Ethereum, the world’s largest cryptocurrency blockchain after Bitcoin, is set to complete The Merge, a network upgrade years in the making that will reportedly slash energy use, set the stage to scale the network, and improve security.
All developments that may boost the value of the Ether cryptocurrency token.
The Merge, expected to occur between Sept. 13-15, will move Ethereum’s network from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism, which could reduce its energy consumption by 99.95%, according to the Ethereum Foundation.
At stake is a payment network worth US$208 billion, which will continue operating during the transition. The biggest risk of The Merge will be disruptions in the infrastructure that hits the equity and that could see the entire industry screech to a halt, said Dr. Anna Becker, chief executive officer of Israel-based algorithmic crypto trader EndoTech.
But with the Merge very much underway, the risk of this happening becomes less with each passing day, Becker said.
Kasper Vandeloock of Musca Capital, a Brussels-based quantitative trader in digital assets, said The Merge will make the Ethereum network more sustainable and secure.
“Most importantly, it will also allow for increased scalability with future upgrades. This is a promising development for Ethereum and one that will likely affect the future of blockchain technology in general,” Vandeloock said in an email response to questions.
Besides cutting down on electricity consumption mostly fed by fossil fuels, the transition to PoS may also lower transaction costs on the Ethereum network – known as gas fees – which can surge during peak network congestion. However, some blockchain specialists have said the upgrade does not ensure the fees – also a factor in minting non-fungible tokens (NFTs) – will fall.
Ben Caselin, head of research and strategy at the Seychelles-based AAX crypto exchange, said the upgrade could benefit crypto prices by attracting more institutional investors.
“Moving away from PoW, which is perceived by some critics as too energy-intensive (although this is debatable) will make Ether potentially more suitable as an investment vehicle for institutions,“ he said.
Speculation around the upgrade did bring some recent price gains to the Ether token, before it lost most of the momentum to recently trade around US$1,700, up about 4% on the week, but still a long way from the US$3,200 it was trading at a year ago, according to CoinMarketCap prices.
Whitney Setiawan, a research analyst at Bitrue crypto exchange in Singapore, said The Merge will make Ether a more decentralized and sustainable coin, while opening up the way for more scalability on the network and price action.
“The Merge lays a better foundation for Ethereum to secure its position as a market leader in the long run, and thus allowing it to possibly reach much higher prices in the future,” said Setiawan.
“While the macroeconomic situation might seem dire, a bear market is always followed by a bull market soon after, and we believe that the next real bull market will pave the way for Ethereum to $4,000.”
Another concern around the Merge is crypto miners creating a PoW hard fork, which would run parallel to the new PoS-based Ethereum network, which Vandeloock considers inevitable.
“There will definitely be a hard fork, as there are some strong opinioned PoW believers that do not want to change to PoS. You also have many Ethereum miners that are wondering what they can do with their hardware.”
Vandeloock said he doesn’t expect the PoW chain to have too many projects or a significant uptake: “I don’t see developers in my circle planning to move to it.“
Becker at EndoTech said the fact a hard fork is possible points to the promise of a decentralized ‘revolt’ that is a unique characteristic in decentralized finance, or DeFi, and offers a powerful check and balance in this new economy.
“While there may be short term justification or opportunity to ‘revolt’, moving to a more efficient, powerful backbone should align incentives and bring miners forward. Net, we don’t see this as a significant or long-enduring possibility,” Becker said.
Another attractive factor around The Merge is the view the change in Ether’s tokenomics and network incentives will make the cryptocurrency deflationary.
New Ether issuance will drop by an estimated 90%, from 13,000 a day to 1,600 a day, which represents a daily sell pressure reduction of approximately US$19.9 million, at current price levels.
“Ether will become deflationary to some extent,” said Vandeloock. “The Ether supply will have to find an equilibrium based on the network demand. Specifically, the ETH burn rate and the ETH issuance,” he said.
The Ethereum Foundation expects it to bring net Ether inflation to “zero or less post-merge” as at least 1,600 ETH will be burned, or removed from circulation, daily.
Caselin agreed this could make the token deflationary, but warns of potential price volatility in the upcoming weeks.
“Ether is set to become deflationary and I do expect significant price appreciation in the wake of The Merge, if successful,” he said.
“However, even if that is the natural effect of the issuance change, over the coming weeks too much retail speculation and leveraged trading could spell a bumpy ride which will be difficult to navigate for untrained traders,” Caselin said in an email response to questions.
Overall, Becker at EndoTech said The Merge represents a shift towards market maturity, in the form of new use-cases, accelerated innovation, improved sustainability, faster transaction times and lower barriers to entry.
“The Merge presents a monumental opportunity for the mass adoption of this currency, over and above Bitcoin, as this becomes the modus-operandi of the DeFi world,” she said.