The merger will likely be one of the most important updates to the ETH blockchain
The next month will be a monumental time for the Ethereum network and its participants. The merger will likely be one of the most anticipated and recognizable updates the blockchain has seen since the DAO hard fork.
Around September 15, 2022, Ethereum will implement The Merge and that means the chain will completely change the consensus mechanism it used to use.
PoW and PoS
Ever since the blockchain was created, Ethereum's consensus mechanism has been proof of work (PoW), similar to Bitcoin's consensus mechanism.
However, instead of the SHA256 PoW consensus mechanism, Ethereum relies on Ethash, a PoW consensus agreement preceded by a mechanism known as Dagger-Hashimoto. The main purpose of Ethash was to provide ASIC resistance, but after a few years, Ethash ASIC miners appeared on the market along with the use of graphics processing units (GPUs).
Once the merger takes place, Ethereum will not rely on miners to validate transactions. Instead, network transactions will be validated by entities called validators. When using a PoS consensus mechanism, Ethereum validators are selected for having 32 ether and are required to run three different pieces of software that include a validator, an execution client, and a consensus client.
With The Merge, the Ethereum blockchain will see a 99.95% reduction in energy expenditure used to protect the network and the non-obligation of miners and stakers to amortize their investments.
Why is Ethereum important?
While Bitcoin legitimized the concept of peer-to-peer (P2P) digital money, it was Ethereum that spearheaded the next step in blockchain – smart contracts that deploy decentralized applications (dApps).
Bitcoin represents around 40% of the total cryptocurrency market cap. But it was Ethereum that extended smart contracts to many uses – lending, predictive markets, NFT markets, exchanges, gaming, governance, wallets, storage, and even gambling.
The total amount locked (TVL) on Ethereum multiplied almost 12 times to around BRL 570 billion ($110.6 billion) between November 2020 and November 2021. Clearly, dApps were in high demand. And this increase has expanded the capacity of Ethereum.
The Ethereum proof-of-work scalability issue
Both Bitcoin and Ethereum were launched as PoW systems that added new blocks of data to a blockchain through expensive computational work.
Under PoW, blockchain networks are less vulnerable to hacking. But the consensus mechanism uses huge amounts of electricity. That's because miners have to rush to solve the math problems first and earn the right to add blocks to the chain.
This means employing vast server farms. However, PoW demonstrated that blockchains can be immutable. Without this immutability, Bitcoin would not have been sustainable and would have been useless.
The difference between the utility of Bitcoin and Ethereum is clearly visible when we compare their daily transactions. Despite having twice the market cap of Ethereum, Bitcoin has more than five times the number of transactions.
However, if Ethereum goes to the mass market, its energy expenditure would become impractical. This is the main reason why Ethereum is transitioning from PoW to PoS.
By making this change, the Ethereum Foundation estimates that the network's energy footprint will decrease by ~99.95%. But there are many other benefits as well.
What exactly is The Merge?
In December 2020, Ethereum launched the Beacon Chain.
Beacon operated like other PoS networks such as Algorand, Avalanche, Cardano or Solana, for example. Validators run software that turns your computers into blockchain network nodes. Each node is responsible for storing the entire copy of the ledger, processing transactions and adding them to the blockchain.
In return, validators receive rewards in ETH. Unlike Bitcoin miners, validators use a fraction of the energy to execute and add new blocks of data.
When it comes to the requirement to be a validator, a common misconception is that they need a minimum of 32 ETH in staking (“locked in”). After all, this only applies to nodes that propose the next blocks to be added.
Most Ethereum validators, however, run non-block generator nodes, via a staking pool. As Vitalik Buterin explicitly stated, a low barrier to entry is the key to keeping Ethereum decentralized. That's because the more nodes there are, each containing the complete copy of the ledger, the greater the redundancy.
Expected impacts of The Merge
There is confusion about what will and won't happen after The Merge. Here are some of the most common misconceptions:
Will ETH gas rates decrease?
Contrary to popular belief, The Merge will not significantly affect ETH gas rates. Whenever a network's traffic load is high, the fees increase because there are only a limited number of transactions that the Ethereum network can process. As The Merge is not focused on scalability, but on staking itself, this will not change.
Currently, Ethereum can process up to 15 transactions per second (tps). This will not change significantly after the event. At best, there can be a single-digit percentage increase in tps due to reduced block times, from 13.3 seconds to 12 seconds.
An average block time is a time it takes to add a new block of data (transaction) to the blockchain. In order for a more significant tps increase to occur, Ethereum must undergo sharding, which is the next scheduled update called The Surge, which should take place sometime between late 2023 and 2024.
Sharding will split the network into pieces. In this way, the network load will be more evenly distributed. Meanwhile, Ethereum will rely on Layer 2 scalability networks such as Polygon, Optimism, Arbitrum, and others for a low-gas rate experience.
What about staking rewards?
All validators who have locked their ETH on the Beacon Chain will have to wait a little longer after The Merge to withdraw the funds. Specifically, this will happen after the Shanghai update, which is scheduled to start about a year after The Merge.
