Galaxy Research: Ethereum's Merge to Proof-of-Stake

A Compendium of Research
by Christine Kim @christine_dkim and Charles Yu @FullNodeChuck

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The Merge is the unofficial name for Ethereum’s forthcoming transition to a fully proof-of-stake (PoS) consensus protocol. It is by the far the most complex upgrade that Ethereum core developers have developed and designed. It is essentially a two-part upgrade that will fuse together the Ethereum Beacon Chain, which launched back in December 2020, with Ethereum mainnet. The first part, called Bellatrix, upgrades the Beacon Chain and all validator node operators. The second part, called Paris, upgrades Ethereum mainnet and makes mining operations on Ethereum obsolete.

There are three main benefits to Ethereum’s transition away from proof-of-work (PoW) mining. The first is that the network will consume 99% less electricity post-Merge as a result of switching to a PoS consensus protocol. This considerably improves the ecological footprint of Ethereum as a public blockchain and permissionless platform for deploying decentralized applications. Second, as a result of the network requiring less computational resources to secure, Ethereum’s security budget will shrink. This means that annual issuance of ether (ETH) the native cryptocurrency of Ethereum will decline dramatically from roughly 5% supply growth per year to below 0.5%. Assuming demand for ETH stays constant, a decline in supply should positively impact ETH price. Finally, the Merge will increase the rewards earned by validators on the Beacon Chain and thereby encourage more users to lock their ETH as collateral into the network, which would further decrease the sell pressure by network stakeholders on ETH over time.

There are several concerns around the Merge as well. As mentioned, the Merge is a two-part upgrade with several moving parts that require users to run two nodes simultaneously. In addition, recent sanctions by the U.S. government against an Ethereum application known as Tornado Cash has created confusion around the extent to which censorship resistance can and will be upheld by the network as a PoS protocol. This is because more than half of all active validators on the Ethereum Beacon Chain are controlled by centralized entities who may be required to censor transactions in compliance with U.S. sanctions and laws. Moreover, active validators on Ethereum wanting to earn additional revenue from maximal extractable value (MEV) will be required to run additional software called MEV-Boost, which introduces additional risks to validator staking operations and concerns around transaction censorship during the Merge upgrade.   

For more information about the Merge and any of the related topics highlights in the summary above, check out the following compilation of Merge-related content published by the Galaxy Research team.
 

Reports

What to Expect from Ethereum's Merge Upgrade (April 8, 2022)

A Step-By-Step Overview of Ethereum's Merge Upgrade & Associated Risks (July 1, 2022)

How to Watch the Merge, Ethereum's Biggest Upgrade Ever (September 8, 2022)

Potential ETHPoW Fork - Impact on DeFi Lending Markets (September 8, 2022)

A Breakdown of Ethereum Supply Distribution Since Genesis (June 10, 2022)

MEV: How Flashboys Became Flashbots (January 6, 2022)

 

Writeups & Notes from Developer Calls

Consensus Layer Call #96 (September 22, 2022)

All Core Developers Call #147 (September 15, 2022)

Consensus Layer Call #95 (September 8, 2022)

All Core Developers Call #146 (September 1, 2022)

Consensus Layer Call #94 (August 26, 2022)

All Core Developers Call #145 (August 18, 2022)

Consensus Layer Call #93 (August 11, 2022)

All Core Developers Call #144 (August 4, 2022)

Consensus Layer Call #92 (July 28, 2022)

All Core Developers Call #143 (July 22, 2022)

Consensus Layer Call #91 (July 15, 2022)

All Core Developers Call #142 (July 8, 2022)

Consensus Layer Call #90 (June 30, 2022)

All Core Developers Call #141 (June 24, 2022)

All Core Developers Call #140, Consensus Layer Call #89 (June 17, 2022)

All Core Developers Call #139, Consensus Layer Call #88 (June 03, 2022)

Consensus Layer Call #87 (May 20, 2022)

 

Additional Merge Commentary from our Weekly Newsletters

Ethereum Successfully Moves to Proof-of-Stake (September 16, 2022)

Coinbase Launches Liquid Staking Token (August 26, 2022)

Ethereum Devs Debate Post-Merge Censorship Resistance (August 19, 2022)

Campaign for Ethereum Chain Split Post-Merge Gains Steam (August 5, 2022)

Antpool Invests $10m to Support Ethereum Classic (July 29, 2022)

Ethereum Devs Simplify Merge Activation (July 15, 2022)

Ethereum Merge Upgrade Activates on Sepolia Testnet (July 8, 2022)

 

Galaxy Brains Podcasts Where We Discuss the Merge

Episode 24: Flashbots & MEV featuring Stephane Gosselin (August 26, 2022)

Episode 22: Tornado Cash, Stablecoins, & the Crypto Market (August 12, 2022)

Episode 17: Roundtable re: Sepolia Merge Upgrade and More (July 8, 2022)

 

External Resources to Follow the Merge

 

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