The long-anticipated Ethereum (ETH) Merge has entered the countdown period. The Merge, which is a crucial part of the long-term ETH upgrade, mainly involves the consensus mechanism shifting from Proof of Work (PoW) to Proof of Stake (PoS).
While many articles have already listed the basic concepts and impact of The Merge, such as how it will affect gas fees, this article aims to discuss the potential risks The Merge could bring to various ETH stakeholders such as stakers and holders, and ecology developers. It also provides suggestions on how to hedge the risks.
How can stakers reduce risks?
Validators on the Beacon Chain will need to run an execution layer client after The Merge in addition to their consensus layer clients. This was strongly recommended pre-merge, but some validators have outsourced these functions to third-party providers. This was possible because the only data required on the execution layer was updates to the deposit contract.
After The Merge, validators must ensure that the user transactions and state-transition blocks they create and prove are valid. To do this, each beacon chain node must be paired with an execution layer (client).
It should be noted that multiple validators can still be paired with a single beacon chain node and executive-layer client combinations. This expands validators’ responsibilities but also gives a validator who proposes a block the right to its associated transaction priority fees (which currently go to miners).
While validator rewards are still generated on the beacon chain and require subsequent network upgrades to be extracted, transaction fees will be charged, destroyed, and distributed on the executive layer. Validators can specify any Ethereum address as the recipient of the transaction fee.
After updating the consensus client, validators should set the “fee recipient” as part of the verifier configuration to ensure that transaction fees are sent to the address they control. If they use a third-party provider to stake, it is up to the provider to specify how these fees are allocated.
In addition, Staking Launchpad has a consolidated readiness checklist that stakers can use to ensure that they are completing each step of the process. EthStaker also runs Validator Prep Workshops and plans to increase the number of sessions.
A staker who wants to run a validator on the test network in preparation for a PoS conversion from the primary network can operate on the Goerli test network (now merged), which also has an instance of Staking Launchpad.
What about developers on Ethereum?
The Merge will have limited impact on the subset of smart contracts on Ethereum and thus the contracts are not likely to be broken. In addition, most users’ Application Programming Interface（API） will remain stable.
In other words, most applications on Ethereum involve much more than on-chain contracts.Now it’s time to make sure the front-end code, tools, deployment pipelines, and other off-chain components work as expected. It is recommended that developers run a full test and deployment cycle on Sepolia or Goerli and report any tool or dependency issues to the maintainers of these projects.
Also, note that all testnets, except Sepolia and Goerli, will be deprecated after The Merge. If you’re a user of Ropsten, Rinkeby, or Kiln, you should make plans to move to Goerli or Sepolia.
What should ETH miners and node operators do?
After The Merge, Etherem will use the PoS-based consensus mechanism. This means the PoW-based mining will no longer be possible.
If their clients were not updated to the newest version, these clients will be synced to the pre-forked blockchain.
Node operators who did not update their clients will be stuck on an incompatible chain following the old rules after a successful upgrade, and will be unable to send ETH or operate on the merged Ethereum network.
What should Ethereum users or Ether holders do?
Basically, ETH holders, regardless of whether they use Ethereum apps, trade Ether on exchanges, or just keep ETHs in their own wallets, do not need to take any action in relation toThe Merge. If the apps, exchanges or wallets provide additional instructions or advice, holders should verify that these are valid and beware of scams.
As The Merge is a complicated process, it is recommended for Ether holders to keep their assets on top exchanges that have strong user asset protection measures such as Huobi Global. The latter is a world-leading cryptocurrency exchange that has operated for nine years since its establishment without any security accident.
Huobi Global has announced that it will support The Merge and is ready for a possible hard fork and a new token that may be produced from it. The exchange will introduce measures, including suspending the deposit and withdrawal services for ETH and ERC-20 tokens, to protect user asset security and reduce the trading risks that may arise from price volatility during the hard fork.
Huobi Global has also contingency measures in place for two possible scenarios regarding The Merge:
1). No new token is created: Huobi Global will confirm the stability and security of the Ethereum mainnet before resuming deposit, withdrawal, margin loan, and crypto loan services for ETH.
2). The network forks into two competing chains and a new token is created: This will see the symbol ETH used in the ETH PoS chain. Huobi Global will then send users the forked tokens at a 1:1 ratio based on ETH balances snapshots taken before the Paris upgrade. The forked tokens will be credited to users’ spot accounts.
Keey an eye on market volatility
Even though choosing a top exchange could protect users from scams, it doesn’t mean Ether holders will not lose money as there may be extremely severe short-term fluctuations in the price of Ether during The Merge process.
Of course, while there could be significant profit to be made from frequent trading during this period, the risk is also high. And in the long term, Ether is also at risk of losing its dominance as the cryptocurrency of choice for smart contracts. The most likely outcome is that several programmable cryptocurrencies will dominate, not just one.