How the Ethereum Merge Will Affect Dapps

The web3 world is certain of some changes, and waits to see what else will happen

With the Ethereum Merge date set for the 15th or 16th September, now’s a good time to look at how the transition will affect decentralized applications. There are some things that developers can prepare for today and there are some consequences that we’ll discover in time. But knowing how the Ethereum Merge will affect dapps when it happens is important for anyone with an interest in the blockchain and its ecosystem.  

Summary

• The blockchain’s energy consumption will fall by 99.95%. Following the move to a Proof-of-Stake consensus mechanism, Ethereum will become a much greener network.
• We already know that transaction costs and confirmation times will not go down as a direct result of the transition.
• Whether or not the price of ETH will rise is anyone’s guess. There are more factors than the impact of the Merge that affect the cryptocurrency’s market value.

Here at DappRadar, we care about what blockchain technology can do, and how it can benefit people in the future. So while things like token prices and NFT speculation are important, the future of dapps and their infinite use cases are of far more interest to the DappRadar community and us, as the world’s dapp store.

With the Ethereum Merge being one of the most important milestones so far in our industry’s short history, it’s important that we take a look at how it could affect the developers, platforms and people who work in Web3 and are leading it into the future.

The Merge

If you haven’t heard or read about the Ethereum Merge yet, here’s a quick re-cap. The Ethereum blockchain will soon transition from a Proof-of-Work (PoW) network to a Proof-of-Stake (PoS) one. This means that cryptocurrency miners will no longer consume huge amounts of energy to process transactions and earn ETH. Instead, people will use their computers as validating nodes, which requires a lot less electricity.

The Merge has been in the works since at least December 1st, 2020. This is when Ethereum’s development team launched the Beacon Chain. The Beacon Chain is a separate network that runs parallel to Ethereum’s original mainnet. Following the Merge, the Beacon Chain will act as the official engine of block production.

Technically speaking, the Merge will occur when the existing mainnet and the Beacon Chain are merged, hence the name. No transaction history will be lost and no funds are in danger of disappearing.

You can read our in-depth article about what the Merge is, how we got here, and what impacts it could have for the future of Ethereum.

The short-term impacts

The Ethereum Foundation, the ‘non-profit organization dedicated to supporting Ethereum and related technologies’, has already indicated some changes that will affect dapp and smart contract developers.

These changes relate to:

• Block structure: PoW blocks will no longer exist. Instead, ‘the former contents of PoW blocks become a component of the blocks created on the Beacon Chain.’

• Slot/block timing: average block times will change. At the moment, they take ~13 seconds. Post-Merge, block times will be exactly 12 seconds. 

• Opcode changes: some operation codes in the current Ethereum scripts will become irrelevant and others will remain.

• Sources of on-chain randomness: this will take place on-chain, thus reducing costs for dapps.

• Concept of safe head and finalized blocks: this affects how quickly and securely finalized blocks become canonical. With PoS, this will speed up.

Anyone running their dapp on Ethereum, or one of the blockchain’s Layer-2 networks (Polygon, Immutable X, Optimism), will need to make sure there are no interruptions when the transition takes place. With all of the changes noted above, developers will need to adjust their code to fit the new paradigm.

Saying this, the Ethereum Foundation has played down any risks of large-scale disruptions to dapps, NFTs and blockchain gaming platforms. According their website, ‘The Merge will have only minimal impact on a subset of contract deployed on Ethereum, none of which should be breaking.’

Dapps that might break

Automated market makers (AMMs), such as Uniswap and QuickSwap, will need to rework their algorithms to ensure they keep running smoothly. The Merge will affect how liquidity pools are managed by their software and how stablecoins are propped up with collateral.

Head of Research at DappRadar Pedro Herrera points out a few areas of concern around what impact the merge will have on dapps.

I think DeFi is the category that is more sensitive to positive or negative effects after the Merge. Liquidity staking protocols like Lido and Rocket Pool will see increased trading as the stETH/ETH pair should come to a parity creating an opportunity window for arbitrageurs.

Pedro Herrera

He also had a word of warning about what impact the Merge might have on NFTs. Remember as well that Ethereum hosts the highest number of NFT projects and the most expensive collections.

As for NFTs, the risk comes in form of a Replay attack. Not interacting with your NFT through any marketplace is recommended until these dapps release their informative updates.

Pedro Herrera

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Effects in the long term

One thing we definitely know will happen post-Merge is that users who staked their ETH will get their rewards. To secure the network in preparation for the transition to PoS, people have locked away roughly 13.3 million ETH. That’s around 11% of the circulating supply and equal to about $20.87 billion, at the time of writing. Reward withdrawals will not be enabled until the Shanghai upgrade, due for early 2023. 

Another thing we can be sure of is that energy emissions and the resulting pollution will decrease as Ethereum moves to PoS. Electricity consumption will decrease by 99.95% as the need for energy-intensive mining machines becomes a thing of the past. A greener blockchain will appeal to more VCs and developers and could result in more builders choosing Ethereum for their dapps. 

The rise of Layer-2

As things stand, there are conflicting views on whether or not the Merge will make Ethereum a faster and less expensive network. The Ethereum Foundation has confirmed that gas fees and transaction times will not get lower as a direct result of the Merge.

What the Merge will do is create an environment for Ethereum to scale beyond its current capabilities. With plans to introduce Sharding to the network further down the road, transaction times and costs on Layer-2 rollup solutions will improve greatly.

According to Pedro Herrera, these changes will have a long-term on how many dapps developers go to Ethereum as their blockchain of choice.

I see a positive impact in Ethereum sidechains and L2s. As the chain is enhanced, the subsequent layers should be favored. This scenario doesn’t mean that other Layer-1 networks will see a demand reduction, but Ethereum’s dominance will probably grow.

Pedro Herrera

Blockparty CEO Vladislav Ginzbury noted that maximum gas fees should also drop, when the network is running at the upper limits of its capacity.

In theory, the Merge will make Ethereum more efficient and quicker, with shorter processing times during peak network usage. Higher frequency and higher volumes of transactions will be possible at speed and scale.

Blockparty CEO Vladislav Ginzbury

Unknowns Unknowns

The Merge could impact the price of ETH. But there are thousands of other factors that affect the price of ETH on an hourly basis. So if you’re a speculator and you plan to flip the blockchain’s cryptocurrency over the next few weeks, make sure you look at a few more indicators than a seven-day price chart and what people are saying about the Merge on Twitter.

Some people have raised fears about the liquidity of their cryptocurrency holdings while the Merge is taking place. Head of Content at DappRadar Robert Hoogendoorn has suggested that in the case of doubt, retreat to safety.

Crypto tokens on exchanges will probably be frozen onto an exchange until the Merge has been completed and the exchange has made the shift. When in doubt about your exchange, move tokens to Metamask and keep 100% control over your own assets.

Robert Hoogendoorn

‘Finally, there is Murphy’s Law,’ says Pedro Herrera. ‘There is room for error, and the Merge is not risk-free. There is a slight possibility that the Merge doesn’t go as planned, and the mainnet needs to pause operations to sync or even be halted. The probability is low as the latest testnet merges went without major incidents.’

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• Source: https://dappradar.com/blog/how-the-ethereum-merge-will-affect-dapps