Merge ahead! A breakdown of the update coming to Ethereum tomorrow and what you need to know if you hold NFTs.
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Hello r/Superstonk, I hope you're enjoying a wonderful Tuesday! Did you know tomorrow is likely the biggest technical upgrade in the blockchain world to date? After taking notes and sharing hype from foobar's appearance on Rug Radio about the Merge with the rest of the Mod team, I was met with 'What's the Merge Jelly?' With that, the team agreed an informational post would be helpful and I volunteered to put together this summary post.
What is the Merge?
After years of preparation, the Merge is Ethereum's transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) and is happening Wednesday evening Eastern Time (ET).
What is Proof-of-Work (PoW) and Proof-of-Stake (PoS)?
Proof-of-Work (PoW): The original blockchain consensus mechanism. A hash function (a mathematical function or computer program) that can only go one way. It is very easy to take an input and get an output. However, if you have an output, it is near impossible to figure out what input corresponded to it, unless you generated it yourself--a one way function.
PoW says you have to find inputs that correspond to an output with loooots of zeros in them (can you hash to a low number?)
The difficulty, says how low of a number you need (how many zeroes in the number) and is dynamically adjusted so that the time between blocks is relatively consistent.
In this system, folks buy ASIC's in BTC's case, GPU's in ETH's case, and run them on these hash functions that serves as sybil resistance, making sure no one party can take over the protocol.
Proof-of-Stake (PoS): An alternative security mechanism to PoW that views security as something that can be more circular and self-contained.
Instead of folks putting up GPU hash power to secure the network, they post their own native coin (ETH in our instance) posted like a jail bond--promising to act honestly and follow the rules of the network and if one doesn't, forfeit the bond.
- Both PoW and PoS require you to buy a resource, and that resource gives you the right to create blocks.
In PoW you buy computer chips and the computer chips allow you to produce blocks.
In PoS, you buy ETH and that ETH gives you the right to produce blocks.
Both mechanisms answer the question who gets to make blocks and who decides what gets to go into them. This is important because who makes blocks and who determines what goes in them could also determine what is censored and what is not or if the blockchain is usable on a day to day basis.
What will this update do?
- Help combat the climate narrative (emissions cut by 99.5% with shift to PoS)
- Make use of a stronger security mechanism
- More predictable block times (PoS blocks every 12 seconds, PoW is randomly generated every 13-14 seconds based on difficulty and hash generation), which will lead to ~10% greater throughput.
- MEV gets easier for bots (this will cause staking yields to go up but can be an issue if you use a wallet or dapp utilizing default RPC nodes, which can lead to sandwiching. foobar mentioned using a private RPC alleviates this concern--however, the GME wallet does not allow RPC to be edited at this time.
What won't this update do?
- Lower transaction fees: The Merge is a change of consensus mechanism and not really an expansion of network capacity. Therefore, it won't result in lower gas fees since validators will take up an almost similar amount to process transactions. However, with the switch to PoS, is laying groundwork for future scaling via sharding, which will impact fees.
- Create a new ETH token
- Allow you to withdraw staked ETH. Staked ETH withdrawals will only be possible after the Shanghai Upgrade - the next major upgrade on the Ethereum network after The Merge. Newly issued ETH will remain locked and illiquid for several months following The Merge until the Shanghai upgrade is done.
- Make transactions noticeably faster--transaction speed will remain the same on L1.
- Cause Network Disruption: that's why core devs have been running the beacon chain in prod for 21 months straight, did 13 different mainnet shadow forks, and 3 live testnet merges
Do I need to do anything if I have NFTs?
No. All you need to do is sit back and wait for the 'Surge, Verge, Purge, and Splurge!'
If there is a ETH-PoW fork you might have 2 versions of your NFTs but the POW version is unlikely to be desirable in anyway--outside those seeking out grifter culture. For example, ETH-PoW backed by LFG swap (the folks behind the Luna foundation is a thing...)
Additional Resources
Ethereum Proof-of-Stake - Explaining Ethereum's consensus mechanism after The Merge: https://0xfoobar.substack.com/p/ethereum-proof-of-stake
