Last Updated: 15 August 2022
The Merge is coming and the enthusiasm around Ethereum is currently high. Ethereum has seen a price gain of over 50 per cent in the last 30 days alone. Contrary to what many people think, the transition to Proof of Stake will not result in lower transaction costs.
Misunderstandings about the Merge
Currently, the biggest update for Ethereum since its blockchain launch in 2015 is scheduled for September 15. Despite the fact that all information about the Merge is public, it appears that even large investors are often not well informed about it. Anthony Scaramucci, the founder and managing partner of SkyBridge Capital, is an example of this.
Indeed, in an interview with CNBC, Scaramucci said the following about the Merge: “Of course, there is Ethereum’s Merge, which lowers transaction costs on the network. Many investors are probably buying in for that reason.” With this, Scaramucci makes it painfully clear that even the big money in this industry is not always fully informed. A statement that doesn’t do much for SkyBridge Capital’s credibility.
The Merge does not change Ethereum’s transaction fees
Andrey Sergeenkov published an article on August 13 via CoinMarketCap in which he discusses all the misconceptions about the Merge. “Contrary to what many people think, the Merge does not change transaction fees on Ethereum. The Merge does not increase the capacity of the network or make transactions more efficient. It is a change to the consensus mechanism and paves the way for future improvements in efficiency,” said a clear Sergeenkov.
Transaction costs on Ethereum are the result of demand for transactions relative to capacity. If the network reaches maximum capacity and the demand for transactions remains high, transaction costs go up. The Merge does not change this. The transition to Proof of Stake does, however, lay the foundation for Sharding. This is a technology that, in theory, does provide greater transaction capacity. The Merge is therefore more of a stepping stone to lower transaction costs, rather than a direct reason for cheaper transactions.
Ethereum’s long-term plan
Vitalik Buterin shared his plans for the future of Ethereum on July 21 at the annual Ethereum Community Conference in Paris. “The Ethereum protocol is in the middle of a long and complicated transition. A transition to a system that is in many ways more powerful and robust than the current Ethereum. […] The Merge is the transition to Proof of Stake, the Surge makes Sharding possible, the Verge brings Verkle Trees, the Purge destroys irrelevant history and the Splurge is a collection of other fun changes,” Vitalik Buterin said of the multi-year plan for Ethereum.
So the Merge should be seen mainly as a first step in the right direction for Ethereum. The coming months and years will show to what extent Proof of Stake is a good alternative for Proof of Work. The technology has obviously been tested to the limit and now seems ready for the real thing. However, it is impossible to test the technology in combination with the full value of the network. That test is now scheduled for 15 September and at this point it is impossible to form a conclusion. So the real test for Ethereum is yet to come.