The End of an Era - The Daily Gwei #237

Goodbye proof of work; hello proof of stake.

Proof of Work (PoW) - it’s something that has been around since the dawn of cryptocurrency with Bitcoin and has had a profound effect on the technology world (in both good and bad ways). With the eth1 <> eth2 merge, Ethereum will fully transition off of proof of work and rely solely on its proof of stake consensus mechanism marking the end of the Ethereum PoW era.

As you can see above, Tim Beiko from the AllCoreDevs is essentially telling miners that they should be planning for the merge to happen by the end of 2021 by ensuring that they’ve broken even on their mining hardware investments. This is simply because once the merger happens, all mining will cease on Ethereum and miners will no longer be receiving any block reward or fee revenue (or MEV). Of course, Ethereum miners can switch over to one of the other chains that share the same hashing algorithm but it will probably not be anywhere near as profitable. The miners can also choose to continue the old eth1 chain as a “fork” but its expected that basically no stakeholders in the ecosystem would support this fork (such as infrastructure providers, app devs, exchanges etc). Though my bet is that there will be a miner-led fork of eth1 (Ethereum Classic Cash?) and some centralized exchange will list the token which may lead to some short-term noise/speculation (similar to what happened during the Bitcoin/Bitcoin Cash split but probably no where near as bad).

I don’t personally have a strong opinion on if PoW is a net good or net bad for the world but I don’t think that matters - what matters is how the rest of the world is going to see it. I believe that over the next few years (maybe even much sooner than that), PoW will become a major liability and governments/nation states will either start regulating it heavily or outright ban it. So from this perspective, I’m extremely happy that Ethereum is going to be getting rid of PoW as quickly as possible - it means that the Ethereum ecosystem does not have the same liabilities that Bitcoin will have due to the usage of PoW. Though on that note, I’m still excited to see the two “grand experiments” of crypto play out with Bitcoin and Ethereum and I’m excited to see how the world treats both of them going forward.

I believe that the merge is going to be the most historic day in Ethereum’s history as it represents the culmination of 8 years worth of work from tens of thousands of people across both eth1 and eth2. Once the merge happens, there will be no more “eth1” and “eth2” nomenclature - it’ll simply be one holistic “Ethereum” (or the “consensus layer” and “application/execution layer” for the more technically-minded). On top of this, with the removal of proof of work, ETH’s issuance will drop by around 90% - something many people in the industry are now referring to as Ethereum’s “triple halvening” event. And if that wasn’t enough, it’s expected that the staking APY will spike and go to at least 20%+ since stakers will now be receiving all non-burned ETH transaction fees.

As you can see, the merge is a monumental event that all Ethereans should be paying attention to over the next few months. Of course, the merge is not an easy task and the execution risk is high, but I personally have full faith in all of the people involved in making it happen. After all, these same people have been building out the core Ethereum protocol for the last 8 years, who better to make the merge happen than them?

Have a great weekend everyone,
Anthony Sassano

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All information presented above is for educational purposes only and should not be taken as investment advice.