THE ETHEREUM MERGE! Everything You Need to Know

ethereum the biggest cryptocurrency after Bitcoin it's the blockchain that pioneered smart contracts which allowed for the entire world of crypto apps and use cases and now host the vast majority of decentralized Finance activity and as we speak it's about to go through the biggest upgrade that the crypto industry has ever seen it's called the merge and it's the upgrade to ethereum that the ethereum community has been waiting for since 2015 the merge is when ethereum changes its consensus mechanism from proof of work which is like Bitcoin to proof of stake and there is a ton of

questions out there there's a lot to unpack why is ethereum doing this at all in the first place and why did it take so long it took seven years to get to this point why is it called the merge what about the ethereum merge is exactly so exciting what about the ethereum merge is getting the community so riled up and how and why is the merge going to change absolutely everything and of course what does it do to the native currency of ethereum ether here's a hint a lot and does ethereum have the potential to flip Bitcoin and take the Throne of the number one cryp crypto asset in the world something that has

never been done before we're going to get through all of these questions and more as we take you from 0 to 60 about the biggest event in crypto's history the ethereum merge my name is David and I co-founded Bank list the leading podcast and newsletter in the crypto industry every week we bring on the biggest guests to talk about the bleeding edge of crypto so hit that subscribe button and sign up for our newsletter because the bankless nation is where you want to be on the frontier of crypto knowledge okay let's start by unpacking the merge a little bit more first what is the merge the merge is the name of the event when the ethereum blockchain changes from proof of work to proof of stake it's called the merge

because it's the merging of two independent blockchains that are currently running in parallel the main ethereum blockchain is being merged with a special purpose blockchain called The Beacon chain the beacon chain launched on December 1st 2020 and the purpose of the beacon chain is to do one thing and one thing only be a proof of stake blockchain on the beacon chain there are no transactions there are no tokens or defi apps there are no nfts there's no nothing it's an empty blockchain and it's solely meant to be a blockchain that runs a proof of stake consensus mechanism because the beacon chain is an

empty chain it can merge with the ethereum blockchain and replace ethereum's proof of work mechanism like Indiana Jones Style just like hot swap without having to be concerned about any other variables once these two chains are merged ethereum's proof of work validation will be replaced by a brand new proof of State consensus mechanism when ethereum launched all the way back in 2015 it launched with proof of work which is the consensus mechanism that it still uses today it was communicated at the time that ethereum would swap to proof of stake 9 to 12 months after after launch as it turns out the ethereum researchers went down this research and development path for proof

of stake and it turned out to be a far bigger Rabbit Hole than previously anticipated what was supposed to be just a year turned into seven and the ethereum road map grew in ambition and complexity in late 2019 the skies cleared around the ethereum road map and the ethereum devs came to consensus on both how proof of stake should be built and as well as how it should be implemented a multiphase plan was developed which would break apart the complexity of the ethereum road map into more manageable chunks the first step was to launch the beacon chain this parallel blockchain I mentioned earlier that phase began back in December of 2020 and the beacon chain has been running ever since the Second Step was

to do dry runs or dress rehearsals of ethereum test Nets ethereum has many test Nets these are like ethereum clones in which developers can test stuff without having to worry about any real world consequences there are three major ethereum test Nets Robson which successfully went through its own merge on June 8th sepolia which went successfully through its own merge on July 6th and gorle which successfully went through its own merge on August 10th all three had very successful transitions to proof of stake which has given the ethereum developers the confidence that we are ready to take

this to the ethereum main net and so the etherium main net merge date has been set a date we have been waiting for for so long between September 15th and 16th of this year the beacon chain will merge with the ethereum main net blockchain and ethereum will switch from using proof of work to using the beacon chains proof of stake and these two chains will merge into the same thing so this answers the question why is the merge so hyped but to really drive this home no blockch chain has undergone such a significant change in crypto's history blockchains do not change such a critical part of their operation very

often ether the native currency of ethereum has about a $220 billion market cap with many more billions of dollars of value based on top of the network in tokens and nfts ethereum is by far the largest and most robust economic system in crypto and the security of all of this economic activity will be changed from being secured from proof of work to proof of stake though it's a really big deal but what about eth what about ether the native currency of ethereum how does the merge impact ether let's get into the fun part of the conversation the money part the merge has a massive

effect on the economics of eth to investors like myself this aspect of the merge is the most significant the merge drastically changes the economics of ether in two different ways one reducing ether issuance and two making ether a natively yield bearing asset let's start with reducing ether issuance once the merge happens the amount that ether is issued every single year reduces by about 90% from a 4.3% issuance rate to 43% this is because of the fundamental improvements to efficiency that a proof

of stake consensus mechanism brings proof of stake is designed to provide the highest level of blockchain security for the lowest amount of cost and these savings are passed on to The Ether holders by reducing the amount of ether that needs to be issued to pay for security proof of work is expensive and it requires significant electricity consumption in order to provide security proof of stake replaces electricity consumption with the opportunity cost of capital which is a fancy way of saying staked ether instead of consuming electricity people simply stake their ether and they get their ether slashed if they try and process an invalid

transaction as a result these lower costs of security make proof of stake consensus mechanisms far more efficient than proof of work and is why proof of stake ethereum can reduce ether issuance by 90% this reduction of new ether issuance is generally considered extremely bullish not only is this bullish because less ether is being issued but stakers also don't have to sell their ether rewards like how proof of work miners do proof of work miners must cover their electricity expenses but stakers don't have any expenses like that they don't have to consume electricity to do their work so they can keep on holding their rewards without

selling removing $7.5 billion dollar in annual sell pressure from the market proof of work miners have to sell their rewards to pay for electricity consumption when you take away the electricity consumption you no longer have to sell the asset so it's like as if $7.5 billion doar is being removed from selling every single year 7.5 billion dollars is not sold of ether that otherwise would have been by comparison Michael sailor the person that all the Bitcoin Community idolizes for being the biggest Bitcoin Bowl has

only bought about $4.5 billion do worth of bitcoin and at this point he's out of cash with ethereum there's effectively a new buyer of $7.5 billion of eth persistently every single year and that is not even including the transaction fee burning of ether from EIP 1559 if you didn't know EIP 1559 is an upgrade to ethereum that's already in place it went live on August 5th 2021 just a little over a year ago since this introduction it's burnt over 2.5 million ether which is 8.5 billion dollars in a little bit over a year because EIP 1559

