As all blockchain enthusiasts know, the first stage of Ethereum Merge, code-named Bellatrix, happened on 6th September 2022, followed by the second stage, Paris. Post-merge, the Ethereum 2.0 network will use the consensus mechanism “Proof of Stake” (POS). Transitioning from Proof-of-work (POW) to POS has been predicted to reduce energy consumption by 99.5% less than earlier.
As an effect of this merger, a phenomenon called “Triple Halvening” will be experienced soon. This article will explain some key concepts to make this more understandable.
Halvening
The halvening concept was originally associated with Bitcoin. Every four years, the number of bitcoin (BTC) entering circulation every 10 minutes – known as block rewards – dropped by half.
Bitcoin is decentralized and trustless—no one controls it. Therefore, strict rules have been imposed on how much Bitcoin is created and released. This process will last until 2140. In another way, it reduces “deflationary pressure,” reducing the BTC sell pressure from miners selling their BTC rewards. As a result, this causes the price of BTC to increase as there becomes less supply on the market.
In May 2020, the number of bitcoin (BTC) entering circulation every 10 minutes dropped by half, from 12.5 to 6.25. It happened every 210,000 blocks (approximately every four years) and had happened twice before 2020.
Validators replace miners
The transition to PoS has replaced miners with validators. A validator will be responsible for storing data, processing transactions, and adding new blocks to the blockchain. That will keep Ethereum secure for everyone and earn new ETH in the process. There is no need for a powerful mining rig anymore to participate as a validator. All someone needs now is 32 ETH to stake and three separate pieces of software: an execution client, a consensus client, and a validator. Validators propose new blocks, submit attestations (votes), and monitor for any slashable offenses (penalties).
Exponential reduction in issuance
Post-merge, validators will consume less energy to run the network. Therefore they can pay smaller block rewards to incentivize people to run them. Annual issuance of ETH will drop from 4.3% pre-merge to an estimated 0.4% post-merge which is a 10x reduction in daily sell pressure on ETH by miners. Selling pressure is when most traders sell their ETH as they think the market price will decrease. This change indicates that the economy will not be mine and dump but to a stake and re-stake.
EIP-1559
Ethereum Improvement Proposal (EIP) 1559 is an upgrade that happened on 5th August 2021 to change how Ethereum calculates and processes network transaction fees (called “gas fees”). EIP-1559 removed the first-price auction, which was involved in the main gas fee calculation. In first-price auctions, people used to bid the amount of money as their transaction to fees, and the highest bidder wins. EIP-1559 has a discrete “base fee” for transactions to be processed and added n the next block. If anyone, users or applications require to make a faster transaction, may pay a “priority fee” to the miner as a tip. This feature will act as a compounding effect on the overall issuance decrease in the ETH supply post-merge.
Staking ETH and Lock-up period
Staking is the act of depositing 32 ETH to activate validator software. Staking ensures better security and sustainability. Before Ethereum Merge started, the staking of ETH started to get a first-mover advantage to gain a staking reward and to be in front of the activation queue.
According to Ethereum 2.0 researcher Justin Drake, initial post-merge staking rewards are expected to be 12%. This is double the expected long-term rewards level of 6%. Therefore, enthusiasts didn’t bother about the lock-up period. The lock-up period is between staking ETH and the complete implementation of Ethereum 2.0, as, at this time, no one was able to withdraw earned or staked ETH.
Therefore, one can think of withdrawing their ETH right after the Merge and dumping it. However, ETH withdrawals are not currently enabled. Once the Shanghai upgrade is completed around 2023, withdrawing will be possible. So again, there is less circulation of ETH.
Therefore, “Triple Halvening” consists of - Exponential reduction in issuance rate, an introduced reduction in supply due to burning of a part of every transaction fee through EIP 1559, and a reduction in available supply due to staked ETH being locked before withdrawals are implemented
These three factors are combined to create the “Triple Halvening”, a once-in-a-lifetime phenomenon that makes ETH more scarce. This will ensure high network security and stability and Less energy consumption.
Reference:
[1] Ethereum’s Big Day: What The Merge Means For Investors (forbes.com)
[3] Justin Drake