CRYPTOGRAM_09_09_22

The Merge FAQ: All your questions answered

September 09, 2022

9 September 2022

In this issue

Hello, For a few more days, all that’s going to be talked about in our world is the Merge on the Ethereum blockchain, which is expected to be completed sometime in the middle of the next week. As the entire ecosystem eagerly looks at the events unfolding towards one of the most seminal moments in crypto history, you may have many questions as a crypto watcher or investor. We have them all answered for you right here on Cryptogram.

For the uninitiated, here is a great primer on Ethereum and the Merge from one of our previous issues. Have a look at this before you scroll down, but only if you aren’t clear about the basics. 

The newsletter is put together by Giottus Crypto Platform and The News Minute’s Brand Studio. You can read all the previous issues of Cryptogram here.

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THE BIG STORY

Ethereum’s Merge: All You Need to Know

Will transaction fees decrease after the Merge?No. Ethereum transaction fees are not expected to change as a result of the Merge. Future network updates, like danksharding may help to address Ethereum's high network fees, but these updates are not expected until 2023. This also means that layer 2 networks including Polygon will continue to be useful.Will Ethereum transaction speeds increase after the Merge? 

Yes, to a minor extent.On an average, Ethereum blocks are issued once every 13 or 14 seconds in today’s proof-of-work (PoW) system. After the merge, proof-of-stake (PoS) blocks will be issued in regular 12-second intervals.What are the tax implications for Indian ETH holders?Given that only the underlying technology changes with respect to Ethereum and ERC20 tokens, there may not be any taxable event when the Merge happens. However, any new airdropped hard fork tokens including ETH PoW will be liable for taxation at the market value of such an event. Similarly, any replication of NFTs on other blockchains may also be taxed.Will the Merge affect only ETH or other crypto assets will be impacted as well?All ERC-20 tokens are impacted.All tokens currently issued on ERC-20 protocol of Ethereum blockchain are going to be affected by the Merge. This includes top stablecoins Tether (USDT) and USD Coin (USDC). Also, with so many variables and unknowns, it is impossible to predict what will happen to the token’s value post the Merge – if they have been pumped in anticipation of the event, a minor sell-off is likely immediately.Will there be a new fork?Likely.Miners will have two options post the Merge – support Ethereum Classic (ETC) mining or maintain a new hard fork ETH PoW blockchain. We believe that while some miners will shift to ETC and other blockchains, a new forked ETH PoW is likely to be created.Will NFTs be migrated to new ETH PoS chain?Yes.ETH based addresses will continue to be the same for the new blockchain. Hence, all ownership of NFTs will be automatically transferred to the new blockchain. What are exchanges doing for the merge?Giottus and other major Indian exchanges:A snapshot of ETH and ERC-20 holdings will be taken before the merge. Deposits and withdrawals will be temporarily paused during the Merge. Once complete, the new tokens will be automatically updated in investor portfolios. Some exchanges (such as Giottus) will also support an ETH PoW fork and equivalent amount will be airdropped after validation. Giottus will also list ETH in its staking product once the ecosystem is stabilised post-Merge. Binance: A Binance representative confirmed that it also plans to pause ETH and ERC-20 token deposits and withdrawals and will share further details soon.For ETH token holders, Binance products will remain unaffected for the most part. There will only be a delisting of ETH from their mining service and a momentary halt on ETH borrowing, deposits, and withdrawals.Binance is also aggressively promoting ETH staking in the US market by offering a 6% annual percentage yield (APR) currently.Coinbase:Coinbase will temporarily pause Ethereum and ERC-20 token deposits and withdrawals during the merge. The pause is a precautionary measure, Coinbase said in a blog post, with the downtime allowing the exchange to “ensure that the transition has been successfully reflected by our systems.”After the merge, you can find your staked ETH (ETH2) balance under your Ethereum (ETH) wallet on the platform. Your staked ETH will be listed separately from any unstaked ETH or dAPP wallet ETH balance you might be holding. As a reminder, ETH2 is the ticker Coinbase set ahead of the Merge to represent staked ETH and will no longer be used after the Merge — there is no ETH2 token.FTX:Trading will remain open for ETH through the Merge. In terms of deposits and withdrawals of wrappers and layer 2, FTX will suspend:Arbitrum One ETH on September 7, 2022 at 00:00 UTC.Solana (Wormhole) ETH on September 15, 2022 at 00:00 UTC.Binance Smart Chain (BSC) ETH on September 15, 2022 at 00:00 UTC.The above deposits and withdrawals will be reopened after the Merge is finished and networks are stable.Bitfinex:To execute a smooth transition, trading, deposits and withdrawals for ETH and all Ethereum-based (ERC20) tokens may be temporarily suspended for accounting and reconciliation purposes. Other than that, Bitfinex will endeavour to support the Merge as seamlessly as possible for its users.Lending Platforms are seeing high ETH borrowing by traders ahead of The Merge.Following The Merge to proof of stake, holders of ETH are hoping for a potential bonus in the form of a "powETH" token airdrop. While it's uncertain whether the fork will happen, or if the forked token would have any value whatsoever, that hasn't stopped traders trying to game the system.Aave:Aave has proposed to halt ETH borrowing and increase the variable borrow APR at 100% utilization from 103% to 1,000% in the interim period leading up to The Merge.Compound:In contrast to Aave’s approach, Compound’s proposal to mitigate overutilization will see the implementation of a borrow cap, swap out the interest rate model with a jump rate model, and increase borrow rates to accommodate withdrawal liquidity. Compound’s jump rate interest model will set rates based on utilization with a 2% rate at 0% utilization, a 20% rate at optimal utilization and a 1,000% rate at 100% utilization, where optimal utilization caps at 80%. Compound asserts that such levels will be sufficient to discourage full utilization of its borrowing and withdrawal markets and reduce cases of insolvency or other market disruption.NFTs are in demand too – especially EOS domain namesThe Merge will have a big impact on NFTs, which are primarily traded on Ethereum and get somewhat singled out for their perceived environmental impact. This reduced environmental impact may help heal the reputation of Ethereum-based NFTs among gamers, content creators, environmentalists and others outside the crypto space.Ethereum isn’t the only blockchain to support NFTs, but it contains the largest volume of NFTs by far. Ethereum comprises more than 80% of all NFTs, whereas the proof-of-stake chain Solana held up to 12% last year, according to The Block’s Data Dashboard.

