Originally referred to as Ethereum 2.0, the merge introduces an upgraded version of the Ethereum blockchain that will use a proof-of-stake consensus mechanism to verify transactions via staking.
The staking mechanism Ethereum is implementing will replace the proof-of-work model where cryptocurrency miners use high-powered computers to complete complex mathematical functions known as hashes. The mining process requires an ever-increasing amount of electricity to verify Ethereum transactions before they are recorded on the public blockchain.
Proof-of work-systems devour a tremendous amount of electricity. Bitcoin mining, for example, currently consumes electricity at an annualized rate of 127 terawatt-hours (TWh). That’s currently higher than the power consumption of the entire country of Norway.
ETH currently has an annual power consumption roughly equal to Finland, producing a carbon footprint similar to Switzerland. Fortunately, the merge is expected to reduce Ethereum’s carbon footprint by up to 99.95%, addressing one of the major criticisms of the cryptocurrency.
Staking is the process that will replace mining to verify Ethereum transactions once the merge is completed.
Staking requires users to lock up a certain amount of cryptocurrency to participate in the transaction verification process. In a proof-of-stake model, an algorithm selects which validator gets to add the next block to a blockchain-based on how much cryptocurrency the validator has staked.
Investors must stake at least 32 ETH to become an Ethereum validator. There are currently more than 300,0000 Ethereum validators. The more ETH each validator stakes, the more likely that validator is to produce blocks. Each time a validator produces blocks, the validator earns rewards in Ethereum for handling validation duties.
With Ethereum trading at roughly $1,700, the minimum requirement of 32 ETH is more than $54,000; staking can be quite pricey for the average investor.
But individual investors can also join staking pools, which are collections of Ethereum stakers who combine their resources and split the rewards. Most large cryptocurrency exchanges also provide staking services for investors who are not willing or able to commit 32 ETH on their own.
The staking yield on Ethereum’s Beacon Chain currently runs around a 4.4% annual percentage rate (APR). Staked ETH (stETH) are locked up while the process leading up to the merge takes place.
Experts also say the ability to withdraw stETH after the merge won’t happen instantaneously.
“The merge isn’t synonymous with (stETH) withdrawals. That’s part of another Ethereum upgrade slated to occur after an estimated six to 12 months. There will also be a mechanism whereby the staked ETH can only be released over time, so it’s uncertain even once (stETH) is unstaked, how quickly someone can sell 100% of their holdings,” says Vinson Lee Leow, chief ecosystem officer at Partisia Blockchain.
