Ethereum 2.0: How The Merge will change DeFi and dApps on the network (Decryption)

ethereum merge

“The Convergence” – the transition from proof of work to proof of promise – is a major paradigm shift for the #1 ecosystem in smart contracts and decentralized applications. Changing something as important as the consensus algorithm, midstream, on a network that ensures so much liquidity is an incredible balancing act.

The entire forest of dApps and smart contracts from DeFi, games and NFT must remain active on the Ethereum blockchain – and be backward compatible after the update. This is nothing more or less than a turning point in the history of the blockchain.

Ethereum (ETH) is set to become the largest proof-of-stake (PoS) cryptocurrency.

Until now Ethereum like Bitcoin used the proof of work (PoW, for ” proof of work ») as a mechanism to validate transactions and blocks on their network.

This included specialized computing hardware to continuously “mine” ETH: these ASICS deployed their computing power to solve cryptographic challenges, each challenge was solved allowing a block to be validated and the associated ETH reward to be recovered.

Assuming the success of The Merger », Ethereum would join the list of blockchains working with proof of stake (PoS, instead of “proof of stake”). No more ASICS and competition between validators, all users will have to deposit at least 32 ETH and agree to block them to participate in securing the network.

Good to know : collectors’ choice as proof of the issue

In the PoS algorithm, ETH holders are thus randomly drawn to validate the transactions. With this probability model, each validator has a theoretical chance to validate a block. However, this probability is weighted by the number of ETH held.

With this change, Ethereum will be the largest proof cryptocurrency. The largest of these was Cardano (ADA), which has a capitalization of just under $15 billion. Ethereum (ETH) weighs more than 180 billion at the current price.

Ethereum 2.0: How The Merge will change DeFi and dApps on the network (Decryption)

Change in rewards and their perception

This is the first big change: ETH issued to pay “miners” as part of proof of work which is now used to block validators from paying their ETH tokens to secure the network.

Currently, 2 ETH are issued creating each block. Given that a block is validated every 13 seconds, this is equivalent to 5 million ETH in rewards per year.

Adding the reward of those who make a bet (about 500,000 ETH), this brings the total issue to 5.5 million ETH per year.

After switching to PoS, 2 ETH were no longer issued for each block. It will only be ETH created to reward collectors. However, it will not have escaped your notice that the Ethereum network had evolved in August 2021 with the EIP-1559 – among other updates.

The purpose of this is to withdraw from circulation (“ burn ”) most of the ethers issued are transaction fees. clean, remove it 2.9 millionETH in the face of the years. In the jargon, it is that Ethereum has become a cryptocurrency deflated.

Good to know : Deflated cryptocurrency

A cryptocurrency is said to be deflated when token issues are slower than token withdrawals.

The immediate consequence is as follows: if, from August 2021, the issue was made at an annual rate of +4%, it will now fall to -1.4% with The Merger.

For those interested in the monetary side of Ethereum, this will give ETH an effective base rate of about 4% per year. Contrary to what some observers say, this is not a true result. In fact, it will be paid from the issuance of ETH, and not from an external source (such as a bond coupon). It is clear that those who do not invest their ETH in the network, diluting it, are the ones who actually pay those who do.

This represents the change of vision that all Ethereum participants will face. Not everyone needs to support the network by staking, but not doing so will transfer value to those who participate in this activity.

Ethereum 2.0: How The Merge will change DeFi and dApps on the network (Decryption)

New dynamics of value creation on Ethereum –

Changing the DeFi energy consumption scenario

The second major change concerns theEthereum’s carbon footprint.

By moving to proof-of-stake, Ethereum will reduce its energy consumption by 100 TW per year : more or less, it is the annual consumption of a country like Finland or the Netherlands.

Due to its impact on the environment, Ethereum has so far not been the privileged choice of institutions to launch their projects.

Despite its #1 blockchain status for dApps, Institutional investors would prefer other networks to meet ESG criteria in their crypto investments.

Now the Ethereum network will become up to 2000 times more efficient, so it will be possible sending a completely irresponsible story like the one about the Solana network.

Good to know: blockchain and its carbon footprint

A report commissioned by the Solana Project (SOL) team established a small hierarchy of the most environmentally friendly blockchains.

  • They are the most corrupt blockchain at proof of work: Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC). They consume around 100 kWh for one transaction, which is equivalent to a 200 km trip in a diesel sedan.
  • Then come the blockchain of layer 2: Polygon (MATIC), Arbitrum, Hope. they consume around 10 kWh per transaction, equivalent to a 20 km journey in a diesel sedan.
  • They are the least polluted blockchain proof of the issue: Cardano (ADA), Solan (URL). Their consumption drops to less than 0.010 kWh per transaction, equivalent to a Google search!
Ethereum 2.0: How The Merge will change DeFi and dApps on the network (Decryption)

PoS will make blockchain 2000x greener for Ethereum

Change in dApps fees

Another change involves the fees users pay to use Ethereum’s decentralized applications. Yes recurrent misunderstanding approx The Mergerthrough which the network (the “gas charges”) will decrease.

However, what is true is: the update will allow the possibility of generating random numbers on the blockchain.

Good to know : random numbers in cryptography

Random numbers are essential for many applications, which until now have relied on external tools – “oracles” such as Chainlink – to provide them with price and volume data, incurring additional costs.

Without going into details, the introduction of random numbers will make a difference to dApps developers and users.

While this won’t make ChainLink obsolete overnight, it will provide options for developers to the shaving.

Cases to be expected include:

  • Decentralized AMM-type exchanges such as UniSwap will have to adjust their algorithms to adapt to new market conditions.
  • Stables like DAI MakerDAO need to change the collateral requirements for token issuance.
Ethereum 2.0: How The Merge will change DeFi and dApps on the network (Decryption)

Evolution of dApps average fees on Ethereum

Reinforced role for layer 2 Hope, Arbitrum and Polygon

The last big change made The Merger is the improved role of Ethereum overlay in the issue of gas costs.

It should be understood that the update is not intended to fix the fee issue. There is no reason to expect changes in network costs unless the number of transactions increases or becomes compromised after the merger.

Therefore, the Layer 2 wait solve this problem.

Good to know: layer 2 or overlay

A layer 2 blockchain is a secondary network built on top of an existing blockchain. Polygon, Arbitrum and Optimism are layer 2 of Ethereum. For example, transactions are validated in batches of 1000 on Polygon, before being validated all at once on Ethereum. This effectively avoids congestion issues and high fees on Ethereum!

However, if the update does not solve the problems of congestion and fares, it is an inevitable step before getting there.

The developers refer to it as ” shaving », which is part of the work plan of the project. Sooner or later, Ethereum developers will have to deal with it.

Good to know : trimming

the shaving A computing technique that consists of dividing a blockchain into several subnets. That fragmentation facilitates computational calculations, leading to significant gains in throughput, security and transaction costs.

Ethereum 2.0: How The Merge will change DeFi and dApps on the network (Decryption)

Before and after The Merge in the Ethereum roadmap

The crypto ecosystem has been hit hard since the beginning of the year and a win is badly needed. Whatever The Merger if not the catalyst for a new, widespread bull market, it will at least provide new ways for decentralized finance to gain traction and overcome the wave of attacks aimed at it.

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