HashKey Learn | What the Ethereum Merge Really Means


In what is regarded by many in the digital asset community as the most significant technological upgrade in the history of crypto and arguably the biggest event in the space in 2022, the Merge would officially mark the Ethereum network's full transition from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) blockchain.


Much has been said about what the Merge actually is, how Ethereum would look like post-Merge and when exactly it is scheduled to happen, but few have actually commented on what the Merge actually means to the ecosystem from a macro-finance level. In this latest episode, Jason Li talks to Henrique Centieiro (Senior Research Manager at HashKey Capital), who describes post-Merge ETH as the "treasury bond of the Internet".


Also, would gas prices really NOT be cheaper post-Merge like what everyone has been saying? Will ETH holders immediately start dumping their ETH after the Merge, causing ETH's price to crash? We explain it all.




Full Transcript


What's up, everyone? Welcome to the latest episode of the HashKey Learn series, where we speak to experts and professionals in the crypto industry to understand the most pressing and important subjects in the world of digital assets.

Today I am again welcomed by my colleague and good friend of the show, Henri Centieiro, Senior Research Manager at HashKey Capital, to talk about the Ethereum Merge. In what is regarded as one of the most historic and important technological upgrades in crypto history, The Ethereum Merge is finally upon us and it is expected to complete its full transition from the proof-of-work mechanism to proof-of-stake in around mid-September, which sets the network up nicely for future upgrades with regards to scalability and making the network much less energy-intensive.

Henri, we've been talking about the Merge a lot. It's finally here. Now, can you rehash us with some of the details: What exactly is the Merge? And what is merging together?


Hi, everyone. Thanks, Jason. It's always a pleasure to talk with you.

The Merge is basically: merging the proof-of-stake chain that already exists: it's called the Beacon Chain and is live since December 2020 with the current Ethereum blockchain that is proof-of-work.
So in mid-September, these two different chains are going to merge together. The Beacon Chain so far has only the consensus mechanism of proof-of-stake, so it doesn't have transactions and data.

And what's going to happen in mid-September is that the current Ethereum blockchain that has the transactions and data and so on is going to merge with this proof-of-stake chain and it is going
to abandon the proof-of-work part. And this is going to open doors to a lot of future possibilities. And like you said, it's going to open doors for future scalability with sharding.


As of recording this video, Ethereum is now anticipated to complete the merge on or around September 14 to 15 2022 at the terminal total difficulty (TTD) of 58750000000000000000000. Henri, can you tell us on that specific day of the Merge, what exactly will happen? And as a normal holder of ETH, is there anything that people should be doing? For example, should they transfer their ETH to somewhere else?


I will start with the second part of your question. Normal users don't need to do anything. Your Ether is going to be exactly the same. And that's why in terms of terminology, the Ethereum developers decided to stop calling it ETH2 or Ethereum 2.0, because it was causing a little bit of confusion.
People were thinking: so there is a different token now? No, everything’s the same from the user’s perspective. You don't need to send it to a new wallet. You don't need to exchange it to ETH2. Everything is the same from a user’s perspective and also after the Merge, if you want to do
a transaction; you want to send ETH to someone else or you want to send a (ERC-20) token. It’s exactly the same.


And also if you are a smart contract developer, after the Merge, 99.9% of the things are going to be exactly the same; the same way you deploy a smart contract nowadays; it will be exactly the same post-Merge. And you can actually already test this by using one of the testnets that have already completed the Merge, e.g. the Goerli testnet is a testnet that you can use; it’s already completed the Merge and have all these updates. And the way they deploy the smart contracts is exactly the same.


Good to know. I want to go back to your point about the fact that users don't need to do anything
during the time of the Merge. And because this Ethereum upgrade is just such a high-profile event in the crypto industry, there's bound to be lots of scams and malicious activities that may prompt you to: for example, when you receive a suspicious email with regards to transferring your assets to somewhere etc. Please be aware that these are all scams and you don't need to do anything
when it comes to your Ethereum assets. So one thing to keep in mind.

Henri, you mentioned about smart contract developers, right? Can you tell us also about the
node operators and validators? What should they do or what are they going to do?

Yeah, that's a great question. So if we start by talking about the proof-of-work miners, basically proof-of-work around mid-September once we hit the total terminal difficulty (TTD). Proof-of-work
will become basically invisible. And that's the moment when we transition from proof-of-work to proof-of-stake. So basically proof-of-work miners will have to abandon the Ethereum blockchain.
It will become impossible to mine ETH and they can transition to Ethereum Classic (ETC) or ETHPoW/ ETHW, something like that.

On the other hand, if you are a proof-of-stake validator, you have to update pre-Merge your consensus clients and execution clients to the new versions. These versions are already released and basically, if you are watching this video at the moment, you can already upgrade your Ethereum nodes.


My next question is: how can users run an Ethereum node? Do they have to stake 32 ETH in order to run a node?

Great question. So if you want to run a validating node - a node that is proposing blocks to the blockchain, you need to stake the 32 ETH. But you don't need to do that if you want to just run the regular nodes just to verify transactions.

So if you just want to contribute to the network or you have a DApp and you want to have your own node, remember people always say: “don't trust, verify”, and the best way to verify
is actually by having your own nodes, right? So if you want to be fully decentralised and fully “don't trust, verify”, you can deploy your own nodes and run your own nodes and have them
fully synchronised with the network; or just for hobby reasons you may also want to deploy your own node.

