The Ethereum Merge: Everything You Need to Know And How it Affects Cake DeFi Users

Around 15 September, Ethereum, the second largest cryptocurrency by market capitalization, will undergo one of its biggest upgrades in history – the current Ethereum Mainnet will merge with the Beacon Chain proof-of-stake network. With this merge, Ethereum transitions from proof-of-work to proof-of-stake and sets the stage for future scaling upgrades.

The question you might ask as someone holding Ether on Cake DeFi is, what does this mean for me? Will it be business as usual, or are there any other steps you have to take?

Why is there a merger taking place?

Initially launched with a proof-of-work (PoW) consensus algorithm in 2015, the vision for Ethereum has always been to become an energy-efficient proof-of-stake (PoS) network.

The early years were marked by the search for a POS mechanism with the necessary security and efficiency. In 2017, the focus shifted to a well-structured transition – a crucial step, since upgrading the entire system is comparable to an open-heart surgery, where the blockchain cannot be held during this process.

The solution: The Beacon Chain. The Beacon Chain is an independent network that has a PoS consensus layer. It runs in parallel with the current Ethereum Mainnet, where the consensus layer remains PoW. The Beacon Chain's main aim is to keep the PoS chain independent of the Ethereum Mainnet so that all accounts, balances, and smart contracts cannot be compromised.

At the approaching Merge, proof-of-work will be permanently replaced by proof-of-stake, and these two systems will come together. As a result of the Merge, the Beacon Chain will be used officially as the engine for producing blocks. It will no longer be possible to produce valid blocks through mining. This role will instead be taken on by proof-of-stake validators, that will check all transactions and propose blocks.

The best thing about the Merge is that no history is lost. With the merge of Mainnet and Beacon Chain, Ethereum's entire transaction history will also be merged. The process is automatic, so you don't have to worry about anything.

Is it possible for me to choose which chain to stay with?

It is actually not possible to choose the chain, since the entire network will switch to the new proof-of-stake consensus mechanism after the Merge. All Ethereum related services on the Cake DeFi platform will support the new Ethereum proof-of-stake chain.

In the event that nodes continue to mine PoW versions of Ethereum, this would then be on a minority fork, where the operational costs would be much higher than a potential coin value.  However, miners are incentivized to operate at a profit, so it is expected that all PoW participants will begin mining on other non-Ethereum PoW blockchains that are simply much more lucrative and cost-efficient.

Will Cake DeFi support a potential PoW version of Ethereum?

In the unlikely event that PoW coins are released after the Merge, Cake DeFi will evaluate how to distribute the forked tokens. If Cake DeFi decides to distribute the forked tokens, customers with ETH in their Cake DeFi wallets will receive forked tokens based on their ETH balances at the time of the fork snapshot. Consequently, Lending batches will not be affected when they go live on 19 August.

Is the gas price going to drop?

Merging does not expand network capacity, it simply changes the consensus mechanism and as a result does not lower gas fees. With future Ethereum roadmap updates, such as sharding, this problem will be addressed and gas prices will be reduced. However, sharding is currently considered a lower priority than the Merge.

Will the Merge impact the address creation fee?

No, there is no direct link between the cost to create a new Ethereum address and the transition over to a proof-of-stake blockchain. Cake DeFi customers with no active Ethereum addresses are already benefiting from a significant reduction to just $10; this is independent of the Merge.

Do note that the fee is taken at the time of confirmation. If your deposit is $1,000 or more, the gas fee will be refunded. There is no fee for subsequent deposits. As part of our commitment to strive for the best rates in the industry, Cake DeFi constantly adjusts its fees to reflect market conditions.