Ethereum's The Merge is the most important event in crypto this year. Here's why.

Ethereum is changing.

The world's most popular blockchain platform is about to undergo a radical change that will make it greener, and pave the way for many optimizations. It's immensely important for the nascent spaces of decentralized finance and NFTs; on the flip side, its immediate effects on Ethereum's speed, scalability and fees are often overstated. Let's dive in.

What is The Merge?

First, a technical definition, mostly lifted from Ethereum.org: The Merge is an upgrade to the Ethereum platform that will merge the Ethereum Mainnet with the Beacon Chain, marking a transition from proof-of-work to proof-of-stake.

If you're not heavily into blockchain and crypto, that probably made little sense, so here's a simpler definition: The Merge is an Ethereum upgrade that ditches traditional mining – meaning having powerful computers solve math puzzles to run the network and create new coins – and switches to a system where owners of the underlying currency, ether or ETH, can stake it (hence proof-of-stake) in order to power the network.

In even more simple terms, computers consuming tons of electricity to power Ethereum are out, and they're replaced by computers that consume dramatically less electricity.

This has massive consequences for Ethereum's power consumption. Following The Merge, Ethereum should become a lot greener, leaving Bitcoin as the only major blockchain that still relies on proof-of-work. According to Ethereum Foundation, Ethereum's energy consumption will be reduced by 99.95% following The Merge. All that talk about NFTs not being green will be obsolete.

The Merge is also the first of many important upgrades that should make Ethereum more scalable and cheaper to use.

When is The Merge happening?

There's no set date for The Merge, but the transition has already successfully been made on Ethereum testnets. Each of those testnet Merges can be thought of as dress rehearsals for the real thing. Now that those rehearsals went well, The Merge can be activated on Ethereum's mainnet. Ethereum developers have confirmed that this will happen fairly soon, likely on September 15 or 16, 2022. The exact time and date will get clearer as we approach the event.

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What do I need to do ahead of The Merge?

If you own some Ethereum or an ERC-20 token (those are cryptocurrencies that run on Ethereum's platform), be it in a software wallet, hardware wallet, or an exchange, you don't need to do anything. If all goes well, the transition will just happen and Ethereum should keep ticking as before, without any downtime.

If you operate an Ethereum node, this text isn't for you, but you can go here to find information on what you need to do.

Is The Merge risky?

The Merge is a major upgrade of an extremely complex system. It could go wrong. Ethereum could run slowly for a while or even halt completely. There could be other unforeseen errors or issues. Chances of any of this happening are small, given all of the testing that went into this event, but they are not zero.

The Merge also changes how the entire Ethereum network is secured. In a proof-of-work system, it's hard to cheat the system because it would require a lot of computational power to do so. In a proof-of-stake system, cheating the system would require amassing a huge amount of ETH. Ethereum's developers claim proof-of-stake is secure, and it has been used in several other major blockchains, including Solana and Avalanche, but there's a degree of risk involved.

Finally, Ethereum is a decentralized network, meaning not all the power lies in the hands of the developers. The community, likely led by miners who aren't too happy about Ethereum leaving mining behind, could decide to create a so-called fork of Ethereum that keeps mining intact (one such fork already exists and it's called Ethereum Classic). There's a chance that this fork might end up becoming more popular than Ethereum itself. However, if you own ETH or an ERC-20 token on Ethereum, you (probably) will own them in any Ethereum fork as these forks are essentially copies of the network. It is up to every user to decide which fork they want to keep supporting and what they want to do with their assets.

Will gas become cheaper while Ethereum becomes faster?

Some of the common misconceptions about The Merge are ideas that all of Ethereum's problems – mainly, high gas fees and network speed – will get solved by The Merge. This isn't true. The Merge is a multi-stage process, and this part only paves the way for optimizations down the road.

Specifically, gas will not become cheaper following the Merge. Likewise, transaction speed will "mostly remain the same" after the Merge, according to Ethereum Foundation.

Finally, folks who have been staking their ETH ahead of The Merge will not be able to withdraw it just yet. This will be made possible after an Ethereum upgrade called Shanghai, which will happen further out (6-12 months according to current plans) in the future.

What are these L2s I've been hearing about?

L2s, or layer 2 networks, are already here; two of the more active ones are Arbitrum and Optimism. A layer 2 is a separate blockchain that uses Ethereum for security guarantees, but takes the load off of Ethereum's main network. Ethereum's current plan for long-term growth is for even more user activity to move onto L2s, while Ethereum's mainnet gets optimized to serve those L2s. The Merge is an important step towards this goal.

A cool thing about L2s is that you can use them right now. For example, Uniswap, a popular decentralized exchange on Ethereum, also works on Arbitrum and Optimism, allowing users to trade ERC-20 tokens for one another faster and cheaper than they can on Ethereum. To do that, users have to send their tokens from Ethereum to these L2 networks (in crypto lingo, this is called bridging), and for this they'll have to pay a fee on Ethereum. Another downside is that these networks are still mostly experimental. Finally, not all apps that live on Ethereum are available on each L2. The Merge won't automatically fix these issues, but it should help with solving them.

Will Ethereum surge in price because of the Merge?

Predicting prices of cryptocurrencies, Ethereum included, is hard, as they depend on a multitude of factors. There are some aspects of the Merge that pave the way for an Ethereum price rise. For example, with traditional mining out the door, fewer ETH will be given as rewards to the computers running the network, meaning the total supply of Ethereum will increase very slowly. Since some ETH is destroyed ("burned" in crypto lingo) by certain processes on the network, this will make Ethereum deflationary, meaning total supply of ETH will slowly decrease over time.

You may have seen something along these lines cited as an indication that the price of Ethereum's native token, ETH, is about to go up. But there are other things to consider. The Merge has been planned for a long time, and it is a public event. It's quite possible that any changes brought forth by the Merge are baked into ETH's current price. Also, the price of ETH may go up or down because of unrelated factors, such as changes in the macroeconomic environment.

What's ahead for Ethereum?

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With cryptocurrency being an extremely dynamic space, it's hard even for Ethereum's leaders to predict the network's long-term future. Ethereum co-founder Vitalik Buterin, however, recently gave an outline of the five stages of Ethereum development, starting with The Merge.

For a detailed overview, check out this graphic shared by Buterin on Twitter. Here's a quick overview: After The Merge comes The Surge, which should bring "massive scalability" meaning faster operation, thanks to L2s and a tech development called sharding.

Things get a bit more esoteric from there. The Verge uses tech called "Verkle trees" that should, among other benefits, bring optimization to data storage on the network which, again, makes Ethereum more scalable. Then there's The Purge, which involves getting rid of "historical data and technical debt," reducing the hard drive space needed for validators to run. And finally, The Splurge should bring further optimizations.

Buterin has made predictions for Ethereum before that haven't always panned out as he planned, but the short version of the above is that, while The Merge is an immensely important step forward, there's a lot of technical work (we're talking years) ahead to make Ethereum a truly scalable and cheap network for decentralized apps.