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The Ethereum Merge: What It Is and Why It Matters

September 06, 2022 - 8 min read

The Merge is a major Ethereum upgrade that will change the network’s consensus mechanism from Proof-of-Work (PoW) to Proof-of-Stake (PoS).

Update: This article was last updated on September 15, 2022 to note that the highly-anticipated Ethereum Merge upgrade (“The Merge”) was completed on September 15, 2022 at 2:42 p.m. EDT.

The Merge was the most important Ethereum upgrade since its initial launch in 2015.

In this article, we’ll explain what the Ethereum Merge is, why it’s happening, and why it might matter to you — and your crypto wallet.

What Exactly Is the Ethereum Merge?

The Ethereum Merge is a major upgrade to the Ethereum blockchain and how it functions. Ethereum is home to ETH, the world's second largest cryptocurrency. The platform allows for the construction of decentralized applications.

The Merge represents a combination of Ethereum’s existing execution layer and a new consensus mechanism layer based on Proof-of-Stake (PoS). If successful, The Merge will mark the end of Ethereum’s reliance on the Proof-of-Work (PoW) consensus mechanism.

To understand why this is significant and what some of the effects might be, let’s explore a bit more about blockchains and their consensus mechanisms.

What Are Consensus Mechanisms?

Blockchains are digitally distributed ledgers that record transaction details in an immutable manner so that all participants can agree on exactly what happened, when, and who was involved. Blockchains are able to do all of this without any centralized authority or oversight from an institution such as a bank.

To accomplish this feat, blockchains require two related — but distinct — tasks to be carried out by network participants. First, each transaction must be authenticated using unique keys to unlock the blockchain and create a transaction on it.

Once authenticated, all parties on the blockchain must come to a consensus and agree to the validation, allowing a permanent block containing transaction details to be added to the chain.

That’s where consensus mechanisms come into play. A consensus mechanism is a system used to achieve this necessary agreement.

Up until now, the Ethereum blockchain has used proof-of-work (PoW) as its consensus mechanism. After the Ethereum Merge, it will employ proof-of-stake (PoS). The Ethereum foundation has initiated The Merge in order to deliver more scalability, security, and sustainability.

Proof-of-Stake Versus Proof-of-Work

The primary difference between the two means of consensus is how transactions are verified. PoW requires crypto mining, an energy-intensive process that relies on computers to solve complex equations. Once validated, miners who own the computers that solved the equation receive a reward. PoS, on the other hand, relies on users of the blockchain to stake their crypto in order to verify transactions. When transactions are verified, they receive fees for their service. This approach is more energy-efficient and scalable.

Proof-of-work requires massive amounts of computing resources to perform the “work.” That, in turn, draws electricity to fuel the computers performing all of those functions.

In fact, the largest cryptocurrency’s energy consumption is on par with the entire country of Sweden, according to one recent report.

But what does this have to do with consensus?

Remember, all participants in a blockchain must agree that a transaction block to be added is indeed valid and not fraudulent or duplicative. Participants in a proof-of-work blockchain can perform this validation function and are rewarded for their work in cryptocurrency.

But in order to make sure they are playing by the rules, they don’t get the reward unless they “prove” their work by solving a very complex mathematical puzzle, one that takes many computers running in sync to solve.

To make matters more intense, proof-of-work is a jump-ball exercise: Many participants may be vying to solve the same problem and add a similar validated block. The first one to solve the puzzle wins and gets the reward and has their block added to the chain.

You can see how the total carbon footprint for such an endeavor grows almost exponentially when so many people — and their computers — are competing against each other.

Because of this, a primary criticism of cryptocurrencies has been their reliance on proof-of-work blockchains and their corresponding massive carbon footprints.

Proof-of-stake came into being to solve that problem.

How Does Proof-of-Stake Work?

Like proof-of-work, proof-of-stake requires a significant commitment from participants who want to validate transactions and have the right to add trustworthy blocks to the blockchain. If no commitment was required, anyone could “validate” transactions, even nefarious actors.

But instead of energy-wasting computing resources, proof-of-stake asks for a different kind of commitment: putting up collateral in the form of the blockchain’s cryptocurrency. Put up sufficient crypto, and you can be a validator and collect fees for your services.