In addition to unlocking ETH in staking by activating EIP-4895, the Shanghai update will introduce a new type of smart contract, the EVM Object Format (EOF). It will further expand Ethereum's smart contract functionality.
Also, validators running block bidder nodes will only be able to partially withdraw their ETH, leaving behind the required minimum of 32 ETH. Naturally, this cap was put in place to prevent a mass exodus of validators. After all, otherwise, the security of the network would be at risk.
Finally, as validators are more efficient at processing transactions, the annual percentage rate (APR) is likely to increase from 4% to 7%. Receiving native token rewards to validate transactions is at the heart of every decentralized blockchain network. On the one hand, traders pay the transfer fees and on the other hand, validators receive them.
That way, there is no need for an accounting department. This is because this incentive structure is automated through smart contracts. Of course, the more users become active, the more fees validators receive.
Changing ETH Tokenomics
Another important aspect of The Merge is how it will change the ETH inflation rate. Each blockchain network has its own inflation control mechanism.
For example, Bitcoin has halving events that reduce mining rewards, meaning fewer Bitcoins are released into the circulating supply. Since its launch, Bitcoin has had three halvings, going from 50 BTC mining rewards to 6.25 BTC.
With a lower inflow of new Bitcoins, each one values more due to the law of supply and demand. In the case of Ethereum, it does not have a limited supply of coins like Bitcoin or even other PoS networks like Avalanche. Instead, Ethereum has an inflation rate of around 13,400 ETH or 4.2%.
After The Merge, ETH issuance is expected to drop to around 0.2%, which equates to Bitcoin’s “triple halving.” Combined with the anti-inflationary pressure coming from burning base rates (introduced with EIP-1559), this translates to a much larger increase in demand over supply. In August 2022, $4.7 billion worth of ETH was burned, i.e. sent to a dead wallet.
The top represents Ethereum's pre-Merge tokenomics, while the bottom simulates its post-Merge tokenomics. Source: ultrason.money The reason for Ethereum's lower inflation rate is directly linked to the higher energy efficiency of PoS. So, validators will need less ETH rewards after The Merge.
Overall, having an inflation rate below 1% should positively impact the price of ETH, especially if greater utility is added to the mix. In conclusion, the event should result in the following impact on the ETH price:
More utility + reduced ETH issuance + burning = higher demand → higher ETH price.
What after The Merge?
It could be argued that Ethereum is already lagging behind other PoS blockchains. While none have the Ethereum dApp offering, Solana, Avalanche, Tron and Algorand provide users with Visa-level transaction speeds and negligible fees.
With The Merge being completed on September 16, 2022, this means that Ethereum is just starting to approach its performance. Keep in mind that Vitalik Buterin only put 55% upgrade completion after The Merge. More updates will be needed to fully call it ETH 2.0:
1 – The Surge – expanding the Ethereum main chain through sharding. This should increase network throughput by up to 100,000 theoretical tps.
2 – The Verge – Upgrading Merkle trees with experimental Verkle trees for greater storage efficiency in each data block.
3 – The Purge – eliminating excess historical data that is no longer needed, so validators can become even more efficient at processing transactions.
4 – The Splurge – the era of maintaining the Ethereum network, tweaking and adding small improvements to the quality of life.
In the end, this long roadmap gives Ethereum's competitors plenty of room to capture DeFi's market share. Only time will tell if Ethereum's first move advantage will have this sustaining power.
As the very translation of the term suggests, Stablecoin is a stable cryptocurrency paired with another asset, which can be pegged to a fiat currency such as the dollar, a commodity or precious metals such as gold and silver. In the cryptocurrency universe, the stablecoin paired 1:1 with the dollar is the most common and most used.
Binance USD (BUSD) is a USD-pegged stablecoin with the third largest market capitalization being issued on ERC-20 and supported on BEP-2 by Binance in partnership with Paxos. These technical characteristics make it possible for BUSD to be transacted at a very low cost on various blockchains.
For a stablecoin to be able to maintain parity with the reference asset, it must be issued in accordance with the allocation of a fund that guarantees parity. In the case of dollar-pegged stablecoins, each unit of crypto issued must be backed by one dollar in reserve.
How BUSD works
The BUSD is approved and regulated by the New York State Department of Financial Services (NYDFS) and according to the monthly report released by Paxos, the BUSD parity is guaranteed with 97% in dollars and 3% in US treasury bonds. This control of the ballast in relation to the issuance of BUSD is what guarantees the 1:1 paired price to the dollar and ensures the stability of the stablecoin.
In theory, if the supply in circulation of BUSD is 17 million tokens, the backing has to be equivalent to 17 million dollars. This process can be monitored month by month directly on the official Paxos website.
What are the uses of BUSD
One of the main functions of the Binance USD stablecoin is to bridge the traditional financial market and the crypto market, as well as allowing the active crypto investor to expose themselves to the dollar without necessarily being in the traditional market.
In addition, BUSD has many other uses such as:
Facilitate trading on various brokers and DEX.
It can be used as a loan guarantee in DeFi protocols.
Facilitate asset liquidity.
Value reserve.
Payment for goods and services.
Staking to provide liquidity and earn rewards.
Use in native play-to-earn games on the Binance Smart Chain network.
