Partnered With:

Interpreting the Ethereum Merger and Fork: How will it change Ethereum?

Read this article in 21 Minutes

Consolidation reduces energy consumption but does not reduce Gas FEE

Original title: What Mergers and Forks will Do to Ethereum

Original source: OKX

Ethereum, as the king of public chain, has been in high heat at home and abroad recently. Whether it is the merger of Ethereum or the hard fork caused by the merger, is the focus of discussion. What impact will the Ethereum merger and hard fork have on crypto in the future? Please hear us out.

ETH: reduces energy consumption and circulation

ETH circulation decline

The merger will make the annual & NBSP; ETH Circulation fell to 0.43 percent from 4.3 percent.

This is because the PoS consensus mechanism brings a fundamental improvement in efficiency.

PoS aims to provide the highest level of blockchain security at the lowest cost, and to transfer these savings to ETH by reducing the number of ETH that need to be issued for payment security. Pows are costly and require significant resource overhead to compensate the security provider (miner) for their services.

In contrast, the cost of PoS security is simply an opportunity cost of capital and does not represent any real-world commodity or tangible cost. Unlike POWs, PoS do not need to issue large amounts of money to pay for security. Therefore, these lower security costs make PoS consensus mechanisms more efficient.

Ethereum was able to reduce annual ETH issuance from 4.3% to 0.43% due to reduced demand to pay PoW miners.

With PoS, circulation is reduced by more than 90%, while the administrative cost of being a PoS verifier is basically reduced to zero. Eventually the Ethereum merger will bring ETH into a deflationary era.

Consolidation reduces energy consumption but does not reduce Gas FEE

This is one of the main results of the merger and PoS. After the merger, Ethereum will consume about 99.95% less energy than it currently uses. PoS protects the blockchain with capital rather than energy. Thus, the amount of residual energy needed to maintain Ethereum is comparable to basic computer usage;

After PoS is enabled, the energy cost of Ethereum is just running one node - about 2.6 MWh per year. Ethereum will actually be the greenest financial system in the world, roughly equivalent to the energy consumption of the Netherlands.

Merging is not a scaling solution for Ethereum, it is limited to upgrading Ethereum's consensus mechanism. In practice, it won't have any impact on the current user experience of Ethereum. gas fee It is a function of block space demand and is not affected by consensus mechanism.

Ethereum's vision is to be a decentralized, secure, energy efficient, scalable network. After the merge is complete, it's time to start sharding and layering. Both of these will have significant implications for the scalability of Ethereum.

The revenue of pledge user increases

Users who pledge on Ethereum will receive an annual interest rate of about 4.2%, before deducting server costs. Kraken, in its report on the State of Pledge in Q1 2022, expects the APR for pledge users to increase to between 8.5% and 11.5% after the Ethereum Merge is completed.

Present pledge & NBSP; ETH is a one-way operation, the pledgers cannot withdraw their ETH rewards, Ethereum will be withdrawn after the merger, and ETH will be sold off in bulk when 12 million pledged ETH are unlocked.

We have reservations about this view for the following reasons:

The merge does not unlock any ETH. Unlocking will take place during the first hard fork after the merger, probably 6-8 months from now. This means that no additional ETH issued by PoW (about 13,000 ETH/ day) will be sold for several months, and no additional ETH issued by PoS will enter circulation.

Just as there is a queue to save ETH, there is a queue to fetch ETH. Assuming a big sell-off, everyone would be in line, unlocked at a rate of 1,125 per day. It will take more than a year for everyone to thaw, and over the course of a year, about 38,000 ETH will enter circulation every day (about 1% of the daily average).

After the merger, the verifiers will also begin to receive fee incentives, and there are estimates that yields could double. There are now thousands of people waiting in line to enter the pledge. Since they can accept 5% ETH yield, I don't think they will give up the deposit when the yield becomes 10%.

Ethereum Ecology: Goodbye miners, smoother path to compliance

Miners will no longer be able to mine Ethereum

EIP 1559 had been activated on Ethereum before the merger, and most of Ethereum's transaction fees had been burned off for nearly a year when the merger occurred. The remaining fees that are not burned after EIP-1559 (called "Tips" or "priority fees") are paid to the block drawer of the PoS block, not the PoW miner.

