What is The Merge?
Traditionally a Proof-of-Work (PoW) network, Ethereum is currently running an additional PoS beacon chain (often referred to as ETH2). These two chains are expected to fully transition over to PoS this year, in an event known as The Merge.
Why is The Merge Happening?
As mentioned, The Merge will move Ethereum to Proof-of-Stake (PoS) to enable a ‘cheaper’ and more democratic consensus mechanism. Consensus is how network participants agree on the state of the decentralized Ethereum chain.
In traditional PoW blockchains, miners use energy (computing power) to create blocks and achieve consensus. By relying on energy, each commitment to the chain carried an economic cost. Good behavior was rewarded with block rewards (tokens), whereas energy would be wasted by acting against protocol rules. Essentially, PoW incentivizes energy consumption and economic investment.
The move to PoS will drastically reduce the cost and environmental impact of block creation. It is estimated that The Merge will reduce Ethereum’s energy consumption by around 99.95%.
PoS also removes the need to purchase expensive mining equipment. Instead, token holders can earn a share of block creation rewards by staking their ETH tokens to validators. This lowers the barrier of entry for small at home stakers and thereby strengthens decentralization of the network.
The Merge Opens Up New Possibilities
Staking models show that the expected annualized reward rate for ETH staking could increase from the current ~4.2% to as high as ~9% immediately following The Merge. This is because following The Merge, ETH holders staking their assets to Blockdaemon validators will receive two additional reward streams directly to their existing withdrawal address:
- Transaction Fee Rewards: whenever a block that your validator has built is accepted into the blockchain, you will receive transaction priority fees (gas paid in $ETH) by the users that have transactions in this block.
- MEV Rewards: Blockdaemon plans to run Flashbot’s MEV-Boost (democratized MEV software) on your ETH PoS validator node. This helps to alleviate negative consequences for the network. If the block your validator is publishing contains any MEV transaction bundles, the tips (extra rewards) will be sent to your ETH1 withdrawal address. These MEV rewards can increase the overall staking rewards by 10-20%.