The Ethereum Merge has begun

The Ethereum Merge has begun

The Ethereum Merge is upon us. [Image courtesy of Liam Cobb]

There’s never a dull moment on the blockchain. Here’s what you need to know this week:

Ethereum’s Merge has begun. The blockchain’s upgrade to Proof-of-Stake was activated by this week’s Bellatrix upgrade.

All your Ethereum Merge questions, answered. We’re breaking down the most commonly asked questions about the Merge.

A reading guide to learn more about the Merge. We’ve collected some helpful resources to help you dive deeper into Ethereum’s upgrade.

MERGE ON THE VERGE

Ethereum’s Merge is underway. What’s the reaction?

On Tuesday morning, Ethereum's transition from Proof-of-Work to Proof-of-Stake approached completion when the last major upgrade of its network ahead of the much-anticipated Merge was activated. The so-called Bellatrix upgrade marks the first of two steps (the Paris upgrade, which will complete the process, is expected next week) that will serve to bring the Merge to fruition. A complex technological endeavor years in the making, the Merge aims to make the second-biggest crypto by market value more energy-efficient and scalable. With the Merge now underway, let’s take a look at some market, developer, and investor reactions.

  • As the Merge upgrade kicked off, ETH was up more than 5% as of Tuesday morning and outperforming the broader crypto market. Enthusiasm for Ethereum Name Service domain names (basically web3 usernames that represent long alphanumeric crypto wallet addresses) has also surged, with a 170% spike in sales sending ENS names to the top of the sales chart ahead of Bored Ape Yacht Club on NFT marketplace OpenSea. The lead-up to the Merge has seen derivatives trading for ETH increase roughly 10% over the last month, with open interest in ETH options having exceeded those of Bitcoin for the first time in August, noted the Block. 

  • Ethereum developers were, not surprisingly, excited about the success of the Bellatrix upgrade. Developer Tim Beiko perhaps captured the mood of the moment when he noted that “I’ve said ‘we might have merged by then’ twice on meetings today and it feels pretty surreal tbh! It's happening.” With one final hurdle to come before the Merge is complete, developer Preston Van Loon said that for those working on the project, “we're not sleeping much in part out of excitement and in part out of a little bit of anxiety because it is such a big deal with so much at stake.” 

  • What will happen to Ethereum’s price as the Merge is completed? That’s anyone’s guess. Some traders are expecting it to push prices higher, while others think it will do the opposite. (You can read Coinbase Institutional Research’s examination of bull and bear cases here.) As a report from Citi noted, “it is hard to say how much of the Merge is priced in” already. But as Matt Hougan, CIO of Bitwise Asset Management, told Forbes, “Anyone who's expecting the Merge to happen on Sept. 15 and ETH price to double, I think, will be sorely disappointed.”

Why it matters… After months of adverse headlines about inflation, the Fed’s rate hikes, and crypto winter price declines, the reality that Ethereum’s long-awaited upgrade is here could inject some much-needed optimism into the market. One of the primary reasons for this renewed confidence? As one commentator put it, Ethereum’s transition “will prove that a decentralized and permissionless network can operate in an energy-efficient manner.”

ETH FAQ

Five key Ethereum Merge questions, answered

Still trying to wrap your head around the Merge? We’ve got you covered. Below we’re answering the most common questions about the Merge, from what it is to why it matters. Let’s dive in.

  • What is the Merge? The Merge upgrade will see the Ethereum blockchain move from its current, energy-intensive "Proof-of-Work" system to a "Proof-of-Stake" system. (Read more about the differences between PoW and PoS systems.) 

  • What exactly is being merged? Ethereum’s upgrade will combine the current Proof-of-Work blockchain with a Proof-of-Stake blockchain called the Beacon Chain, which has been running since 2020. After the Merge, the Beacon Chain will begin validating Ethereum mainnet's blockchain through a system based on rewards and penalties (i.e. "stake") rather than the costs associated with energy-intensive computations (i.e. "work").

  • Why is it so important? The biggest protocol upgrade in the history of crypto will see the second-largest cryptocurrency’s network move toward being vastly more energy efficient, potentially reducing its consumption by as much as 99%. The Merge will also allow for the building of more efficient scaling solutions — Ethereum’s smart-contract compatible blockchain powers everything from DeFi to Bored Ape Yacht Club, but the tsunami of resulting traffic has bogged down the network.

  • Will the Merge reduce Ethereum’s gas fees? In the short-term, probably not, as the upgrade is about a change in the consensus mechanism (the way Ethereum validates transactions) rather than an increase or expansion of its capacity. 

  • What comes after the Merge? In July, Ethereum co-founder Vitalik Buterin laid out a series of upgrades that will follow the Merge. First up is what he referred to as “the surge,” which will increase scalability and enable faster, cheaper transactions via a process called “sharding,” which essentially divides large pieces of data into smaller shards, making it even easier for layer-2 blockchains (like Polygon) to operate more efficiently on top of the main Ethereum blockchain. (Read our explainer of the other upgrades here.)

AROUND COINBASE

A rundown of Merge resources

  • Our guide to all things Merge, complete with a countdown clock!

  • Here’s a post from our blog on what users can expect from Coinbase in response to the Merge. 

  • Coinbase Head of Institutional Research David Duong unpacks the bull and bear investing cases for Ethereum related to the Merge along with some misconceptions surrounding what this upgrade means to the network and its users.

  • Coinbase software engineer Yuga Cohler explains why accomplishing the Merge will “prove the viability of decentralization as a social organizing principle.”

  • ICYMI last week, listen to Coinbase CEO Brian Armstrong and Ethereum co-creator Vitalik Buterin discuss the Merge, Proof-of-Stake, decentralization and much more on our Around the Block podcast.

TOKEN TRIVIA

Which of the following is not a planned Ethereum upgrade?

A

The Verge

B

The Scourge

C

The Purge

D

The Splurge

Find the answer below.

Trivia Answer

B

The Scourge