The Ethereum Merge represents a fundamental upgrade to the Ethereum protocol, transitioning the network from a Proof-of-Work (PoW) consensus mechanism to Proof-of-Stake (PoS). This shift enhances the network's energy efficiency by approximately 99.95% and supports greater decentralization. The Merge introduces significant changes to how staking rewards are generated and distributed, creating new opportunities and considerations for ETH holders.
Understanding the Ethereum Merge Timeline
The Merge was anticipated to go live around September 15, though precise dates in blockchain upgrades can be challenging to forecast due to the nature of network consensus mechanisms. This upgrade unlocks new reward structures for participants in the Ethereum staking ecosystem.
Post-Merge, stakers can earn two primary types of rewards:
- Consensus-Level Rewards: Generated through validator activities such as submitting attestations and proposing blocks. These rewards are locked on the Beacon Chain, meaning stakers cannot immediately withdraw them or their initial stake.
- Execution-Level Rewards: A new reward type earned when a validator proposes a block. This occurs approximately 6-7 times per year per validator on average. These rewards consist of a percentage of transaction fees and tips (MEV - Maximal Extractable Value). Crucially, they are liquid and are sent directly to the staker's Ethereum address. MEV can significantly boost the total Annual Percentage Yield (APY).
This dual-reward structure means stakers can earn more overall and access a portion of their earnings immediately.
Economic Shifts After the Merge
The Path to Dynamic Deflation
Under Proof-of-Work, Ethereum issued 2 ETH per mined block. To counter this inflation, EIP-1559 introduced a fee-burning mechanism. The Merge removes the 2 ETH issuance, leading to a new economic equilibrium based on network activity:
- High Network Congestion: Results in higher base fees for transactions, leading to more ETH being burned. During these periods, more ETH may be burned than is issued, making the overall supply deflationary.
- Low Network Congestion: Leads to lower base fees and less ETH burned. At these times, less ETH may be burned than is issued, resulting in a net inflationary supply.
This creates a dynamic, usage-based monetary policy for Ethereum.
Projected Changes in Staking Rewards
Based on projections from the Ethereum Foundation, combining both consensus and execution-level rewards could push the APY for ETH staking into the 7-9% range. The increased yield and the liquidity of execution rewards are strong incentives for more participants to stake their ETH.
This could reduce the liquid supply of ETH on the market, potentially creating upward pressure on the price, which may, in turn, encourage further staking. However, as more validators join the network, the probability of an individual validator being chosen to propose a block decreases. This means that while total network security increases, consensus-level rewards for each validator may gradually reduce over time with greater adoption.
Currently, over 10% of the total ETH supply is staked. This figure is expected to grow steadily, especially once the ability to withdraw staked ETH is implemented.
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The Future: The Shanghai Upgrade
The next major milestone after the Merge is the Shanghai upgrade. This subsequent network update will introduce crucial mechanisms for stakers, primarily enabling the withdrawal of staked ETH and accumulated consensus-level rewards.
Two key operations will be introduced:
- Unstaking: This allows a staker to fully exit their validator role on the protocol level and retrieve their initial stake plus all accumulated consensus-level rewards.
- Skimming: This function enables a staker to withdraw only their accrued consensus-level rewards to their Ethereum address, leaving their original stake actively validating.
The Shanghai upgrade will eliminate the indefinite lock-up period for staked ETH, providing much-needed flexibility and making staking accessible to a broader range of investors.
Frequently Asked Questions
What is the main benefit of the Ethereum Merge for stakers?
The Merge introduces execution-level rewards, which are liquid and paid directly to your address. This, combined with existing consensus rewards, increases potential overall yields and provides immediate access to a portion of your earnings.
How does the Merge affect Ethereum's inflation rate?
The Merge eliminates the 2 ETH block reward, significantly reducing issuance. Coupled with EIP-1559 fee burning, Ethereum's monetary policy becomes dynamically deflationary during periods of high network activity and slightly inflationary during low activity.
When will I be able to withdraw my staked ETH?
Withdrawals for staked ETH and consensus rewards are not enabled by the Merge itself. This functionality is scheduled for the next major upgrade, known as Shanghai, which is expected to follow several months after the Merge.
Will my staking rewards decrease after the Merge?
While individual consensus rewards may decrease over time as more validators join the network, this is offset by the new execution-level rewards from transaction fees and MEV. The overall APY is projected to be competitive.
What are execution-level rewards?
These are new, liquid rewards earned by validators who propose a new block. They include priority fees (tips) and, potentially, MEV rewards, which are transferred immediately to a designated Ethereum address.
Is staking ETH safer after the Merge?
The transition to Proof-of-Stake is designed to enhance network security and sustainability. However, stakers must always practice proper key management and choose reliable infrastructure to avoid slashing penalties.