The Ethereum Merge: Everything you need to know

TL;DR

• In mid September, the Ethereum Mainnet will merge with the Beacon Chain 
• The Merge marks Ethereum’s permanent transition from a Proof-of-Work (PoW) system to a Proof-of-Stake (PoS) system
• The exact date of the Merge depends on the hashrate
• The move away from Proof-of-Work will significantly reduce Ethereum’s energy consumption
• This Merge is the biggest upgrade in Ethereum’s history
• Bitpanda fully supports the Merge from PoW to PoS

What is the Ethereum Merge?

The current Ethereum Mainnet blockchain, which contains every transaction and smart contract recorded since Ethereum’s launch, will be merging with Beacon Chain, a separate Ethereum blockchain that was created in 2020. Since its beginning, Ethereum Mainnet has been secured by a Proof-of-Work consensus system. Beacon Chain, on the other hand, has been using a Proof-of-Stake consensus system. 

The Ethereum Mainnet and the Beacon Chain have been running separately but in parallel for the last two years. The Merge marks the joining of these two chains to become one single chain. After the Merge, Ethereum will be permanently using a Proof-of-Stake system to validate transactions and the creation of new blocks.

Why is Ethereum merging?

Ethereum has been using a Proof-of-Work consensus mechanism to secure the Mainnet ever since it launched back in 2015. Proof-of-Work, however, is notorious for expending massive amounts of energy in order to create new blocks through mining, which has detrimental effects on the environment. It’s also considered to be an inefficient system for scaling and has been criticised for its security flaws. 

For years, Ethereum developers have been preparing for the eventual shift to Proof-of-Stake, creating the parallel Beacon Chain in 2020 with the goal of eventually merging the two chains into one. There are several benefits to moving to a Proof-of-Stake system:

It’s more sustainable

In a PoW system, miners consume electricity in exchange for issuing new blocks. Proof-of-Stake eliminates the need for energy-intensive mining, because the network is secured by validators who stake ETH to validate transactions, which doesn’t consume nearly as much energy. PoS is therefore considered to be more environmentally friendly than PoW, making Ethereum a more eco-friendly platform post-Merge. It’s estimated that Ethereum’s energy consumption will be reduced by around 99.95%. 

It’s more secure

While a PoW system requires hardware and coding skills, PoS makes it easy for anyone to stake and therefore to help secure the network. This is ensured through a process called slashing, which makes it very expensive to attack a network. In a PoW model, a network attack can go on continuously if someone holds 51% of the network power. In PoS, if you can prove who is attacking the network, the attacker’s stake gets slashed and the attack is over. 

When is the Merge?

Though there is no fixed date yet, the Merge is going to take place in the middle of September, most likely on the 13th of September. The soft deadline for developers is on 19th September. The exact date of the Merge depends on the hashrate and on the success of the final test merge that happened in mid-August.

What’s not changing

The focus of the Merge is to switch from a Proof-of-Work consensus to a Proof-of-Stake consensus. This move will make Ethereum more sustainable and more secure. However, there are a few things that were expected to change with this upgrade, but that are staying the same for now. Here’s the lowdown.

Speed & Scaling

Though transaction speed and scaling capabilities will not improve this time around, the Merge will lay the groundwork for sharding in the next major upgrade. Sharding allows the blockchain to scale vertically by creating 64 blockchains that spread out all transactions, reducing network congestion caused by transactions queuing up on a single blockchain. Removing the energy requirement for validators in the PoW system and changing the consensus mechanism to PoS will eventually make it easier to process transactions faster. 

Gas fees

Since the upcoming upgrade will not affect network capacity and focus only on transitioning from a Proof-of-Work to a Proof-of-Stake system, gas fees will not change. This means that gas fees won’t be lowered with this upgrade.

How to prepare for the Merge

A few things to keep in mind as Ethereum merges:

• If you hold ETH, you don’t need to do anything to protect your funds or wallet before the Merge. Bitpanda supports the upgrade to PoS and that means your assets are safe with us.
• Be careful - there’s a lot of scams going around offering an ETH2 token. There is no ETH2 token and if you hold ETH on Bitpanda, you don’t need to do anything to prepare for the Merge.  
• Withdrawals and deposits on the Ethereum network will be suspended a few hours before the Merge to ensure safety of funds. Once we’ve verified the PoS network is safe to use, we will enable deposits and withdrawals again.
• Any support for forked assets on the PoW chain will be evaluated with our regular asset listing process.

Potential Airdrop for ETH holders

We’re aware that there is a chance that assets on the Ethereum Proof-of-Work (PoW) chain might still have value after the Merge. If Bitpanda decides to list ETHW (Ethereum on PoW) according to our regular listing process, eligibility for receiving ETHW depends on ETH holdings at the time of the snapshot. The exact distribution will be shared soon in the next communications.

Due to technical reasons inherent in blockchain technology, there is no exact date and time planned for the Merge to happen. There are only estimations on when the upgrade will take place, based on hashrates and mining difficulty. Therefore, we cannot give an exact time when the snapshot will take place at this moment. Current expectations set the Merge to take place at block 15,540,293, so we estimate the snapshot will be taken between September 14, 20:00 and September 15, 10:00 CEST

Please also note that this is not a guarantee of any ETHW allocation as it is subject to external factors and any forked asset will follow our regular listing process.

Disclaimer
The information shared in this article does not constitute investment advice. Investing in financial instruments carries risks. Conduct your own research before concluding a transaction.

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