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As the deadline for the next stage of the transition to Eth2 approaches, Ethereum community manager says the focus is now “exclusively on The Merge.”
Over the last few years, the Ethereum community has been hard at work preparing the groundwork for the blockchain’s transition away from its existing proof-of-work (PoW) algorithm, which has served as the backbone of its functioning until now.
With recent modifications to its blockchain, Ethereum’s migration to its proof-of-stake (PoS) driven Ethereum 2.0 chain is edging closer to reality, with the supply of Ether (ETH) becoming deflationary.
Recent upgrades have resulted in deflationary issuance of ETH, where the burning of a portion of transaction fees has surpassed the issuance of new ETH through mining. Some in the industry had not expected this to happen before the Ethereum 2 network update (Eth2). It’s a significant factor that’s expected to boost the underlying cryptocurrency’s value in the months and years ahead.
The impact of this earlier-than-expected change to deflationary ETH issuance on the value of the cryptocurrency cannot be overstated. Furthermore, industry players predict that after the network fully converts to Eth2, the network’s current supply of 2 ETH per block mined will be reduced by more than 10 times.
Late last year, the foundation was laid for the transition to Eth2 as the proof-of-stake Beacon Chain went live, allowing users to stake Ethereum in order to become validators. This would essentially replace the role of current miners that use physical hardware to validate transactions, add new blocks and generally maintain the network.
As of November 17, 2021, there are over 260,000 validators that have staked the minimum 32 ETH needed to become a validator on the chain. At the time of writing, the current amount of Ethereum tokens staked sits at 8,327,638 ETH — valued at around $34.1 billion.
The value of Ethereum has been steadily increasing in 2021, reaching new highs as a result of a number of factors, including the expanding popularity of the decentralised finance (DeFi) area, of which the Ethereum blockchain is used by a big fraction.
The London hard fork, which introduced a number of Ethereum Improvement Proposals, was the most anticipated update of 2021. (EIPs). Due to the shift in fee structures received by miners and paid by users, one proposal, EIP-1559, was a source of dispute.
A sore point was the built-in ETH burn mechanism that destroys a portion of Ether used to pay a transaction fee. This irked Ethereum miners before the upgrade, given that transaction fees are a driving factor that incentivizes miners to maintain the network.
The deflationary influence of the ETH burn mechanism was a significant benefit of the London hard fork, which occurred in July 2021. Every transaction now destroys a certain amount of ETH, progressively removing more ETH from the ecosystem and increasing the scarcity and value of ETH as an asset.
Users of the Ethereum network are expected to pay lower fees in London, according to reports. This scenario did not pan out, with excessive fees still being a source of concern in November 2021. As a result, some investors are turning to multichain decentralised financial networks to avoid the hefty transaction fees still present on the Ethereum mainnet.
The most recent upgrade to the Ethereum network following London was coined as Altair. As Beiko told Cointelegraph, Altair served as the first update to the Beacon Chain since its launch in December 2020. According to him, the upgrade served as a test for the merge while also serving the purpose of aligning incentives for validators:
“The upgrade raised the penalties that validators receive if they propose invalid blocks or are offline to their ‘true’ levels. When the Beacon Chain launched, these penalties were lowered to be more lenient towards stakers in the early days. Now that we know that things work reliably, it was time to bring the penalties to their true level.”
Ben Edgington, lead product owner of Teku, a ConsenSys Eth2 client, also chimed in on the Altair upgrade’s complexities: “We’d never done it before, and we wanted to make sure everything was working before making the big switch to proof-of-stake.” “It went quite successfully,” he added, “and we are sure that we will be able to manage future updates.”
While Edgington emphasised some of the material changes made to Altair, he also acknowledged that the majority of these upgrades are general enhancements that may not have been visible to stakers.
Sync committees were introduced as an enhancement that will allow light clients to trustlessly sync up with the state of the Beacon Chain, according to Edgington, making it “possible in the future of having things like an in-browser wallet that does not rely on any trusted third-party.”
