Revolution or simple step in the crypto universe?

Ethereum’s ‘Merge’ update could send the cryptocurrency to new heights. Explanations.

Excitement is mounting around the Ethereum “merger,” which hopes to increase scalability, security, and sustainability. Could this game-changing technology propel Ethereum to new heights?

Crypto enthusiasts are waiting for the second largest crypto currency by market capitalization to get closer to a massive upgrade that will strengthen its infrastructure and make it more sustainable. In doing so, Ethereum aims to get closer to realizing its vision of a digital future on a global scale.

What is Fusion?

The Ethereum merger, in its simplest form, is an attempt to move from a “proof of work” model to a “proof of stake” model.

Revolution or simple step in the crypto universe

Source: ethereum.org

In the current “proof of work” model, miners complete complex puzzles to validate transactions. This process requires a lot of energy to power computers, which makes it both expensive and unsustainable due to its environmental impact.

With the planned “proof of stake” model, users will be able to validate transactions based on the number of coins they bring, or stake. In exchange for their stake, users can be chosen to complete transactions and obtain rewards.

The merger is expected to strengthen Ethereum’s positioning as an energy-efficient global Proof of Stake blockchain network.

With the merger, the Ethereum blockchain would completely switch to the proof of stake model, called Beacon Chain, making mining obsolete.

The merger is expected to be completed in the second quarter of 2022, but a specific date has not yet been set. Ethereum founder Vitalik Buterin could give more information on the exact timing during the ETHAmsterdam event on April 22.

Impact of the merger

The merger is expected to strengthen the positioning of the Ethereum blockchain as an energy-efficient global Proof of Stake blockchain network.

Power consumption will decrease by 99%

It is expected that power consumption will be reduced by 99% when miners are no longer involved. Miners, who typically buy expensive hardware including computers, graphics cards and other equipment to build Ether mining rigs, rushed to hit Ethereum ahead of the merger. One of the effects of transitioning to a more sustainable blockchain could be that investors and projects will be more willing to adopt the Ethereum blockchain. For example, Tesla, which has been hesitant to buy more cryptocurrencies due to its environmental impact, could turn to Ethereum. Many institutional investors with ESG criteria as part of their mandates, might also be more inclined to look to Ethereum due to its eco-friendly aspects.

An asset with a yield

Rewards that currently go to miners through the proof of work system will go to users through the proof of stake model.

Users, through a form of passive investing on the network, will be able to earn estimated returns of between 10% and 15%, making cryptocurrency potentially attractive as a “carry” trade, with some investors potentially be tempted to earn a regular income. Some sophisticated investors may also borrow in USD and, to some extent, hedge the downside potential, just to benefit from the yield of Ethereum.

Investors will need to deposit a minimum of 32 ETH (worth approximately $98,000) to participate in staking, although some services offer staking for investors with only 0.01 ETH. Ethereum’s enduring appeal and post-merger yield could attract a large number of institutional investors as long-term investors.

Reduced costs, increased security and scalability

Since the current proof of work model is extremely energy-intensive, the proof of stake system should significantly reduce overall costs and continue to reduce them as users participate in the blockchain.

Staking, which is cheaper than mining, should attract more people to become validators, increasing the decentralization of the network.

The planned updates improve the security of Ethereum, as validators have to invest large sums of ETH in the protocol. So, if they make fraudulent changes, the protocol can automatically destroy their ETH.

The Beacon chain will also assign validators to different parts of the blockchain, making collusion between them virtually impossible.

Finally, staking, which is less expensive than mining, should attract more people to become validators, increasing the decentralization of the network.

To scale, Ethereum needs more transactions per second and more nodes. The upgrade should improve speeds beyond the current limit of 15 to 45 transactions per second. Validators will only have to examine their own part of the blockchain, which will make nodes lighter and allow Ethereum to grow while remaining decentralized.

Insights from industry experts

Industry experts tend to express very positive opinions on the merger, as it should strengthen the Ethereum blockchain and make it more attractive to investors.

1650398112 860 Revolution or simple step in the crypto universe

Source: Bloomberg data, FlowBank

Former BitMex CEO Arthur Hayes thinks Ethereum could hit $10,000 before the end of the year, although in the short term he foresees the crypto could come under pressure due to the fallout from the war in Ukraine and the slowdown in global growth.

Billionaire cryptocurrency enthusiast Marc Cuban is also positive about Ethereum. He is especially optimistic about the aspects of smart contracts, which will be improved thanks to the greater scalability and security after the merger.

Bloomberg Intelligence’s Mike McGlone sees ETH ending the year between $4,000 and $4,500. Coinpedia’s latest prediction at the end of March predicts that ETH will trade between $4,890 and $10,870 by the end of the year.

While these views are very bullish, it is important to note that crypto enthusiasts often have aggressive price targets which may not be realistic in a lower risk scenario.

According to over-the-counter technology platform Paradigm, options activity also suggests there is a lot of interest in call options with a strike price of $10,000 for the December 2022 expiry. (latest price: $3,050), suggesting that investors are betting that Ethereum could hit 5 figures by the end of the year.

Effect on the DeFi ecosystem

Ethereum serves as the base layer for nearly 3,000 decentralized applications. Altcoins include meme currencies like Shiba Inu and metaverse tokens like MANA. Ethereum also enables NFTs, DAOs, and other crypto technologies. Ethereum’s blockchain upgrade should help fuel the whole ecosystem, especially if Ethereum goes up in value, as users might be more inclined to buy Ethereum and then trade it. against NFTs and other digital assets.

Fusion concern

Moving to a proof-of-stake system poses great challenges and a lot of things can go wrong. There may be software bugs, hacks, or miners may create an alternate Ethereum network.

A sudden drop in network mining power could also lead to a pre-merger security issue.

A bug occurred in 2020 during an update, which saw Ethereum split in two, wreaking havoc on the DeFi ecosystem.

Due to the risks involved, most centralized crypto exchanges should halt Ethereum deposits and withdrawals around the Merge as a precaution. DeFi apps could do the same.

Ethereum miners may abandon mining shortly before the merger, thinking they can make more money selling their equipment than waiting until the last minute. A sudden drop in network mining power could also lead to a pre-merger security issue. In this case, the developers can interrupt the merger if they notice a too great drop in mining activity. It is likely that proof of work and proof of stake will co-exist for some time after the merger, until things have fully stabilized.

In conclusion

The merger offers a new version of Ethereum that should drive wider adoption of blockchain technology, as the increased security and scalability make it even more attractive for DeFi. For investors, sustainability and staking make it more attractive as a long-term investment, as investors staking are more likely to hold it, than miners who have to sell Ethereum to pay for energy and mining equipment. This exciting upgrade comes with its own risks, and while the price of Ethereum could reach new heights, it will first have to be proven that this new technology fully works.

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Revolution or simple step in the crypto universe?


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