Gas Fees Will Not Drop Significantly Post Merge
Busting a common misconception about the upcoming Ethereum merge…
“The Merge” is almost upon us and will usher a new era of a substantially more energy efficient Proof-of-Stake (PoS) consensus.
One thing the Ethereum merge will not do, however, is reduce gas fees by any significant degree — at least initially, anyway.
For those of you who don’t know, blockchains are made up of three parts:
A consensus layer
An execution layer
A data availability layer
When you submit a transaction through to the blockchain and pay the “gas fee” for that transaction, you are paying to use the execution layer of the blockchain — not the consensus layer. The execution layer is the layer that’s responsible for bundling and executing transactions. The gas fees paid to use the execution layer are dictated by simple supply and demand economics.
The consensus layer, on the other hand, is responsible for enforcing the rules of the network and validating transactions. This validation can be through a Proof-of-Work (PoW) consensus where computer processing power (and energy) is used to “mine” blocks to validate transactions. It can also be through a Proof-of-Stake (PoS) consensus where transaction validation depends on a user’s ETH stake, rather than computational power.
The Merge will, therefore, likely result in no change in transaction throughput and gas fees.
It does, however, set the stage for future gas fee optimisation.
Activating PoS is the first step toward enabling sharding on the Ethereum network. Sharding will allow the network to be split into “shard chains” that share the load of Ethereum… increasing transaction throughput, reducing congestion and (finally) reducing gas fees.
Sharding is planned to begin in 2023 and should enable the scalability that The Merge promises to deliver.
Once implemented, sharding could increase Ethereum’s transaction throughput to 100,000 transactions per second. This figure is higher than all the leading credit card companies combined. Visa, for reference, has a network capacity of around only 1,700 transactions per second.
With so many transactions validated and the network scaling up significantly, web3 applications (including the metaverse) become more reality and less fiction.
Unlike what you might expect, it’s unlikely that this drop in gas fees will negatively impact the price of $ETH as currently there are:
13,000 ETH issued/day in the form of mining block rewards (90%)
1,600 ETH issued/day in the form of staking rewards (10%)
While the staking rewards will remain following The Merge, no more mining rewards (13,000 ETH/day or 90% of the total daily issuance) will be distributed. This will, effectively, bring net ETH inflation down to zero should gas fees remain at 16 gwei.
Should they increase, however, the cryptocurrency may turn deflationary.
It should be noted that the while the number of new $ETH issued daily through mining is small, it quickly snowballs over the course of a year to equal 5 million ETH tokens that were never issued (or roughly 4% of all ETH in existence).