This is part three in a series on Ethereum's Merge. In part one, we explored what the Merge is. In part two, we evaluated the impact that the Merge would have. In part four, we will look at what you need to do to prepare for the Merge. Here, we will look at how the Merge will happen.
The Merge is actually the second step in a three-step plan to transition Ethereum from Proof of Work (PoW) to Proof of Stake (PoS). This multi-part plan was devised by Ethereum's developers, who felt it would simplify and de-risk the process.
The first step was launching an entirely separate blockchain called the Beacon Chain, which pretty much only does PoS. The Beacon Chain launched in December 2020, and it has run happily alongside the main Ethereum blockchain since then.
The Beacon Chain is as stripped back as a blockchain can be, containing only the essentials to perform PoS. Unlike the main chain, there are no transactions, no tokens, and no applications. In fact, the Beacon Chain is so simple that it only accepts ETH to stake, it doesn't allow withdrawals.
This simplicity is intended to make step two easier and safe
Step two is merging the existing Ethereum blockchain into the Beacon Chain -- hence the name the Merge. When the Merge happens, PoW will stop on the main chain and the Beacon Chain's PoS will take over.
The third and final step will be allowing stakers to withdraw their staked ETH from the Beacon Chain. This will require another update and isn't expected to happen for 6-12 months after the Merge.
How Will Everyone Know When To Merge?
Blockchains require everyone in the network to agree on what's happening. Therefore, it's important that everyone expects the Merge to occur at the same time. If they didn't, chaos would quickly emerge as everyone would disagree on which blocks were valid.
Normally, blockchains are updated at a certain block height. For example, everyone might agree that the chain's rules will change when block 1000 is produced. But, for security reasons, things will be a little different for the Merge.
Instead of taking place at a specific block height, the Merge will be triggered by something called Terminal Total Difficulty (TTD). That should make it more difficult for miners to attack or manipulate the process.
TTD comes from something called difficulty in PoW. This is a measure of how difficult it is for miners to win the PoW guessing game.
When we looked at PoW in part one, we saw that the miner with the most computing power stood the best chance of winning. That's because they can make faster guesses than anyone else, and are more likely to stumble upon a correct answer as a result.
But, what if every miner increased their computing power? Well, the number of guesses made would increase, so you'd expect a winner to be found in less time. And, that's exactly what happens. As more computers are used for mining, blocks are produced more frequently. Similarly, if fewer computers are used, blocks are produced more slowly.
Ideally, a blockchain should produce blocks on a regular cadence. And that is why difficulty was invented. If blocks are produced too quickly or too slowly, difficulty is automatically adjusted to put them back on schedule. In real terms, it's a change to the target that miners aim for in their guessing game. For example, if blocks are being produced too quickly, difficulty is increased -- meaning the target is moved downwards so the game is more difficult to win.
Total Difficulty is the number you'd get if you added up the difficulty in every single block in the chain. And Terminal Total Difficulty is the Total Difficulty at which the Merge will occur. Total Difficulty will not increase beyond that point because difficulty doesn't exist in PoS.
Once a block comes in and pushes Total Difficulty beyond the TTD, everyone will know it's time to Merge. Specifically, TTD is set to be 58,750,000,000,000,000,000,000, which should be hit on September 15th.
That date could move. It's entirely dependent on the number of miners still working on Ethereum and the rate at which blocks are produced. If a lot of miners decide to move on to other things before the Merge, blocks will slow down and it will take longer to reach TTD.
What Happens Next?
Stakers on the Beacon Chain have been producing empty blocks since the chain launched in 2020. That will finally end once the PoW chain reaches TTD.
To understand what happens next, we need a little more background on how Ethereum works.
Everyone who wants to be part of a blockchain network must run a piece of software called a client, which knows all the rules of the chain and how to talk to others in the network. Because the main Ethereum chain and the Beacon Chain are separate blockchains, people would need a different client for each one.
Beacon Chain clients are called consensus clients because the Beacon Chain is also known as the consensus layer. Meanwhile, main-chain clients are called execution clients, with the PoW chain known as the execution layer.
Pre-Merge, miners use their execution layer clients to put together blocks full of transactions. They then use it to play the PoW game and release their block if they win. Similarly, stakers use their consensus layer clients to put together their largely empty blocks and to do other activities like voting on valid blocks.
You might expect execution layer clients to become useless after the Merge. After all, they support a chain that won't really exist anymore. But, Ethereum's developers thought it would be easier and safer to keep using the existing software in the new world. After all, why spend huge amounts of time and money redeveloping something that works perfectly well?
The consensus layer client will also stick around after the Merge. So, stakers will need to run both a consensus layer client for the Beacon Chain and an execution layer client for the PoW chain.
When the Merge happens, stakers will put together a block full of transactions using the execution layer client -- just as miners did up to that point. Then, instead of doing PoW, they stuff the block inside their otherwise empty Beacon Chain block put together using their consensus layer client. They can then release the entire two-block combo as a package.
That is how Ethereum will operate from the Merge onwards. The first staker selected after TTD is reached will know this is how they should produce a block. Similarly, everyone else will know to expect one of the new-format blocks, and so they'll accept it when it arrives.