I used to run an Ethereum node and I wasn’t really mining - the same way you can now deploy an Ethereum node and not be a staker. Although you are not proposing and validating transactions, you are still contributing to the healthiness of the network for different reasons. One: your node is contributing to keeping the Ethereum ledger more decentralised. Your node means it’s an additional peer on the network contributing to the ceding of data to other nodes. So when a new node comes online or when you have a light wallet in your mobile phone, for example, these wallets also need to synchronise with the network.

And if you are running a non-validating node, you are still contributing to those things. Let’s say for some reason a number of validating nodes go offline and your non-validating nodes don't go offline. Once the other nodes become offline, you node will help them to “self-heal” the network and synchronise again. So it's always good to contribute to the network by running a node even if you are not staking.

A lot of people are asking: after the Merge, can I immediately unstake my Ether? And if not, when can people start withdrawing their staked either?


That's a great question. I think some people are afraid: “Oh my gosh, after the Merge, all these people that are staking are going to dump their ETH in the market, and then the price will crash. That's not going to happen. It's actually impossible to happen for two main reasons:

First, you cannot immediately start unstaking post-Merge. We need to wait for the Shanghai upgrade, which is going to happen 6 to 12 months after the Merge and after that you need to queue up to be able to and unstake. So this is a mechanism that is important to keep the number of validators on the network relatively stable so that you don't have someone gaining a lot of power or just withdrawing from the network to cause volatility all of a sudden.

So the limits are: approximately 6 validators can enter or exit the Ethereum network every 6.4 minutes. 6.4 minutes is 1 epoch on the Ethereum network. And at each epoch you can have a maximum of 6 validators entering or leaving, meaning that even if you start to or want to withdraw your stake and withdraw your 32 ETH, you will need to your queue up. And it may take days, weeks or even months, depending on how many people are trying to unstake their ETH.


It's good to know that the developers actually have these mechanisms in place in order to prevent, as you mentioned, people queuing up and withdrawing everything at the same time.

Henri, it's all well and good saying, “Oh the Ethereum Merge is one of the most significant events in crypto history”. But explain to us what does this actually mean for the wider crypto ecosystem? Like why is this hailed by many people in the crypto community as such a sacred event that people have been looking forward to for quite a while?

I think Ethereum is going to set new standards in the crypto community. From one side, you can see here Ethereum as the “treasury bond of the Internet” post-Merge. So post-Merge, we go away from proof-of-work to proof-of-stake and energy consumption will be reduced by 99.9% and the validators will receive a yield or receive a reward for validating. And this is really considered
as a “Treasury bond of the Internet” because Ethereum is the biggest and most decentralised chain at the moment.

At the time of the recording, we have around 400,000 validators earning these yields, and this will set a new standard for yield generation on the Internet. It’s really like a US Treasury bond, but on the Internet, in a more decentralised manner, of course. And these Treasury bonds are going to pay in perpetuity. In normal bonds, it pays like 5 to 10 years - discounting the coupons and all that stuff. But imagine a bond that pays 2, 3, 4, 5 or 10%. We don't know exactly how much because it will depend on the number of validators, number of transactions, transaction fees and so on. But it will pay these in perpetuity. So I think it's going to set a new standard for yield generation on the Internet.

On the other hand, I think it will also help a lot in terms of adoption and open doors for many different institutions to bring their DApps (decentralised applications) to the crypto space. Ethereum going away from PoW to PoS means: more environmentally friendly (ESG) and pays a yield. It’s going to be so much more solid and I think it's going to open doors for many more use cases and more developers and institutions in embracing crypto.

And now we've arrived at Misconception Moments, in which every single episode we break down the most common myths and misconceptions with regards to that specific crypto subject. Henri, obviously there are a lot of questions people are asking about the Merge.

So the first one or the very first common misconception that people might believe is: gas prices or transaction fees will drop or decrease after the Merge. Can you debunk that for us?

Yes, I want to debunk “the misconception of the misconception” that you have in the market at the moment.

Will the transaction fees drop after the Merge? It’s kind of - yes and no? I don't want to go against the stream because everyone is saying, “No, the gas fees will not improve,” and the reality is that they will not improve anything in a meaningful way for the normal users.

However, if we want to be really accurate, the reality is that the transaction fees will improve a little bit. Let's say, if you now pay $1 of transaction fee, maybe after the Merge you'll pay $0.90. So it's not exactly the same thing. And to be accurate, we need to say that maybe the fees will improve a little bit and they will improve in two ways.

First, it’s the fact that with the Ethereum blocks, the average block production will go from 13.3 seconds on average to 12 seconds. So it will be 10% faster with 10% more capacity for transactions. I was doing some calculations - at the end of one year, post-Merge is like 14 million more transactions, so it will gain some capacity and consequently lower the fees a little bit. Just a little bit - it’s not the same as sharding. Sharding will really lower it a lot.

And last but not the least, “the Merge will result in some network downtime”, can you explain that for us?

Most likely it will not result in any downtime. Just to contextualise it a bit, developers have been talking about this since 2014. You can Google search the Vitalik Buterin post from January 2014 where he's already talking about transitioning the chain to proof-of-stake. So this has been prepared for many years and over the last 1 or 1.5 years developers have been working full-time to prepare for the Merge. here were many different tests. The testnet also performed the Merge updates. So this has been really tested a lot.

Now there are some other misconceptions that people might be asking, and there's a very useful link on the Ethereum Foundation's website (https://ethereum.org/en/upgrades/merge/), which you guys can check out as well. Well Henri, I think this is a good time to end today's discussion. Thank you so much again for being here.

Thank you again for being on the show, Henri. If you guys are watching this on YouTube, be sure to leave a like and subscribe. And we'll see you guys next time.