Ethereum 2.0 Merge Will Not Reduce Gas Fees – Layer 2 Solutions Such As Loopring Remain Best Option Until ETH ‘Surge’ in 2023

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Ethereum ‘The Merge’ which may be completed in September this year will solve the Proof-of-Work (PoW) power usage issues by moving to Proof-of-Stake but this will not affect the high ETH gas fees plaguing the blockchain. Layer 2 protocols such as Loopring which uses zkRollup tech to batch transactions on the Ethereum network reducing fees to less than $1.

Loopring Tweet From September 2021

According to the Ethereum schedule after the Merge another stage following is ‘The surge’, this upgrade is expected to increase scalability for “shadow chain” rollups—a way to scale ethereum by making transactions cheaper—through sharding; dividing transactions across several different chains in a way that’s designed to decrease fees and speed up transactions. However this is not planned until 2023 and since the Merge has been delayed since 2017, this planned upgrade may be delayed as well.

Despite reaching a multi-year low, Ethereum’s transaction fees — known as gas fees in the Ethereum community — are still double those of Bitcoin and magnitudes more than the fees charged by competitors such as Solana.

In the complex world of Ethereum upgrades, the “Surge,” which will increase the blockchain’s scalability and lower gas fees, is at times conflated with the Merge, which will make Ethereum more energy efficient but will do little to control transaction costs.

The upcoming September Merge — the title given to Ethereum’s upcoming switch to a consensus mechanism powered by proof-of-stake — will rely on layer-2s to soak up users switching chains and curb gas fees. Ethereum’s more permanent update to lower gas fees will release next year at the earliest.

Ethereum’s gas fees incentivize validators to operate nodes and keep the blockchain live. Under a proof-of-work system, gas fees are paid to miners for processing transactions. In the forthcoming proof-of-stake system, gas fees will go to stakers for lending their ether (ETH) to the protocol.

The protocol’s gas fees vary based on the price of ETH and the number of transactions being processed on the network.

Gas fees tend to move in the same direction as ETH’s price, meaning that fees declined in 2022 — a small consolation to ETH holders.

The magnitude of gas fee changes depend on factors beyond price, though. The recent gas fee decline has outpaced ETH’s price slip in part because the cratering NFT market reduced demand for Ethereum settlement.

Layer-2s keep gas fees in check

For now, Ethereum is patching its gas fee problem with layer-2 rollups that compress transactions into batches before sending them to the pricey main layer. In practice, layer-2s such as Uniswap and Arbitrum help lower the user-borne cost of Ethereum-based transactions.

“Layer-2s are just a band-aid for higher gas fees,” Howard Wu, CEO of Aleo, said. “They’re only as scalable as Ethereum’s throughput allows.”

Ethereum hopes to permanently lower gas fees on its main layer after the Merge through sharding, which would split the network into smaller pieces and distribute data settlement more efficiently. The Surge, as the transition to sharding is known, is slated to happen sometime in 2023, though that may be an optimistic estimate — the Merge has been delayed six times since 2017.

Gas fees appear to create room for more efficient layer-1s running smart contracts to steal market share from Ethereum, but Steven Paterson, CEO of crypto fund Margin Syndicate, does not believe Ethereum has reason to worry.

“People have gone on a limb and said, ‘Hey we’re going to build this more efficient blockchain,’ but it just doesn’t accrue value like Ethereum has,” Paterson told Blockworks.

Ethereum is betting the Merge will deflate token supply and drive up price. If ETH’s price rises while network demand surges from users moving to the proof-of-stake Beacon Chain, Ethereum may experience swiftly rising gas fees and disgruntled investors.

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