Unless something crazy and unexpected happens, the transition to full PoS should be pretty smooth -- but we'll talk more about that later.
What About Withdrawing Staked ETH?
Earlier, I mentioned that the Beacon Chain only accepts ETH deposits to stake, it doesn't allow withdrawals. That won't change at the time of the Merge. Users will still be able to transfer ETH to the consensus layer to stake, but they won't be able to withdraw back to the execution layer. Additionally, any ETH created on the consensus layer to reward stakers will be stuck there until withdrawals are enabled.
It's worth noting that only ETH on the Beacon Chain/consensus layer will be frozen. Any ETH on the PoW chain/execution layer will remain liquid. That means that stakers will actually have access to a portion of their rewards.
Remember that staking rewards come in three parts: newly issued ETH, a portion of transaction fees, and MEV. The newly issued ETH is the only portion that lives on the consensus layer. Fees and MEV must live on the execution layer because they're coming from the transactions taking place on the execution layer. So, stakers will have access to some of their rewards, but they'll have to wait to gain access to the rest.
At some point in the future, probably 6-12 months after the Merge, Ethereum will undergo another update called Shanghai which will unlock staked ETH. From that point on, stakers will have complete freedom to withdraw some or all of their ETH from the consensus layer.
What's important about this -- from a price perspective -- is that no new ETH can hit the market until that upgrade happens. As a result, the Merge could lead to a sudden and very dramatic shift in sell pressure. In the blink of an eye, we'll move from a world in which miners are practically forced to sell ETH to cover costs, to a world in which stakers can't sell their rewards if they want to. That might result in price appreciation in the weeks and months after the Merge -- so it's another reason for Ethereans to be excited about it.
Of course, markets should price in the possibility of massive sell pressure once the ETH is unlocked. That will put a dampener on things -- especially as markets tend to dislike uncertainty, which is all we have about Shanghai right now.
As a result, I don't know what to expect price-wise. But, I'm certainly intrigued to see how these opposing ideas and market forces will work themselves out in the months to come.
Can Anything Go Wrong?
The Merge certainly carries some risks. After all, it is a huge change to the way Ethereum operates. But, it’s been tested extremely thoroughly for months up to this point, and it wouldn’t be happening if developers thought there was any realistic chance of failure.
I wouldn’t be surprised to see a bit of instability immediately after the Merge. For example, there will surely be some stakers who haven’t properly prepared themselves for the event, and they may be knocked offline until they sort themselves out. However, I don’t see that happening on a large enough scale to cause real problems.
Ethereum’s PoS will work exactly as intended until more than 1/3 of stakers go offline. At that point, it will stop reaching finality. That doesn’t mean the chain will stop, it just means the most recent portion of the chain isn't firmly locked in place and could change.
That sounds bad, but it wouldn’t necessarily be cause for concern. After all, Ethereum doesn’t reach finality under PoW and there aren’t problems. Chances are, things would continue almost as usual even if more than 1/3 of stakers went offline. But, there is a slim possibility of more severe issues. For example, blocks might be produced and then immediately replaced with alternatives. That kind of instability would make the blockchain effectively unusable until the issue was resolved.
Something major would have to happen to knock 1/3 of stakers offline at the same time. The most likely scenario would be a bug in one or more of the clients that stop them from operating as expected.
Ethereum has tried to reduce this risk as much as possible by using multiple, independent implementations of each client. For example, 4 different teams have released their own version of the consensus layer client. Similarly, there are multiple implementations of the execution layer client. All of these different clients work together in a mix-and-match way, so a bug affecting any particular pairing shouldn't take too many validators offline.
Ethereans have also made a big push for client diversity to reduce this risk even further. The effort has been particularly successful on the consensus layer. Of the 4 clients, none stand out as especially dominant or overly used. The same can't be said for execution layer clients, with an implementation called Geth standing head and shoulders above the rest in terms of usage. That makes Geth the main source of risk heading into the Merge.
As long as Geth is OK, at least two other implementations would need to run into issues to put 1/3 of validators at risk. Given the sheer amount of testing that has taken place in the months leading up to the Merge, that doesn't seem likely. By now, every major bug should have been caught and eliminated. Recent tests and dress rehearsals for the Merge have only experienced minor issues from weird edge cases, all of which have also been accounted for. Realistically, it would take something especially strange and unexpected to cause a problem today.
And then, even if a large number of validators were taken offline, they would all face a massive incentive to get up and running again.
Ethereum would interpret the sudden, unexpected dropoff in validators as an attack. Every offline validator would face an economic penalty proportional to the number of offline validators. As a result, validators would scramble to fix their problems and get back online as quickly as possible, returning Ethereum to a healthy state.
Overall, then, the most likely scenario is that a handful of validators experience minor problems. They might go temporarily offline, but the network would be unaffected. The chance of anything more severe happening is low. And, if anything bad did happen, the recovery time would probably be short. That certainly wouldn't be ideal, but it wouldn't be apocalyptic either.
Altogether, the chance of the Merge failing is practically 0. Unless I just jinxed it.
So that’s how the Merge will work. To see what you need to do to prepare for it, check out part four.