Burns transaction fees is removed 2.5 million ether out of the total supply of 120 million ether that's on the market when you add the eth burn mechanism from EIP 1559 to the eth reduction issuance from the merge you get what the ethereum community calls ultrasound money sound money is money that holds Supply constant over time unlike the dollar which inflates but ultrasound money is money that decreases its Supply over time so if you're bullish on bitcoin's 21 million unit Supply you should be ultra bullish on ether's ultrasound

money so that's the issuance reduction of ether the second effect that the merge has on ether is that it gives ether a native yield what does that mean it means that you can get yield on your ether at the protocol level built into the protocol the word yield is thrown around a lot in crypto but the yield that ether gets is of a different nature than all other yield bearing assets in crypto ether gets it yield from the staking rewards that proof of stake brings to eth if you stake your eth you can get a 4.6% risk-free yield and the reason why it's risk-free is there is no counterparty to your yield there is no external party in defi applications you

put your ether stablecoin or other assets into smart contracts and then on the other side of that contract somebody else is doing something with them they're borrowing trading with them something with ethereum your counterparty is the ethereum protocol and the only thing that the protocol does is make sure that you propose valid block to the blockchain so if you're staking ether proposing valid blocks is the default thing to do there's no way to accidentally process a bad block and get slashed it's a very intentional thing to do to propose a bad block the only people who propose bad blocks are people who are trying to attack ethereum

and if they do that they just get their ether slashed so in theorum there's no counterparty risk your counterparty is the protocol and the protocol is meant to just custody your eth there's no one to rug you when you stake your ether you get your ether rewards that come with processing every single block but you also get what's called priority fee fees which are extra fees that people pay to process their transactions ahead of others people who want to jump the line and get their transaction ahead when you combine these two things the native ether rewards from blocks and also the transaction priority fees paid by transactors we come to an estimated 7%

of ether denominated yield on your stake de this is why almost 14 million ether is staked to the beacon chain currently earning just over 4% and once the beacon chain merges with ethereum the stakers will also get their transaction fees raising the native yield of e staking to something about 7% we'll know how much that number goes up when the merge actually happens at bankless we have about 160 ether staked with rocket pool and we run 10 rocket pool nodes so in the last two months or so we've earned a little over a single eth on our 160 eth stake in just the last month the native yield of ether is definitely a big part

of the story of the ethereum merge and is why the ethereum community is so hyped about this upgrade I've hinted at this already a few times in this video but it's worth ding deeper into the change to ethereum's energy consumption with the merge the ethereum merge reduces electricity consumption by ethereum by 99.99% it basically sends it to zero proof of stake secures a blockchain with capital instead of energy instead of consuming energy you just stake your ether so the remaining energy that's needed to maintain ethereum is comparable to basic computer usage the stuff you are doing right now like reading this article sending Tweets

downloading a movie to your hard drive stuff like this watching this video with proof of stake enabled the energy cost for ethereum is just running a node and it's estimated that in proof of stake ethereum ethereum is going to consume 1,300 times less than what the entire us gaming industry consumes ethereum will quite literally be the most environmentally friendly Financial system that the world has ever seen the Banking and Financial industry still requires people to physically move around in combustion engine cars they have to have lights on in physical buildings they have to take up space with Office Buildings and otherwise

consume energy that would no longer be needed in a crypto enabled World maybe Wall Street should go green by using ethereum crypto grew a terrible brand in 2021 as being this wasteful industry that's going to consume all of the world's electricity while these believes weren't entirely accurate it is what it is broader Society wants things green and efficient the ESG investing narrative is in and proof of work blockchains just don't fit into the ESG movement once ethereum is merged with the beacon chain all decentralized finance will be built on a blockchain that consumes just about as much electricity as you viewing this YouTube video finally let's talk about ethereum

scalability will ethereum merge lower ethereum transaction fee costs no no it won't the scalability of ethereum which means how many transactions it can process per second is a different story ethereum has a clear road map to sub one cent instant transaction times and that is done by this technology called rollups but that's out of the scope for this video we've covered the ethereum scalability strategy with so many different episodes on Bist which is why you should subscribe thank you so much for watching this video I hope it proved informative and helpful if you want to see more of these videos you got to subscribe to bank list at bank list we've interviewed the gigabrain of

crypto on topics like this metallic reuterin the founder of ethereum has been on the show like over 10 times talking about various topics around the ethereum space but we've also had crypto adjacent guests on like Mark Cuban Kathy Wood and so many more to get their perspectives on how crypto is impacting their thoughts and perspectives on the world so subscribe because bankless is about taking on a journey that we're all going on together we're still so early in the days of crypto how crypto is going to look in 5 10 years is going to be completely different from how it looks today and the ethereum merge is one of those big phase changes one day

your kids will ask you where were you during the ethereum merge and if you answer listening to bank list they'll tell you you're a legend so join me Ryan and over 200,000 others going on this journey into the frontier thanks for watching