‘One of the Most Significant Upgrades in the History of Crypto’
Data from CoinMetrics shows that Ethereum’s monthly high in August jumped 100%+ from early June this year. Major research institutes estimate that expectations for the Merge scheduled for September may have affected it.
The Merge for Ethereum is one of the most significant upgrades in the history of crypto and also the most anticipated event for crypto enthusiasts.
Now, let’s briefly look into what the Merge is in less technical language.
What is the Merge?
The Merge is an upgrade that integrates the PoW(proof-of-work) execution layer of Ethereum with PoS(proof-of-stake) consensus layer, the Beacon Chain. After the Merge, PoW will be replaced by PoW.
Ethereum’s vision is to be a more scalable, secure, and sustainable ecosystem while preserving decentralization. There have been numerous testing and bug bounties for a safe transition to PoS.
- PoW requires miners to use their computing hardware and this process uses too much electricity which causes environmental issues.
- With the Merge upgrade, Ethereum aims to improve sustainability and security.
When is the Merge?
On Sept 7, Bellatrix hard fork was activated and Vitalk Buterin posted on his Twitter that the Merge is expected to happen around Sept 13–15. Refer to the external links below to track the timing of the Merge.
What Changes after the Merge?
There are two big changes following to the Merge.
1) After the full transition to PoS, Ethereum’s energy consumption will be reduced by about 99%.
2) The annual issuance rate of Ethereum will decrease by ~90%.
1) Gas Fees: there won’t be any noticeable changes in gas fees until further upgrades after the Merge.
2) Transaction Speed: changes slightly but not noticeable. Transaction speed will improve through sharing upgrades.
3) Value of Hard Fork Token(ETHPoW): chances for doubling the asset will be low (the current price of ETHPoW is only about $30~40 as of Sept 7)
Further Upgrades after the Merge
Further upgrades for scalability called sharding will take place after the Merge. Sharding upgrade is expected to land within next year, which will lower the transaction fees of Layer 2 systems.
At the Ethereum Community Conference held in July in France, Vitalk showed his vision for future upgrades. According to Vitalk Buterin, Ethereum will undergo further upgrades called- Surge, Verge, Purge, and Splurge.
Price Trends Before and After the Upgrades Related to the Merge
- After the Launch of Kiln testnet
After the Kiln testnet was launched successfully on March 15, Ethereum price and daily ETH deposits soar according to the data from CoinMarketCap and Dune Analytics.
- After the Launch of Goerli Testnet on Aug 11
Data from CoinMarketCap shows that after the successful launch of Goerli testnet on Aug 11, Ethereum’s price hits its highest since June.
However, since all of the events were testnet launches, it is difficult to jump to conclusions as many variables will affect the price after the Merge.
Factors that Might Affect Ethereum Price
- Expectations that Ethereum will become a deflationary asset
- The issuance rate will drop by 90% and some research institutes expect that it might be a deflationary asset if the burn rate of Ethereum is higher than the issuance rate. But as everyone knows, financial and crypto markets are unpredictable and many factors might affect the price.
2. Shanghai upgrade will enable staking withdrawals
- Some concerns about selling Ethereum after the Shanghai upgrade enables withdrawals of staked Ether — which is unlikely to happen since exits are rate limited
3. Technical uncertainty
- The merge is an important and highly complex upgrade that changes the consensus algorithm of the mainnet. After years of theoretical discussion and testnet, the possibility of unexpected technical issues might occur which can lead to volatility in crypto market.
How Market Participants are Preparing for the Merge
- Some miners are trying to hard fork Ethereum and issue PoW hard fork token, such as ETHPoW.
2. Cryptocurrency Exchanges
- Most of the exchanges are preparing for the big event, stating that they will support the Merge and will go through the same listing review process for the PoW fork related token.
- MEXC, BitMEX, and Poloniex have already launched ETHPoW(PoW fork of Ethereum) futures contracts.
- Binance recently announced that they will waive fees for trading Ethereum using BUSD until Sept 26.
- Stablecoin providers Circle(USDC) and Tether(USDT) announced that they will support Ethereum and will not speculate on the possibility of any hard fork of PoW.
4. DeFi Projects
- Most of the DeFi Projects stated that they will support the merge as their decision is also aligned with the Ethereum Foundation and the broader Ethereum community.
- Chainlink, which provides a decentralized oracle service for the Ethereum blockchain, said it will not provide support for the forked version.
- Aave, one of the largest DeFi lending protocols by TVL, will only support the PoS after the merge and decided to pause loaning temporarily ahead of the Merge.
- The Aave community agrees that transition to a PoS from a PoW possess the risk of high utilization in the ETH market.
- Unlike stablecoin and other DeFi projects, there might be an argument regarding which assets are the original.
- Despite those possibilities, Yuga Labs stated that they will support only with PoS ETH chain to avoid any confusion.
The Merge is undoubtedly a historical moment for the Ethereum ecosystem and a broader community of Ethereum. Successful completion of the merge will open the era of a more sustainable and scalability ecosystem.
After the further upgrades based on the roadmap, the Ethereum network will process faster transactions with low gas fees which will further increase the value of the Ethereum ecosystem from a long-term perspective.
Written by Jiyon Kim, Associate at Trinito, and contribution from SungPil Huh, Head of Investment at Trinito.
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This is not investment advice and is for informational purposes only. You should not construe any such information or other materials as legal, tax, investment, financial, or other advice.
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