The Ethereum network’s long-awaited upgrade to how transactions are verified is finally set to happen in mid-September – tentatively set for Sept. 19.
This upgrade will shift Ethereum from using mining as a means of validating transactions (proof of work) to using validators who must lock up at least 32 ETH (proof of stake). In the works since 2015, this major transition has been delayed several times.
According to the Ethereum.org website, “The Merge is the most significant upgrade in the history of Ethereum.”
From a technical standpoint, this is no doubt true.
But from an investor’s standpoint, it’s even more significant.
Anticipation of the Merge has already had an impact on the Ethereum price. It rose more than 48% in the 30 days (as of July 28) as talk of the event has intensified. Most other top cryptocurrencies over that period have been up single digits, flat, or down.
And this may only be a small taste of what’s to come. The Merge is just one of several upgrades that address long-standing issues such as high fees and scalability while reducing issuance of new tokens.
All of these elements will combine in a perfect storm of catalysts to drive the price Ethereum far beyond its previous all-time high.
One analyst, Nikhil Shamapant, a visiting research fellow at the Global Policy Institute and an investment research analyst at SumZero, Inc., thinks these changes will push the price of Ethereum to at least the $30,000 to $50,000 range – with a possible peak as high as $150,000.
The recent rally has put the Ethereum price at about $1,700, so we’re talking about gains of more than 1,600% at low end and more than 8,700% if ETH hits the predicted peak.
So it’s important for investors to understand what the Merge is, what it isn’t, and how it fits in with the other changes coming to Ethereum that will trigger that monster rally.
You’ve come to the right place…
Defining the Merge
The term “merge” refers to the merging of a parallel test network called the Beacon Chain merging with the Ethereum Mainnet. The Beacon Chain has run proof of stake for more than a year-and-a-half alongside the Mainnet so developers could make sure it worked smoothly.
When Beacon Chain merges with the Mainnet, its proof-of-stake system will replace the existing proof-of-work system permanently. The Beacon Chain becomes the Mainnet.
How It Will Affect Your Ethereum
Thankfully, it won’t. The Merge will be a seamless transition for ordinary users of Ethereum. Any Ethereum you hold, be it in a private wallet, on an exchange, or anywhere else, will be unaffected. You don’t need to do anything to prepare beforehand, and you won’t need to do anything after the event.
Impact on Gas Fees
Unfortunately, the move to proof-of-stake won’t have any significant impact on the price of “gas,” essentially the Ethereum network’s transaction fees.
However, the Merge is a necessary step toward a planned upgrade known as “sharding,” as well as efforts to make Ethereum work better with “Layer 2” solutions – both of which will reduce fees and help the network scale to accommodate increasing usage. For example, future upgrades are expected to boost the network’s ability to process transactions from about 15 to 20 per second to 100,000 per second.
These “in-the-pipeline” changes make up what is often referred to as “Ethereum 2.0.” Each upgrade will drive ETH prices higher.
Impact on Transaction Speeds
According to the Ethereum.org website, blocks will be produced about 10% more frequently on the proof-of-stake network. “This is a fairly insignificant change and is unlikely to be noticed by users,” the website says.
One thing that will change is that transactions will be finalized when the block is validated. With proof-of-work, transactions are often not considered “final” until several more blocks are added to the blockchain to confirm it.
Since after the Merge transactions will be considered “final” almost right away, users won’t have to wait for more “confirmation” blocks. That may seem faster to some people even though the transactions themselves aren’t going to be processed that much more quickly.
Biggest Benefits of the Merge
The finality of the transactions increases security. Proof-of-stake makes it even harder for a bad actor to hack the network itself.
Another significant benefit of the Merge will be that as a proof-of-stake network Ethereum will use far less energy – more than 99% less.
High energy consumption by proof-of-work cryptos like Bitcoin and Ethereum has been a big deal for climate activists. The move to proof-of-stake will be great PR both for Ethereum and the crypto industry.
Finally, the Merge sets up those future upgrades that will improve scalability and reduce fees.
Don’t Forget the Triple Halving
The “triple halving” refers to a series of changes to Ethereum that will cut its daily issuance of new ETH by approximately 90%, which is roughly the equivalent of three Bitcoin halving events.
The first change was the so-called “London Hard Fork” that went live one year ago, on August 5, 2021. Its purpose was to lower gas fees by making them more predictable.
It also reduced some of the ETH fees that go to the miners by “burning” it, or permanently destroying it. That’s one element in the reduction of daily issuance of ETH.
The Merge brings a much bigger reduction in daily issuance because it replaces the miners with proof-of-stake validators. The shift is a structural change that results in an even larger cut to the total amount of daily ETH rewards created and paid out. It’s the change that gets us to the triple halving.
The triple halving also figures prominently in the case for Ethereum having a major rally. Over time the reduction in supply will have a cumulative impact.
Right now about 13,500 new ETH are generated per day. After the Merge that will drop to about 1,350 per day. That may not sound like a big deal compared to Ethereum’s average daily volume of more than 11.3 million ETH, but it does add up. In 30 days, the market will have 364,500 fewer ETH than it would have without the Merge. In 90 days, that number swells to over 1 million ETH. After a year, the difference is 4.4 million ETH.
The Road to Ethereum at $150,000
The move to proof-of-stake shifts incentives in a way that will result in less selling in addition to the reduction in daily issuance.
Most miners need to sell a large portion of the ETH they earn to pay for the mining costs like equipment and electricity. In addition to having much lower costs, validators must lock up ETH in order to participate. The more they lock up, the more they earn.
That incentive to lock up ETH will result in even less available for sale on the exchanges.
And we haven’t even talked about demand yet. With less sell pressure, prices will go up if demand stays flat.
But demand almost surely will rise. Ethereum is already the dominant platform for smart contracts, DeFi, NFTs (non-fungible tokens) and more. Progress on the path to Ethereum 2.0 will keep developers from defecting to capable rivals such as Solana and Cardano. Improving tech could even draw developers away from rivals.
Ethereum’s planned upgrades that will further reduce fees while improving speed and scalability will act as a great magnet pulling more innovative activity to the platform. And the more that gets built on Ethereum, the higher demand will be.
To get an idea of how much more progress lies in front of us, note that Ethereum founder Vitalik Buterin recently said that even after the Merge, Ethereum will only be about 55% complete.
While predictions of Ethereum at $50,000 and especially $150,000 may seem unrealistic, don’t forget Bitcoin was trading at about $400 in early 2016. The Bitcoin price is $24,000 as I write this – a 5,900% gain in a little more than six years.
So, investors will need a little patience. But with the execution of the Merge, the pieces are starting to fall into place.
“The Ethereum 2.0 roll-up could take two or more years to reach full development,” Ales Kavalevich, CEO of BDC Consulting in Dubai told Forbes in June. “Stakes are extremely high. I didn’t expect any fast changes, but I’m pretty sure Ethereum will fly far away from its competitors after they are finished with all the new stuff.”
— David Zeiler
Source: Money Morning