The Ethereum Foundation team has published a breakdown of major misconceptions about the upcoming network upgrade

Eight myths about Ethereum's migration to Proof-of-Stake

18.08.2022

276

5 min

An upgrade of the Ethereum (ETH) network called The Merge is scheduled for September, after which the cryptocurrency's blockchain will switch from the Proof-of-Work (PoW) transaction confirmation algorithm to Proof-of-Stake (PoS). The long-awaited network upgrade has been repeatedly postponed and generated speculation, rumors, and misconceptions. Developers have published explanations for the most frequent of these.

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Myth 1: You need to send 32 ETH to stake a node

In fact, anyone can start an Ethereum node, and it doesn't require ETH. There are two types of nodes: those that can produce blocks and those that do not. There are much fewer of the former. These include Proof-of-Work (PoW) mining nodes and Proof-of-Stake (PoS) validator nodes. They require the computing power of the mining hardware or ETH coins for staking, respectively.

No economic resources other than a computer and an Internet connection are required from the rest of the network nodes. These nodes do not produce blocks but still play an important role in network security by confirming the validity of block production according to network consensus rules.

Running a node that does not produce blocks is possible for any user under any consensus algorithm and is necessary to maintain the decentralization of the Ethereum network.

Myth 2: The merge will result in lower gas charges

In fact, the merge is a change in the consensus mechanism, not an expansion of network throughput, and it will not result in lower gas charges.

Gas charges are a product of network demand in relation to network throughput. The merge cancels the use of the PoW algorithm but does not significantly change the parameters that directly affect network throughput. The network will be scaled through second-tier solutions (rollups), while the core network will serve as a decentralized settlement layer, optimized to store these rollups, making their transactions cheaper. The switch to PoS is critical for this.

Myth 3: Transactions will be noticeably faster after the merge

Despite some minor changes, the speed of transactions on the core network will generally remain the same. Transaction speed can be measured in terms of the time to join a block or the time to complete a transaction. Both will change slightly, but users are unlikely to notice. Also, with PoS, blocks will be produced ~10% more often, but this will also hardly be noticeable when using the network.

Proof-of-Stake also introduces the concept of the transaction finality, which previously did not exist. Blocks will be aggregated into epochs (6,4-minute chunks of time, containing 32 chances for blocks), which are voted on by validators. Canceling finalized transactions is not economically feasible, as it would require getting and burning more than a third of all the ETH that has been staked.

With the PoW algorithm, many decentralized applications (dApps) require a certain number of transaction validations per block. The final completion of a PoS transaction takes the same amount of time but provides additional security.

Myth 4: You can unstake ETH immediately after the merge

Actually, it will only be possible to unstake ETH after the next Shanghai update. Staked coins and accrued rewards, as well as coins issued immediately after the upgrade, will still be locked into the Beacon network without the ability to withdraw them. This means that tokens issued after the PoS transition will remain illiquid for at least 6-12 months after the merge.

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Myth 5: Validators will not receive liquid ETH in rewards until the Shanghai upgrade when withdrawals open

Fees and MEV (maximal extractable value) will be credited to the validator's account on the main network and will be available immediately. ETH in staking and block rewards (i.e. new coins) are stored on a separate validator address in the Beacon Chain and will be locked until the Shanghai upgrade.

ETH in core network turnover is accounted for separately from the consensus level. When users complete transactions, they pay ETH to cover gas and validator fees. This ETH is already in the execution layer, that is, it is not reissued by the protocol and is therefore available to the validator immediately (provided the address for fees is specified in the client software).

Myth 6: When withdrawals are available, all validators will immediately take the coins

Withdrawals by validators are limited for security reasons.

After the Shanghai upgrade, all validators will have an incentive to withdraw from staking balances over 32 ETH required. Depending on the Annual Percentage Rate (APR), validators may find it more profitable to add coins to staking for greater returns.

The simultaneous exit of validators is limited by protocol, so only six of them can exit in a single epoch (1 350 per day, or only ~43 200 ETH per day of the more than 10 million ETH in staking). The limit is adjusted based on the total amount of ETH staked and prevents mass withdrawals, as well as potential attempts at instant coin withdrawals by attackers.

APR is intentionally dynamic. When withdrawals are available, if the rate is too low, validators will exit at a rate limited by the protocol. This will gradually lead to a higher APR for anyone who stays, attracting new or returning stakers.

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Myth 7: Staking APR will triple after the merge

According to more current estimates, after the merge, the APR is projected to increase by 50%, not 200%. To calculate how much exactly APR will increase after the merge, it's important to understand that the increase will happen not due to the growth of ETH issue (ETH issue after the merge will be reduced by ~90%), but due to the redistribution of transaction fees, which will start to go to validators instead of miners.

Block creation will become a new separate source of income for validators. The amount of the fee a validator receives is proportional to the activity of the network at the time of block creation. The more users pay, the more validators get.

With PoW, roughly 10% of all gas fees paid go to the miners in the form of fees, and the rest is burned off. With the current average network activity, it can be assumed that the APR for staking will rise to ~7%, which is about 50% higher than the basic APR for issuance (as of June 2022).

Myth 8: The merge will lead to network downtime

The Merge upgrade is designed to move to proof-of-stake with zero downtime. The developers have gone to great lengths to ensure that the move to PoS does not disrupt the network or affect its users.

The upgrade will be triggered by terminal total difficulty (TTD), which is an aggregate measure of the total mining power spent on building the blockchain. When the time comes and this criterion is met, the blocks will move from proof-of-work building in one block to proof-of-stake building in the next. There will be no downtime.

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