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Meaning of Ethereum Merge for Layers-2 and the Gas Fee problem

The Merge (Ethereum Merge) is probably the most interested event in the near future because this is the event that determines where the fate of Ethereum will go.

This event is taking place on September 19, there are many opinions that this upgrade is a big problem not only for investors but also related to the development of projects on Ethereum.

The launch of Ethereum Merge has created a bullish momentum for ETH in recent times, which shows that the expectations of crypto investors for the Ethereum Merge event are huge.

So why is this upgrade a big deal, what will really happen after Ethereum Merge is successfully launched, what does it mean for Web3 projects and related Layer 2, including how it interacts with Ethereum’s competitors (Solana, Avalanche, ..)

Ethereum Merge (also known as The Merge), is the upgrade event of the Ethereum network when moving from Proof-of-Work (POW) consensus mechanism to Proof-of-Stake (POS). Once the upgrade is completed, the Ethereum 2.0 blockchain will be born with the fusion of the existing Ethereum chain and the Beacon chain.

As such, Ethereum Merge is perhaps best described as a large-scale change in the network’s consensus (PoW) mechanism and the most significant upgrade in Ethereum’s history.

Currently, the Ethereum Mainnet uses a proof-of-work system where miners use computational power and consume a lot of energy to reach consensus (consensus) and ensure security. network secret.

According to an announcement from a member of the Ethereum Foundation, the launch of Ethereum Merge will be released on September 19.

The Merge
The Merge

Although PoW (proof-of-work) plays an important role in the distribution of ownership of ETH tokens and decentralizes the network like other blockchains that use proof-of-work. The Ethereum network has been criticized for its lack of scalability and sustainability.

On the other hand, the Proof-of-stake consensus mechanism achieves economic adoption (for example, sending 32 ETH on the Beacon network), in addition, the security of the network also depends on validators staking, or locked their ETH tokens.

Thus, in this way it is possible to eliminate the need for “hashing power” to consume a lot of energy. Specifically, after Ethereum Merge, miners (miners) cannot participate in the ETH mining process, but have to spend a lot of energy (power consumption). Instead, the PoS consensus mechanism that Ethereum uses will be able to bring many benefits to the development of the ecosystem later.

What will happen after Ethereum Merge takes place

Reduced release rate & deflationary pressure

Perhaps the most dramatic, immediate impact after Ethereum Merge was the significantly reduced ETH token issuance rate. With proof-of-work (PoW) defunct, the Ethereum network will no longer issue token rewards to miners, this change is estimated to reduce ETH’s annual issuance rate by up to 90%.

This drastic drop in the issuance rate, combined with the fee-burning mechanism by EIP-1559, could lead to the Ethereum network going into deflation in the near future, as demand represents each block. is increased, corresponding to the more ETH is burned (burned) by the EIP-1559 mechanism.

This represents a fundamental, structural change to the Ethereum network on a scale unprecedented in its history.

The capacity of the network does not change

It’s important to note that Ethereum Merge itself will not directly scale the capacity or throughput of the network itself, with the introduction of subsequent sharding updates addressing long-standing scalability issues. term of Ethereum.

This means that the space and capacity of each block (also known as blockspace) remains unchanged and the gas fee will continue to be driven (fee gas can increase) by the demand for blockspace. Thus, with Layer-2 Roll-ups can provide the necessary scalability for users of the Ethereum network.

Source: cointelegraph
Source: cointelegraph

Demand for blockspace increases & gas fees increase

It can be said that quite a lot of people confuse one thing that the launch of Ethereum Merge may lead to a decrease in gas fees on the Ethereum network, and the cost of gas fees per block after Ethereum Merge is extremely cheap.

But, that is not true and false, gas fees can even increase when the demand of Ethereum network increases after Ethereum Merge takes place (the demand here can be judged by the number of blocks per block increases). fast).

Staking rewards will increase from what is currently rewarded on the Beacon Chain, as transaction fees that were once paid to miners are now paid to validators. With the increase in staking rewards, ETH will be able to become a much more attractive asset, which will boost the interest of institutions in the issue of profitable assets and network usability today. the rise of Ethereum.

The capacity of the network does not change
The capacity of the network does not change

What Ethereum Merge Means for L2 and Dapps on Ethereum

Layer-2

The interest in Ethereum network launching Merge, which will drive demand for blockspace and gas fees, has contributed to placing greater importance and demand on layer-2 scaling solutions like Starkware, Polygon , Arbitrum and Optimism.

Dapp

Dapps built on Ethereum Mainnet will continue to move to Layer-2, if these dapps have not been migrated and developed on these Layer-2. As liquidity mining incentives, lower gas fees, and retroactive token airdrops contribute to a potential factor driving users to move their assets off the Mainnet to Layer-2.

Improved integration requirements, improved UX

As users accumulate on these rollups and TVL increases, new protocols will also be encouraged to build directly on Layer-2, which places greater demand on improved UX on-ramps, wallets and bridges so that users can better participate directly on Layer-2.

Liquidity staking providers benefit

Increasing staking yields for ETH will directly benefit staking protocols like Lido and pStake.

Holders and institutions looking to participate in adding liquidity by staking their ETH, will increasingly become a provider of liquidity staking in increasing numbers, primarily due to the yield of ETH staking is increased and this demand for profit will be the solution for those ETH miners (PoW miners).

What Ethereum Merge Means for Investors

Positive impact on the value of ETH

Structural changes to the ETH token supply, made possible by EIP-1559 and Ethereum Merge, have been highly anticipated by the crypto community for a long time.

Removing rewards from ETH mining will reduce the issuance rate of ETH tokens, but also help reduce selling pressure from miners selling ETH to cover their operating costs (such as paying for electricity). .

When a large amount of ETH is staked to become validators, it means that a large part of ETH will also be removed from the circulating supply, contributing to a significant reduction in the amount of ETH currently in circulation and available. available to investors and institutions in the marketplace.

Positive impact on the value of ETH
Positive impact on the value of ETH