Users should expect that their NFTs will safely reside on the new Ethereum (PoS) chain along with their ETH tokens.If an NFT marketplace supports both Ethereum’s merged mainnet and the proof-of-work fork in question, then perhaps you’d see both versions of the token listed. That will cause confusion, and there could be scammers who will sell duplicated versions of prominent NFTs—like Bored Apes and Beeples—to less-experienced crypto users.The best way to protect against such attacks is to not interact at all with the older chain post the Merge. Yuga Labs, the company behind Bored Apes, Mutant Apes, released a statement that Yuga intends to only recognize NFTs on the ETH PoS chain as subject to the relevant NFT license and eligible for Yuga-offered utility.Leading marketplace OpenSea, which owns a commanding share of the Ethereum NFT marketplace, also said that it will only support the proof-of-stake chain. By refusing to list NFT assets on forked Ethereum PoW chains, it may help a significant chunk of collectors avoid confusion and scams around duped NFTs.ENSThe Ethereum Name Service (ENS) has been hotly trending recently, just ahead of Ethereum’s Merge upgrade. ENS is an open, distributed, and extensible naming system that interacts directly with the Ethereum blockchain, and works similarly to the domain name system (DNS) we use in web browsers. ENS domains are essentially NFTs.With $2.44 million in trading volume over 24 hours (as on Sep 6, 2022), ENS is currently No.1 among the top non-fungible token collections, according to DappRadar.The crypto data portal also revealed that the number of traders had increased 45% over the past day, while the number of sales had risen 67%. ENS even managed to top the trending Bored Ape Yacht Club, which recently hit a new all-time high in value.

ENS domain names will also be automatically transferred to the new PoS blockchain.Will ETH become deflationary?Likely.Current ETH Mining rewards are at ~13,000 ETH/day, pre-merge.Current ETH Staking rewards are at ~1,600 ETH/day, pre-merge.After the Merge, only the ~1,600 ETH per day will remain, dropping total new ETH issuance by ~90%Comparing this with the burn, at an average gas price of 16 gwei, at least 1,600 ETH is burned every day, which effectively brings net ETH inflation to zero or less post-merge.

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  THE TOP FIVE 

Stories from this week you cannot miss

  EXPLAIN, PLEASE 

Demystifying the world of cryptocurrency

This week, we explain "DIFFICULTY BOMB" One of the main reasons for Ethereum’s shift from PoS to PoW mechanism is that not as much energy is spent in processing transactions as it is now, due to mining as required by the PoS mechanism. While the Merge itself will nudge users towards the PoW mechanism, other strategies are needed to dissuade miners from continuing to benefit from it. In 2016, a code was developed which would rapidly increase the difficulty to mine a block on Ethereum. The goal of the code is to eventually make it economically infeasible to mine ETH using the PoW, and incentivise miners to abandon PoW altogether. This code was called the “Difficulty bomb”.There has been a lot of debate as to when this bomb should be dropped, before or after the Merge, as timing it right is extremely important to the success of the code. The consensus now is that it will be dropped after the Merge. The bomb is now expected to be dropped in October 2022.Let’s wrap up the issue here, see you next week on Friday. By then, we would probably have a very good idea of whether the Merge has happened successfully or not.

If you have any questions or feedback for us, write to us at [email protected]. You can check out the previous issues here.

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