If any node continues to mine on the PoW version of Ethereum, they will be in the minority of the fork, and the economic value of their block rewards will be much lower than their operating costs. Since miners are profit-driven, it is expected that the miner group after Merge may:

1. Mine other PoW tokens

2. Data centers that provide high-performance computing

3. Provide computing for Web3 protocol

4. Sell the mining machine and pledge the dug ETH to participate in PoS

Upgrade of technology platform

One of the key features that has made Ethereum such a successful platform and a serious challenger to Bitcoin's market dominance is the Ethereum Virtual Machine (EVM), which allows the creation and use of smart contracts on the network.

To help improve the system and make it easier for newcomers to the platform, Ethereum will replace the EVM with a new system after the upgrade, called Ethereum WebAssembly(EWASM). The system will allow developers to freely write code creatively without having to learn Solidity, the native Ethereum proprietary language.

The road to compliance is smoother

The recently enacted Responsible Financial Innovation Act aims to encourage "Responsible Innovation" by integrating digital assets into existing law and provides a clearer framework for the crypto industry. The SEC will regulate digital assets classified as securities, while the CFTC will oversee those that are recognized as commodities.

This may pave the way for the arrival of an Ethereum upgrade, with PoS converting ETH into Internet bonds, a viable alternative to US Treasuries. Although ETH is more volatile than bonds, it guarantees a higher yield, and real yields would still be better if ETH prices had not collapsed. Ethereum's conversion to PoS could be a pioneer that other cryptocurrencies could follow in the future, and even prompt some organizations or governments to fully embrace cryptocurrencies. This approach can greatly boost Ethereum adoption and move cryptocurrencies toward a better future.

Public chain competition pattern:

Optimistic expectations:

Everything went well, and Ethereum was dominant, even as other public chains became Layer2 of Ethereum.

Pessimistic expectations:

The merger was delayed again and again, people lost confidence in Ethereum's execution, other public chains rose up, and the merger became a game of "waiting for Godot".

Multi-chain infrastructures like Cosmos allow multi-chain ecosystems to blossom and eat into Ethereum's market share.

What is a hard fork?

As the merging node of Ethereum slowly approaches, the community users of Ethereum hold different views on the transfer of PoS consensus mechanism. In fact, the main opinions are focused on whether to carry out a hard fork? The main argument is made by ETH miners and some stakeholders.

加密对冲基金 Galois Capital 分享了一项问卷调查：「以太坊在 The Merge 后是否会分裂成两条链」。其中 53.7% 的受访者表示合并会顺利进行，但 33.1% 的受访者认为链条可能会分裂。如果它确实分裂了，即使已经存在 PoW 版本的 ETH，也会有 PoW 和 PoS Token 。

Hard forks often occur when consensus rules are updated, resulting in old "not updated" nodes that cannot participate in the new consensus mechanism. These unupdated chains are kept on the original chain alone, and the two chains are separated from each other and do not interfere with each other's authentication and broadcast blocks.

For a blockchain, a hard fork is a normal upgrade, which is basically a planned update in the roadmap and belongs to the category of consensus. However, sometimes some hard forks do not maintain consensus, and The division of The community leads to The generation of multiple blockchains. For example, in 2016, Ethereum split ETH and ETC due to The hacking incident of The DAO.

Ethereum has gone through a number of hard forks since its birth in 2015:

ETC

ETC 是以太坊历史上第一次硬分叉的结果。此次事件发生在 2016 年，原因是 The DAO 的合约漏洞导致资金被黑客盗取。不同意硬分叉的团体继续支持旧的区块链，即承认资金损失。ETC 是最有争议的一个，目前 Token 在 CMC 的市值排名为 19。

ETZ

ETZ 是由一群技术爱好者在 2018 年发起，旨在打造更好的去中心化应用平台。但似乎支持者太少，dapp 也没有发展， Token 价格几乎归零。

Reset hard fork on difficulty bombs

The difficulty bomb was created to smooth the transition from PoW chain to PoS chain, artificially increasing block difficulty so that miners could not continue to receive rewards and blocks, avoiding the result of the coexistence of new and old chains. However, due to the technical progress of ETH2.0, the difficulty bomb has been delayed and reset six times, resulting in six hard forks. These hard forks are not controversial, and there are no new forked chains.

