Finematics | Watch the video explaining the motivations, differences, and common misconceptions of Ethereum upgrades!

Expected Ethereum merge "The Merge" will happen on 9/19, how much do people know about the Ethereum merge? Finematics, a DeFi educational video content creator, has a new video that explains "The Ethereum Merge" in a light and simple way. How much do you know about the following questions?

• What is the motivation behind the Ethereum merge?
• What is the mechanism of the Ethereum merge?
• Diversity of clients
• Differences post-merge?
• Common misconceptions
• Potential risks

Motivation for Ethereum Merge

The motivation for the Ethereum merge is to transition the current Proof of Work (PoW) mechanism to a Proof of Stake (PoS) mechanism.

• Proof of Work (PoW) refers to a blockchain network maintained by miners who purchase and operate mining equipment. PoW miners consume electricity to produce blocks and earn transaction fees.
• Proof of Stake (PoS) involves validator nodes staking Ether as a condition to validate and operate the network. PoS mechanisms do not consume as much electricity.

Finematics believes that the transition to PoS will make Ethereum more efficient and secure, laying the foundation for the next scalability technology, sharding.

Indeed, the transition from PoW to PoS has been part of Ethereum's roadmap. To mitigate risks during the transition, researchers and developers have divided the process into two steps.

The first step was the launch of the Beacon Chain in December 2020. Its purpose was to create a parallel PoS chain for testing without impacting the existing PoW mainnet, where billions of dollars of economic activity are ongoing.

Simultaneously, the Beacon Chain provides ample time for ETH stakers to accumulate a significant amount of staked Ether to ensure network security post-merge.

As of the time of writing, Beacon Chain has accumulated 13.18 million ETH with 412,022 active validators. The staking annual return rate is approximately 4.2%.

Due to the significant reduction in energy consumption, PoS aligns better with societal and regulatory expectations in terms of energy efficiency, ESG, and corporate governance.

The current issuance of ETH comes from block rewards under the PoW mechanism and staking rewards on the Beacon Chain under PoS. After the merge, PoW will cease, and issuance will solely come from the PoS mechanism. Finematics describes this as a "Triple Halving," equivalent to three Bitcoin halvings.

Another argument is that post-merge, Ethereum supporters can participate in consensus from home, enhancing network security without relying solely on institutions and high-level miners.

Mechanism of Ethereum Merge

Finematics metaphorizes Ethereum as a car driving on a highway where the "merge" is akin to converting a gasoline car to an electric one, all while in motion without stopping.

How does the Ethereum community achieve this goal? Developers first built an independent electric engine and tested it with actual staking for over 1.5 years, running it simultaneously with the gasoline engine.

What happens during the merge? The car switches to the electric engine, deactivating the current gasoline engine.

The advantage of running in parallel during testing is that it allows testing of the electric engine without halting the vehicle. The metaphorical "stop" signifies halting block production, which would pause transaction recording on the blockchain. This pause could be disruptive to applications on Ethereum, especially DeFi applications.

In addition to the metaphor, here is more technical information:

The merge involves combining the user state of the Ethereum network with the PoS Beacon Chain. Currently, node operators use clients like Geth, Erigon, and Nethermind to verify the Ethereum network, running the execution layer (EVM) and consensus layer (PoW) together. To smoothly transition to PoS, the execution and consensus layers must be separated. These two layers can run independently and are developed by different teams.

Post-merge, a full node will consist of an execution node and a consensus node, with an Engine API responsible for communication between the two. See the diagram below.

Popular consensus layer clients currently include Prysm, Lighthouse, and Teku. These execution and consensus layer clients will combine to form an Ethereum full node post-merge. Node operators will have numerous combinations to choose from when forming a full node, with 4 mainstream execution layer clients and 5 consensus layer clients resulting in 20 pairing options.

