What the Upcoming Ethereum Merger Could Mean for the Crypto Market
Developers of the Ethereum network have been working on a series of significant changes that will bring about many changes to the platform. The goal of the Merge is to maintain a stable and secure network while also improving scalability.
The Shift to Proof of Stake
Ethereum uses proof of work to validate transactions recorded on the blockchain. Computers race to solve puzzles and receive rewards in ETH as a result. However, this method has been criticized for the longest time for being energy-intensive, hence environmental degradation.
Ethereum is looking to shift to proof of stake, whereby the consensus mechanism is 99% more energy efficient. Here, proof of stake validates transactions through the addresses that stake ETH. The higher the stake, the more the rewards.
As you have heard, Merge hit the news last year, and it aims to make the Ethereum Network cheap and fast. The two are significant concerns that the network has been facing over the years. However, note that the Merge is not solving the high Ethereum fees. It sets a base for Ethereum upgrades to occur and cut these costs as time goes on.
The "Shard Chains" upgrade, set at some point later, will be the last stage of the Ethereum upgrade that will solve congestion issues. It will make Ethereum more scalable and hence cut transaction fees.
ETH Issued to Drop 90%. A Price Boost?
When the Merge takes place, the network will issue lesser coins. The drop will be around 90%, which is a lot. Likewise, according to a blockchain analyst, the move could also reduce gas fees by as much as 5% a year. Over the past month, the network has recorded one of the most significant falls in gas fees.
In August, the EIP-1559 launched on the Ethereum network. Since the upgrade, the network has burned $6.5 million in ETH. Even if this upgrade is not connected to the Merge, the network has already issued lesser coins.
With the rule of supply and demand, the demand goes up once the supply goes down. Hence, the speculation that the ETH price will surge. However, because cryptocurrencies are very volatile, it is not assured that this trend will suffice.
Staking on Ethereum
Ethereum is transitioning from crypto mining to staking. At the moment, the staking rewards are around 4.5% which is much lower than the approximately 15% Beacon Chain offered after its launch.
Analytics and exchanges like Coinbase have stated that the Ether staking yields will increase to around 10%, doubling. Investors usually pool their funds on platforms like Coinbase to create a full node. A complete node features 32 ETH to get to node validator status. With this feature, they can earn rewards even if small ETH amounts are staked.
The staking yields increase is mainly due to the incorporation of transaction fees paid to miners. It will make investing in assets with positive real yields more attractive. Currently, most traditional investments yield negative returns since inflation comes into play. Hence, crypto staking has become more attractive to investors.
Ethereum Bonds
Due to the transition to PoS, institutional investors might start viewing the Ethereum network as a kind of internet bond. To them, it could come as an alternative to the U.S. treasury bonds.
According to Arthur Hayes, Bitmex CEO, Ether can be regarded as a bond because it rewards validators through native ETH purchases and network fees for staking it in validator nodes. For example, if the staking rate is pegged at 9.60%, ETH could plunge 38.45% in value. However, it will still be the same as an interest bond of 10 years at 2.5%.
With the price of Ether expected to reach $10,000 in the next couple of years, many investors may start looking to invest in Ether instead of the U.S. bond market. This is assuming the necessary infrastructure to support such investments is approved and in place.
More Delays? Impact on Price
Tim Beiko, a core Ethereum developer, has confirmed that the Merge will take longer to launch and get implemented. He did not give the exact dates but said the due date is in a few months. This fact confirms the fears that Ethereum will still have delays as usual for a project set to finish up in 2019.
Due to the delay, momentum traders may sell their tokens. This move could result in a loss of around 75% to 80% of their gains from mid-March. If the Merge is extended even further to 2023, sentiment will be negatively affected. It will lead to the momentum traders selling hence opening short positions. This scenario could cause Ether's liquidity to flow into other places, such as cash and other protocols.
At the moment, it has become a waiting and hoping game. However, the crypto market usually has a concise attention span. With time, the move could impact the market negatively. However, this is just speculation.
Final Thoughts
Most of the Ethereum community is enthusiastic about the Merge. However, there are still some skeptics who have raised concerns. Alyse Killeen, the Stillmark founder, wrote on Twitter that Ethereum is setting up for a more challenging task of keeping the network secure.
She added that PoS is less secure, and as a result, the network will be more vulnerable to hacks from malicious folks. Beiko dismissed her statement, saying that, on the contrary, PoS will bring about more security. The move will be so that if an attack occurs, the team can upgrade the network to rid of the perpetrator's coins.
Overall, the Merge is a big move for the Ethereum network and will bring a lot of new positive changes. Currently, ETH is trading above the $3,000 level.