The merge refers to Ethereum’s move from a proof-of-work (PoW) blockchain to a proof-of-stake (PoS) blockchain. PoW and PoS are consensus layers that helps settle a transaction on the blockchain.
PoW vs. PoS
With PoW, all nodes compete to be the first to verify a transaction to win a prize. The better your hardware, the higher the probability of you being the first to complete verification and win the prize. This mechanism uses large amounts of energy.
With PoS, a few nodes (called validators) “stake” some Ethereum to verify the transaction. Nodes could collude to “fake” verification and need to be prevented from doing so. This achieved by making attacks really expensive — i.e. the upside from collusion is lower than the downside from losing your staked Ethereum. In return for staking their Ethereum, validators receive yield (which is like interest from a bank account).
The merge
The intention of the merge is to improve efficiency, reduce environmental impact and increase security. It could happen as early as June 2022. Validators will need a minimum of 32 ETH if they wish to stake. As of today, approximately 10.5m ETH is staked. The return on staked Ethereum will increase from 4.8% → 10-15%. There will also be less Ethereum issued per day — falling from 12,000 ETH per day to 1,280 ETH per day.
What should I do?
As a holder of Ethereum, there is nothing you have to do. There are two main actions you can take:
1) Choose to stake Ethereum
Technically, users need to stake a minimum of 32 ETH (~$86K at the time of writing) to earn 10-15%. Platforms like Coinbase and Binance offer the ability to stake lower amounts but offer less return (~5%). The main call out is that you won’t be able to withdraw your staked Ethereum for a while. If you’re considering this, do it with money you won’t need in the short-term.
2) Bet on the price of ETH
The merge is arguably the biggest network change in the blockchain ecosystem. As a user, you could bet on the price of ETH going up or down. The current market conditions point to prices falling. Higher staking rewards and the reduction in the issuance of ETH may lead to prices increasing. This isn’t investment advice — just a few pointers to get your research started.