The ETH Merge Is (Almost) Upon Us – Here’s What To Actually Expect

With all of the excitement around the upcoming Ethereum Merge, it can be hard to know what is hype and what is real alpha. To help sort the fact from fiction, we’ve broken down what to expect come September 19th.

Issuance Tanks

Ethereum issuance will now go to stakers and not miners. This represents a large removal of supply from the market. Miners will no longer receive ETH rewards that they have to sell to finance their operational costs. This means over 10,000 ETH in daily sell pressure could disappear overnight. Instead, the ETH issuance will go to stakers and won't be available for withdrawal for at least six months.

Merge Won't Lower Gas Prices Or Turn ETH Deflationary

Ethereum transaction fee costs are already at lows for the year, but it bears repeating that the merge shouldn't change much about gas prices. If gas prices remain this low, the ETH burned per day won't surpass issuance and ETH will remain inflationary. However, around 15-20 ETH burned should be more than ETH issued and it becomes deflationary. There could be any number of catalysts for this, but crypto continues to develop products and attract users.

As more users enter the decentralized space, either through DeFi or NFTs, usage of block space increases, which pushes burned ETH higher. Layer-2s will also likely contribute, as they store more data on-chain from larger user volumes.

What Will The Merge Look Like For End Users?

To prepare for the merge, most DeFi users won't need to do much. The chain should switch over from Proof of Work (PoW) to Proof of Stake (PoS) mechanisms without disruption of DeFi protocols. The merge is just a change in the execution layer, not state or consensus, so DeFi will continue as before. If everything goes smoothly, DeFi users won't even notice a difference.

Developers and DeFi builders also shouldn't notice much of a change. There are a few minor differences between execution, but most dApps should continue working without big upgrades. For developers who want to learn more about the changes, the Ethereum Foundation has published an extensive review for builders.

There are, however, some big changes coming for other members of the Ethereum community.

Miners will be immediately removed from the system upon the switch to proof of stake. This has led to rampant speculation on where this hash rate will go. One of the more popular options is for miners to create a hard fork and continue mining. This will bring chaos to the PoW chain's DeFi market as oracles fail, lending protocols go insolvent, and users rush back to the native ETH asset. However, it could open up interesting ways to make money as users find they suddenly have two copies of other assets like NFTs and ETH.

Since there is the potential to make money, there is a lot of positioning going on in the market, and a tentative date for the merger coming from the Ethereum Foundation makes it even more interesting.

Who Will Win The Liquid Staking Wars?

It is clear that liquid staking derivatives have achieved product market fit. Lido already controls one of the largest stakes in the network. Their size has raised questions about staking concentration and what happens with a highly concentrated monopoly staking company gaining even more share.

Competitors are also coming from all sides. There are DeFi native options like Rocket Pool and Stakewise. But, there are also meaningful offerings from the centralized exchanges. Coinbase has just launched a cbETH token, representing 1:1 ETH that they have as part of their staking product. Similar to a USDC, but for staked ETH, the Coinbase cbETH can be used throughout DeFi.

Post-merge, liquid staking derivatives will retain their importance. The ETH unlock from the beacon chain will become the next major milestone for Ethereum's roadmap. It will require further network upgrades and another hard fork but should come within a year after the merge. However, lots of stakers looking to unlock could mean months in withdrawal queues. Users looking to seamlessly enter and exit staked ETH positions will rely on liquid staking derivatives. They will also have continued use throughout DeFi.

What Could Go Wrong?

There are still lots of open questions about how the PoS network will work in practice. Some of these won't be known until the network has been running for some time.

For example, it remains to be seen if there will be meaningful attempts to censor transactions or disrupt the network. The question has come to the forefront in the aftermath of the Office of Foreign Assets Control (OFAC) sanctioning the Tornado Cash contracts. Will some validators, especially those under US jurisdiction, look to exclude "problematic" transactions?

There could also be a bug in one of the clients, or other issues with the network execution. While there has been thorough testing on multiple testnets in the lead up to the merge, new technology always contains bugs. Just this week, one of the main Ethereum clients found and triaged a critical bug in their database code. While we expect minimal issues and any bugs to get quickly corrected, everyone's eyes will be fixed on the network health post-merge.