其中 ETC 算的上是以太坊的硬分叉成功案例，得到了大部分矿工的支持。而本币以太坊合并可能产生的硬分叉有着很大的不同，但是 ETC 时代以太坊社区相关的人士（矿工，开发者，节点等）对去中心化的认知有着比较大的分歧，并且技术实现有着较低的难度，基本不需要考虑智能合约和 Token 的问题。而对于本次以太坊 2.0 合并来说，它需要保留以太坊上的执行智能合约的功能和完成的历史数据，包括当前所有以太坊用户的用户状态，以及运行过的所有智能合约的历史记录。

Although the relative probability of a successful merger of Ethereum is relatively high in terms of current state and user opinions, is a successful hard fork bound to fail? Of course not, we can from two aspects to discuss.

What are the conditions for the success of an Ethereum hard fork?

If the fork chain is as good as ETC, in the current Ethereum ecology and public chain environment is very difficult. At present, the competition of public chain racetrack is fierce. On the basis of "impossible triangle", high performance and PoS consensus mechanism may become the trend of The Times. If there is no high investment and more technical leaders to support the hard fork, then in order to "insist on" fork and fork, it will become more risky, and there is no potential to complete the possibility of subsequent ecological maintenance. However, due to the uncertainty of the exact timing of the Ethereum merger, it also gives the team who want to create a hard fork more time for development operations and risk control, which can also improve the probability of success.

In the short term, the most important and important thing for a fork to happen is if the hard fork's backers can win over more supporters, including miners, trading platforms, developers, and Kols. Considering the current way out for Ethereum miners, there are not many alternatives except ETC, and ETH's current computing power is seriously overloaded for ETC, and it may even grow to $2000 when ETC can barely consume the existing ETH computing power, so they will take the lead in supporting forking chain to reduce losses. At the same time, in order to obtain the fork currency, some people will buy ETH, thereby temporarily driving up the demand for ETH.

In the long term, the fundamental reason for the merger of Ethereum is that Ethereum, as the king of public chains, is not capable of supporting on-chain activities in performance, let alone supporting the supply of underlying facilities in the future Web3.0 era. The PoW bifurcation chain will also face this problem, and with the development of ecology and the increase of the amount of computing, the requirements for mining machines will continue to increase. It is also important to consider whether a miner is willing to commit to a forked chain for a long time.

In fact, we can see that the old PoW public chain does not have very good performance in terms of performance and ecological construction. The final rivals of ETH PoW forked chain in the future are the public chain of PoW on the same track and the PoS public chain with immature ecological development and insufficient users. The PoW fork chain can work with the Layer2 team and may become a competitive public chain if it is provided with adequate and long-term technical support from the project.

What are the risks of an Ethereum hard fork?

51% attack and replay attack

Branch chain and etheric fang mining machine is the same, calculate the force is also relatively easy to loan, if only a tiny part or even a few miners support branch chain, so complete in a short period of time after the bifurcation, fork is on the chain and the block of time will be very unstable, the rest of the miner can be relatively easy to branch chain on 51% of attacks. In fact, this problem happens many times on ETC. It is for this reason that small forked strands simply cannot succeed.

In addition to 51% attacks, replay attacks can also occur. A hard fork in Ethereum creates two chains with identical address and key production algorithms and identical transaction formats, resulting in transactions on one chain that are likely to be perfectly legal on the other. So a transaction that you initiate on one chain can be rebroadcast on the other chain and possibly confirmed.

Smart Contract Risks

Another risk is smart contracts. At present, most of the rights of smart contracts are in the hands of the project parties, and the contract can be changed at any time to affect the situation of fork coins. These forked coins may be worthless, but they are inextricably linked to the ETH forked coins in the smart contract. Once the ETH forked coins have value, there will be room for arbitrage. Some can also make risk-free arbitrage through flash loans.

Finally, on the hard fork, I hope you can think about the possibility of crypto world and the construction aspect of future ecology through the important upgrade of Ethereum. After all, what we want to see is the continuous improvement of ecology.