Since the crypto being staked is the crypto of the blockchain, it isn’t encumbered by a massive proof-of-work carbon footprint.

The price of entry for validators — the crypto coins they stake — is a significant enough investment to weed out bad actors. Should a validator turn malicious, all of their staked crypto would be forfeited. In PoW, the requirement for a massive investment in computing infrastructure to solve the math puzzle acts as a similar deterrent.

Participants who want to serve as validators and have anted up the required crypto stake form a pool from which validators are chosen at random. Or almost random. Some PoS systems skew selection in favor of those who have higher stakes in the blockchain.

So, in practice, once a sufficient amount of coin has been staked, a validator gets selected to work on a transaction block. Once validated, the block then requires agreement by a specified number of other participant validators. When there is sufficient agreement, the block is accepted.

Why are People Excited About the Ethereum Merge?

By some estimates, Ethereum’s energy consumption will be cut by 99.9% post-merge. This massive cut is enough to cause a stir, but it is not the only reason the crypto world is watching.

With proof-of-work, validators (called “miners”) are rewarded in newly minted crypto coins. Proof-of-stake, on the other hand, offers validators network fees. This difference could prove to be important.

After The Merge, because validators will receive fees instead of newly minted ETH, there’s likely to be far less new ETH entered into circulation. Some estimates put the reduction at close to 90%.

With fewer new coins, Ethereum’s market cap could rise and it could become a deflationary currency which could theoretically lead to a significant rise in the price and value of ETH.

One more positive driving the excitement: PoS provides a consensus mechanism far more scalable than PoW. This will potentially enable Ethereum to scale quickly to the point where it could process 100,000 or so transactions a second.

5 Myths About The Merge

Below, we debunk some common myths surrounding The Merge.

1) You need to stake 32 ETH to run an Ethereum Node

Incorrect. Only those wanting to be validators will. That’s what proof-of-stake means.

2) The Merge Will Lower Gas Fees

Ethereum “gas fees” are the transaction fees required to run the network — paying validators, for example. The fees are based on network capacity and demand. The Merge will not directly change that.

3) Transaction Speed Will Soar After The Merge

Though there may be slight differences in moving from proof-of-work to proof-of-stake, most users won’t notice any difference.

4) The Merge Will Shut Down the Ethereum Network for a While

This is false. Plans are for a transition with no network disruption.

5) There’s Really No Risk With The Merge

As with anything software-related, you can test and plan like crazy, but there’s always the chance something unforeseen can go wrong. The Ethereum development community has been preparing, and we’ll still have to wait and see.

However, some speculate that a chain split could occur resulting in a PoW and a PoS version of the chain. In this scenario, two Ethereum blockchains would coexist: one that is an improved PoS and one that remains as a PoW and likely fades into obscurity over time.

How to Prepare for the Ethereum Merge

No action is required for Binance.US customers to prepare for the merge as we will complete all upgrades on our users’ behalf. The trading of ETH and ERC20 tokens will not be affected, though Binance.US will briefly suspend ETH and ERC20 token deposits and withdrawals during the network upgrade. In addition, Binance.US will implement all applicable technical updates for customers who hold ETH and ERC20 tokens in their Binance.US account. Learn more about how Binance.US will support The Merge upgrade.

Simply put, if you own ETH, do nothing at all. Binance.US has you covered.

There’s plenty of activity for participants in the Ethereum network, but ETH holders should just sit tight.

You’ll have access to your ETH after The Merge as you have now. Avoid any untrustworthy actors who may try to convince you otherwise.

There is much speculation on whether the Ethereum Merge will spur a rise in the value of ETH. As we’ve seen, it could slow the entry of new ETH and morph it into a deflationary cryptocurrency whose market cap might even rival that of the largest cryptocurrency, Bitcoin.

Some speculate that the drastic reduction in Ethereum’s carbon footprint will make it more attractive for corporate investment: They could purchase the crypto for their portfolios and invest in Ethereum apps on its blockchain without fear of negative repercussions.

Of course, all of this remains to be seen. The best thing you can do to prepare is to stay up-to-date on what’s going on, why, and the potential implications.

That’s another advantage of having a solid crypto partner, like Binance.US, where keeping you up-to-date and informed is part of our total crypto experience, along with some of the lowest fees and a wide range of choices.

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