Traders keep a close eye on all things related to the cryptocurrency industry, especially notable events that could change the landscape of the industry as we know it and have a dramatic impact on future price action. The Ethereum Merge is one of those events which everyone is talking about. To help our audience understand what the Merge is all about and what it means for the top-ranked altcoin in the future, we have prepared this in-depth guide on the upcoming Ethereum Merge.
Most importantly, the Merge is happening on or around September 15. At its core, the Merge update will transition the Ethereum network from a proof-of-work consensus mechanism to a proof-of-stake system. The result will be greater energy efficiency and a less competitive environment for those that contribute to the blockchain.
In addition, post-Merge, the Ethereum blockchain will utilize the Beacon Chain as its consensus layer and use the existing mainnet as its execution layer. According to estimates, this could reduce ETH emissions by as much as 95%.
Validators simply need to stake at least 32 ETH for a full node to be able to propose a block. The requirement ensures that the participant has enough stake in the ecosystem that it would be against their own interest to be a bad actor. Any validators that attempt false transactions or fraudulent chain history have their stake reduced by penalty, further discouraging any disruptive behavior.
The 32 ETH barrier might seem high to many individuals, but compared to the enormous cost of mining hardware necessary for PoW systems, the barrier to entry for Ethereum is low in terms of cost, initial investment, and maintenance. Less overhead and expenses make the blockchain more accessible and therefore improves overall decentralization.
Some members of the cryptocurrency community incorrectly assume that the Merge is designed to reduce gas fees when using the network. The shift is focused on a reduction in energy consumption and lowering costs for block producers. The Merge also doesn’t immediately scale the Ethereum network. However, it does lay the foundation for this to occur.
The lack of a carbon footprint could also make Ethereum more attractive to businesses and institutions that consider their ESG responsibilities carefully. Bitcoin’s impact on the environment was subject to extreme public controversy, with Tesla CEO Elon Musk at the center of it all.
All the above is how the Ethereum Merge works and why it is happening, but what might it mean for Ethereum prices? The Merge will also feature a reduced issuance rate. Less issuance translates into an immediate reduction in sell pressure from block contributors of more than 80%. The estimated daily new supply of ETH issued in USD terms is roughly $20M+ currently. Post-Merge, the daily new supply is expected to drop to approximately $2M+ each day.
Taking millions of dollars worth of ETH out of the system per day means less and less ETH to be sold into the market. The lower cost of entry to maintain operations as a validator is also less expensive, limiting the need for network participants to sell ETH for operating expenses. The net result could be demand vastly outweighing available supply over time, which is the basis of price appreciation across all markets.
Ethereum PoW miners aren’t going down without a fight, however, and plan on forking the blockchain. A fork of the blockchain would result in a PoW version of Ethereum and a PoS version of Ethereum. It also should mean that if you hold a balance of ETH, you may be eligible to receive an equal portion of PoW tokens.
The potential of earning free tokens alone could have an impact on near-term price appreciation in Ethereum. The Bitcoin Cash fork in 2017 helped drive Bitcoin price to all-time highs and take the rest of the crypto market with it. BCH also soared to astronomical prices following the split but, in the long term, has lost much of its value due to BTC being chosen by community consensus. The Ethereum development community warns of a similar outcome with any PoW tokens.
The Merge isn’t entirely without risks. There is no telling if the Merge will impact the thousands of tokens and smart contracts running on Ethereum’s back. The PoW fork tokens could also be sold and take down crypto prices as a whole. Serious controversy could ensue as the PoW token and PoS token compete at the start.
Furthermore, the cryptocurrency community hasn’t fully learned its lesson from the DeFi and CeFi collapse earlier this year. Investors are borrowing ETH en masse in order to get additional PoW tokens from the fork. However, these positions are exposed to liquidation risk if prices were to drop. Popular lending protocols like AAVE have established limits on ETH borrowing in an attempt to curtail any potential fallout from the clear overleveraging.
The Ethereum Merge is estimated to happen on Wednesday, September 14, 2022 around 15:16:31 UTC. Prior to this, the consensus layer upgrade is scheduled for epoch 144,896 on the Beacon Chain on Tuesday, September 6, 2022 at 11:34:47 UTC. Margin trading of ETH/USD and ETH/BTC will not be affected. Please note that liquidations remain possible under extreme price volatility. The upgrade may result in a hard fork and new token.
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