Internally, the method block rewards are calculated has also been fine-tuned. Proposing blocks now earn a greater payout, as well as certain technical improvements, although staking incentives remain same.
Finally, the slashing penalties, which were set to a lower threshold when the Beacon Chain went online last year, have been changed significantly. Slashing is used to prevent validators from misbehaving on the network, such as becoming offline and thus unable to sign transactions. As Edgington points out, there’s now plenty of time to assess the mechanism’s effectiveness:
“Slashing penalties were reduced at the start of the Beacon Chain to increase stakers’ confidence. Now that we are all much more comfortable with staking, penalties are gradually being increased towards their ‘crypto-economically correct’ values.”
A number of representatives from Ethereum client teams took part in a workshop titled Amphora in October. The group collaborated to carry out a set of development milestones to mimic the Eth2 merge on a test net – effectively serving as a dress rehearsal for the real thing some time next year. Edginton unpacked what was accomplished at the workshop and gave a best estimate for the shift to Eth2 taking place sometime in Q2 of 2022.
“We are now working towards a public Merge testnet called Kintsugi that is planned to go live in early December, next month. Kintsugi is intended to implement a release candidate design for The Merge, meaning that the technical implementation work is all but done. After that, there is only a process of testing, risk management and governance required before The Merge can happen.”
Focus now squarely on ‘The Merge’
One more minor upgrade to Eth2 is planned for 2021, according to the roadmap. Arrow Glacier is made up of only one EIP-4345, which modifies the parameters of the Ethereum Ice Age Difficulty Bomb.
The Difficulty Bomb is the term for the current PoW Ethereum mainnet’s expected increasing difficulty level for miners. When the Bomb goes live, the Ethereum network’s mining difficulty will grow exponentially at a particular threshold, serving as one of the motivators for the whole Ethereum network to join the Eth2 merging.
Beiko said that the main focus for the wider Ethereum development community is now exclusively on ‘The Merge’, signaling the start of the final chapter in the blockchain’s evolution to PoS consensus.
What to expect when Eth2 becomes a reality
While the exact date of ‘The Merge’ is not yet set in stone, both Beiko and Edgington highlighted the fact that Ethereum developers are now solely focused on the final steps towards Eth2.
Nevertheless, many cryptocurrency users and enthusiasts are asking the same question. What can happen when Eth2 becomes a reality? Edgington gave some insights into how the network will operate in conjunction with various layer-two solutions providing improvements to scalability:
“The move to proof-of-stake will not immediately provide any significant extra throughput to the Ethereum chain, so I don’t expect it to have a measurable effect on gas prices. The scalability strategy in Ethereum now revolves around layer-two solutions like the various roll-ups that are currently being deployed. Once The Merge is done, we will focus on providing data shards within the Ethereum protocol that will allow roll-ups to scale massively.”
As a result of the loss of the mining block reward, issuance of Ether will reduce by 2 ETH each block post-merge, but EIP-1559 will continue to burn Ether as it does now: “As a result, it is quite possible that the overall quantity of Ether will fall for the foreseeable future.”
Viktor Bunin, a protocol specialist at Coinbase, emphasised the significance of the London hard fork earlier this year, as well as EIP-1559, which has been hotly disputed. The upgrade’s algorithms provide some insight into how the value of ETH will fluctuate if the deflationary mechanism gains traction, stating:
“Since launch, EIP-1559 has reduced net issuance on Ethereum by 66%. If the merge were live today, net ETH emission would actually be negative, making the network deflationary. The key bit around EIP-1559 and running validators are making ETH, the asset, more useful. Whereas before, ETH was only indirectly capturing the upside generated on Ethereum, having direct measurable metrics will be useful in helping industry participants understand the value and utility of holding and using ETH.”
Coinbase software engineer Yuga Cohen shared these comments, delving into the figures to provide a data-driven assessment of EIP-1559’s impact to date and how it will continue when The Merge occurs: “Despite the burn, total miner revenues have climbed by 33% in dollar terms.” The increased scarcity of ETH will be a component of its value proposition as validators replace miners and more ETH is staked — and so, at least temporarily, locked up — to safeguard the network.”