risks to regular users?
Firstly, it’s important to state that regular users can safely just ignore this whole process and continue to use Ethereum via wallets such as Metamask as they always have without any risk. The major Ethereum infrastructure providers will all follow the PoS chain, so performing standard transactions and interacting with DeFi will be the same as always. The main risks to regular Ethereum users are only relevant if they interact with a forked PoW chain, which will create the possibility of replay attacks. In theory this risk could be minimised if developers working on a PoW ETH version chose to implement a parameter known as chainID that clearly defines ETHPOW as a different network, but this doesn’t seem to be properly implemented in their public codebase as it stands. Replay attacks occur when transaction data is replicated on both chains, so you may only intend to sell your PoW ETH, but the transaction is maliciously rebroadcast on the post-merge mainnet, selling all of your real ETH too.
There are a few ways to mitigate this risk, but the easiest way is to just avoid touching the PoW ETH network. The value of assets on a forked PoW ETH is likely to be minimal if previous comparable situations (ETC, BSV, BTG) are anything to go by, but if this turns out not to be the case, and you wish to access assets on the PoW chain, then you would need to empty your ETH (and ERC20 tokens, NFTs etc) from the PoS address, before doing anything with the assets in that address on the PoW ETH network. This would make any attempted replay attack unsuccessful as the replayed transaction would be invalid when trying to move assets that have already been moved elsewhere with plenty of confirmations. The risk could also be mitigated through nonce manipulation to achieve the same result of causing a replayed transaction to be invalid.
The final countdown to The Merge is now ongoing, and the approach to the terminal proof-of-work block can be observed via EtherNodes. As of the time of writing, the merge is expected to be completed on Thu, Sep 15, 2022.