During the merge, execution layer clients like Geth will begin listening to the PoS block state. The merge will be triggered once the variable "TERMINAL_TOTAL_DIFFICULTY" reaches the total difficulty of the PoW network, switching to the PoS chain. This marks Ethereum's first upgrade to use a total difficulty variable rather than block height to prevent attackers from maliciously forking the PoW chain at low difficulties, causing finality confusion.

Post-merge, applications on Ethereum will continue to function as before, with the merge process undergoing multiple tests, including shadow fork merges and testnet merges. After Ropsten and Sepolia testnets, the final testnet Goerli will bring the mainnet merge date closer.

Diversification of Clients

Finematics notes that unlike other platforms, Ethereum does not rely on a single client. Currently, there are four mainstream execution clients: Geth, Nethermind, Erigon, and Besu. This diversity allows for quick switching to another client in case of client failure, making Ethereum more resilient to attacks, vulnerabilities, or errors introduced by a single client.

Client diversity will play a more critical role post-merge.

Finematics explains that in a PoS network, issues may arise due to the percentage of staked Ether, leading to varying degrees of impact. In the worst-case scenario, if over 2/3 of staked Ether is affected, undesirable outcomes may become final or worse.

If half of the staked ETH is impacted, an unreverted invalid main chain may result, while a third of staked ETH being affected would prevent new transactions on the network from achieving finality.

If 70% of consensus clients run on Prysm, a failure could lead to severe consequences. However, with Prysm holding only 40% of the network influence, a failure can be mitigated by halting Ethereum's finality until the issue is resolved or replaced by another client. Prysm currently holds around 40% of the consensus client market share, an improvement from the early 2022 figure of 70%.

Differences Post-Merge?

Finematics states that the block time post-merge will not be the same as PoW, typically averaging 13 seconds, but it will be fixed at 12 seconds post-merge. Although block times may occasionally exceed 12 seconds, they should generally be below 13 seconds.

Finematics also outlines the following points:

• Post-merge, reduced block time differences will allow faster transaction confirmations on average.
• Ethereum and Bitcoin networks fundamentally differ, with one being a new network driven by PoS and the other a well-established PoW network.
• Enhanced economic security and weakened attacker capabilities.
• The GPU market may witness improved supply post-merge.
• Expectations of increased currency scarcity post-reduction in ETH supply.
• Developers previously focused on the merge can now work on other improvements post-merge, such as sharding technology.

Common Misconceptions Explained

Finematics explains common misconceptions:

• The merge will not scale Ethereum or reduce transaction fees.
• Although there will be a slight reduction in block time post-merge, the primary significance of PoS is to lay the groundwork for further scalability technologies.
• Post-merge, ETH cannot be immediately withdrawn from validators; it must wait for the next hard fork upgrade post-merge.
• Post-merge, transaction fees collected will have their own collection addresses on the EVM, allowing immediate access to accumulated transaction fees.
• The merge will not halt Ethereum.
• The merge will not create another ETH token.
• ETH supply will not continuously decrease to zero; it will balance based on network demand, especially from transaction fees and issuance. This balance will evolve over time but will not approach zero.
• The estimated peak ETH supply at the merge is 120 million ETH, reaching a long-term equilibrium of 60-100 million ETH over the next few decades.

Risks of the Merge

1. Post-merge, due to the public selection process, validators may know the next block proposer in advance, making them vulnerable to DoS attacks. Attackers could target the next proposer to disrupt block processing and potentially gain access to high-value transactions.

The primary solution to this issue is a single secret leader election, employing sophisticated cryptography to prevent attackers from knowing the next block proposer in advance while providing the information to the actual proposer.

2. Stake concentration in PoS pools like Lido and Coinbase may pose regulatory scrutiny or extortion risks. In Lido's case, there are also risks of governance centralization and smart contract vulnerabilities.

Conclusion

This is one of the most anticipated upgrades in the cryptocurrency space, scheduled for September, pending the successful merge of the Goerli testnet. Upon completion, it will pave the way for subsequent significant upgrades Surge, Verge, Purge, and Splurge.