At press time, estimates are that Ethereum’s Merge, or the transition from proof-of-work to proof-of-stake-based transaction validation and settlement, will happen around 1 a.m. ET, or 5 a.m. UTC, on Sept. 15. It’s probably the most significant piece of crypto news since the collapse of Three Arrows Capital in June.
The Merge is, thankfully, much more positive. If you’re looking for a fundamental explainer or some last-second insights into how to trade the Merge, we’ve got you. But my job is the big picture, so here are the three most important things the Merge will change – and the one important thing it will not.
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Lower fees? No.
The most important thing the Merge WON’T accomplish is reducing transaction fees on Ethereum. It’s certainly what many users would have wished for, and lower fees may eventually be enabled by infrastructure changes made in the Merge. But it won’t happen immediately.
That means, above all, there’s still going to be a serious place in the crypto world for alternate layer 1 blockchains like Solana and Near, as well as for layer 2s like Optimism and Polygon, which save user’s fees by “rolling up” batches of transactions to post to Ethereum.
Somewhat ironically, Ethereum fees have actually jumped by around 25% to an average of over $3 per transaction since Tuesday, likely in part thanks to traders and holders repositioning for the Merge. Fees are still quite low historically, but if you’re reading this earlyish Wednesday take care of your moves soon because those fees are likely to rise further as the day goes on.
The ecological premium
By removing computationally intensive proof-of-work mining from Ethereum, the Merge is expected to reduce the network’s overall energy consumption by more than 99%. For at least five years, the ecological impact of proof-of-work mining has been a major headwind for blockchain adoption in general, and the transition has at least two specific catalytic implications for Ethereum.
First, as a recent Bank of America report argued, some institutions or other investors who were reluctant or unable to invest in proof-of-work systems will now be free to stake Ethereum. That’s not necessarily going to be an instant sea change given the bear market but could have huge upside implications for crypto’s next bull cycle.
Second, and I think more important, the shift to proof-of-stake totally transforms the playing field for non-fungible tokens (NFT). As silly as things got during the last bull cycle, NFTs are one of the clearest cases of real, end-user product-market fit on Ethereum, and I’m extremely bullish on the concept long term.
But a lot of artists and consumers seem to have a general antipathy to blockchains tied up in environmental concerns. That’s not their only gripe, but removing that issue will be huge for the appeal of digital art on Ethereum in the long term.
Just three weeks before the expected date of the Merge, financial regulators at the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) dropped a bomb on the crypto world with the sanctioning of the Ethereum-based Tornado Cash mixer. There remain a lot of unknown implications, but many developers and node operators decided they needed to protect themselves by unilaterally censoring transactions associated with Tornado Cash.
The Merge makes moments like this far more worrisome, for a variety of complex reasons. Proof-of-stake-based settlement is widely expected to concentrate more power in the hands of the biggest Ethereum stakers, including very public entities like Jump Trading.
These entities may, in turn, be more susceptible to pressure from entities like OFAC, which could lead to “base layer censorship,” or systemwide refusal to process transactions associated with entities sanctioned by governments.
This is a worst-case scenario and, hopefully, it won’t happen. But the fact that it’s possible, and would undermine the system neutrality that should be part of any blockchain’s core value proposition, is a real cause for long-term concern and vigilance.
The network state of ETHistan
Luckily, the fourth big consequence of the Merge is much more upbeat: It’s one of the first big examples of a globally coordinated network transition in crypto. Bitcoin has had its own drama around upgrades and forks, but never anything quite like the Merge.
While it’s true that Ethereum has a significant advantage given the leadership role of the Ethereum Foundation and co-creator Vitalik Buterin, it is still a huge, global ecosystem whose stakeholders have all had to stay on the same page through the complex process of the Merge.
It’s a tentative, partial example, but in this light the Merge looks a bit like Balaji Srinivasan’s concept of “the Network State.” Very broadly, Srinivasan believes that digital communities, some organized around blockchains, will begin to mimic some of the features of the offline governance units we think of as “nations” now.
Bitcoin already has many features of a network state, but Ethereum’s much richer technological underpinnings may form a more fitting foundation for the many complex potentials of a network state. The Merge, assuming it’s successful, could be seen as a moment of “national unity” for Ethereans, strengthening the community as much as anything technological.
Of course, not everyone has gotten on board with the Merge, particularly a few folks trying to keep proof-of-work Ethereum going. Frankly, it’s hard to see that effort as anything but a short con intended to fleece the naïve, but even if it were sincere it’s arguably the exception that proves the rule. You can’t have a nation, after all, without a few dissenters.
At the risk of overstating the case, from this perspective the Merge could be an important display of unity and power by the Ethereum “nation.” That may be particularly important for some of the looming fights around base-layer censorship and the regulation of utility-focused tokens.
As with most things Merge, it’s less about what happens in the darkness tonight than about what will be possible tomorrow morning.
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