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The Merge Explained: How will the issuance & burn be affected?

By September 22, 2022September 23rd, 20223 minute read
Note: This blog is written by an external blogger. The views and opinions expressed within this post belong solely to the author.

The Proof of Stake mechanism has finally replaced the Proof of Work mechanism on the Ethereum Blockchain Network. After the Merge was accomplished, crypto supporters were delighted. Google had also put up a countdown to mark the Merge. These examples show how the Merge was a widely anticipated milestone in the crypto community. But what are the changes to the Ethereum Issuance? How does it affect the ETH burn? Is ETH ultrasound now?

Let’s examine the changes that the new Ethereum phase will bring.

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How is ETH Issuance affected after the Merge? 

Pre-merge the ETH issuance happened in two layers: the execution layer issuance and the consensus layer issuance. The execution layer was miner based, i.e., solely backed by the PoW mechanism. 

The Beacon Chain, which is the consensus layer, went live in 2020. It is secured by validators using proof-of-stake rather than miners. This chain was bootstrapped by Ethereum users who made a one-way deposit of ETH into a smart contract on the Mainnet, which the Beacon Chain then listened to and credited with an equivalent amount on the new chain. The Beacon Chain’s validators stopped executing transactions until The Merge; instead, they were reaching an agreement on the state of the validator pool itself.

Post the merge; the execution layer issuance will be demolished. All the activities concerning the issuance layer will be included in the beacon block and be validated by the proof of stake validators. Furthermore, the consensus layer issuance will work as before. Ethereum miners won’t be able to create new blocks on the network after the Merge. In order to receive rewards on the PoS network, many miners will stop mining and instead “stake” ether.

According to the Ethereum organization website, the net reduction in the annual ETH issuance post-merge will be ~89.4%. 

How is ETH Burn affected after the Merge?

The pace at which ETH is burned is the opposing force to ETH issuance. On Ethereum, a base charge constantly fluctuating based on network activity must be paid for a transaction to be processed. The fee must be paid in ETH in order for the transaction to be accepted. During the transaction procedure, this charge is burned, taking it out of circulation.

Fee burning began in August 2021 with the London upgrade and will continue after the Merge. In addition to the London upgrade’s fee burn, validators may also be fined for being offline or, worse yet, terminated for violating particular rules that endanger network security.

The Criticism and the Support

Proof-of-stake is much more energy-efficient. Since the energy-guzzling mining procedure is wholly eliminated, 99 percent of previously consumed energy will be conserved. As environmental factors like climate change impact our globe, energy efficiency will become more and more important, even for fundamental technologies.

But there are many who oppose the move to Proof-of-Stake. There are solid arguments against Proof-of-Stake, such as the potential for a significant wealth concentration within a small number of validators and the possibility that it would make it impossible to lower the entry barrier. The reduction in issuance 

However, many people believe that, in the end, the advantages outweigh the disadvantages, especially regarding the blockchain’s security and long-term scalability. In addition, supporters contend that moving to Proof-of-Stake will increase Ethereum’s robustness and decentralization.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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Shashank is an ETH maximalist who bought his first crypto in 2013. He's also a digital marketing entrepreneur, a cosmology enthusiast, and DJ.

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