It’s been quite the year in the Cryptocurrency ecosystem. Almost one trillion dollars worth of value has been wiped out from the market, we’ve seen volatile price fluctuations and we are without question in a bear market.
There is perhaps some light at the end of this tunnel and it’s coming soon.
The Ethereum Merge
What is the Ethereum Merge?
Ethereum is a blockchain, that is, a publicly viewable ledger where exchanges of digital coins are recorded.
Transactions on this chain are conducted in Ether.
Thousands of businesses and projects in the experimental world of decentralized finance now use the platform to offer lending, borrowing, and other sophisticated investment options. In addition, many nonfungible tokens — unique digital collectibles known as NFTs — are built on Ethereum.
At its core, the Merge is a change to the way Ethereum verifies transactions. Here’s how this works.
Ethereum is decentralized
Crypto is decentralized and operates without a middleman. In Crypto, transactions are verified by a scattered network of computers. Computers around the world run software that solves complex puzzles, an energy-guzzling process for confirming transactions.
This verification process is widely known as crypto mining and has the technical name “proof of work.”
The Merge is set to shift Ethereum to an alternate framework called “proof of stake,” which requires less energy. In a proof-of-stake system, computers don’t burn energy racing to verify transactions.
Instead, crypto investors deposit a certain number of digital coins in a shared pool, which enters them into a lottery. Each time an exchange happens, a participant is selected from the lottery to verify the transaction and win the rewards.
I spoke to our CEO Jeff Kirdeikis about the Ethereum Merge and here are his thoughts.
“The Merge represents a historical transition in the Ethereum ecosystem from an inflationary to a deflationary currency. Post-Merge, Ethereum will be running on Proof-of-Stake validation, where the transaction fees are the primary fees sent to the validators. Previously, in Proof-of-Work, it was the inflationary newly minted ETH that was issued to miners. This means ETH is about to become a LOT more scarce in comparison to if it continued on as PoW.
While many people have concerns about the decentralization of ETH on PoS, it could easily be argued that it is now far more decentralized, as anyone can stake their ETH or join in pools and become a validator within minutes. On PoW, to become a validator, you’d have to physically purchase and install mining hardware, that uses copious electricity.
ETH PoS is a step in the right direction for sound money, the environment (and arguably) decentralization”
Concerns about the Ethereum Merge
Now, as Jeff alluded to in his statement, while there is a lot of fanfare about the coming merge, there are concerns, especially since the process of merging is incredibly complicated.
“It’s flying the jet, and changing the engine in the sky,” said Chandler Guo, a crypto industry veteran who leads a group opposing the Merge. “It’s very difficult. It’s very dangerous.”
Here are some other concerns a lot of people have about the upcoming Ethereum Merge.
Scams
One big concern is scams. The Ethereum network and some in the broader crypto community have been using the shorthand “ETH2” to refer to the proof-of-stake layer.
The Ethereum Foundation has acknowledged that this could lead to confusion during the Merge and warned against “scams trying to take advantage of users during this transition” by making them believe that they need to take steps to upgrade to ETH2 or swap their current tokens for new ones.
“There is no ‘ETH2’ token, and there is nothing more you need to do for your funds to remain safe,” the foundation said.
Miners
The proof-of-work Ethereum network, known as Mainnet, has relied on miners to validate blockchain transactions. Ethereum’s proof-of-stake layer, known as the Beacon Chain, will rely on builders (who bundle transactions together) and validators, whose ability to select and validate transaction blocks depends on how much cryptocurrency they own.
Andy Long, CEO of White Rock Management, said that for miners, the Merge means “the end of the super-normal returns they’ve enjoyed lately.” McMahon of Chainalysis agreed, saying Ethereum miners face a “grim” future.
That has led to some speculation that the Ethereum miners would opt to keep going on their own, leading to the creation of a fork, similar to one that created Ethereum Classic in 2016.
Technology problems
Experts said technology glitches could prevent a smooth transition to the new system: for example, if validators or other nodes fail to update their software. That could spook the market.
Sara Xi, chief product officer of Prime Trust said a fumbled or failed Merge would hurt Ethereum’s standing as the dominant smart contract network. “It gives opportunities to all the alternative smart contract chains,” she said, citing Solana and Avalanche as examples.
“It is their moment to shine if Ethereum doesn’t complete the Merge,” she said. “There are much faster and cheaper chains. If Ethereum fails, it will in the short term push up the prices for all the alternatives out there.”
Valuation of Ethereum
The Merge could also have significant effects on how Ethereum 2.0 is valued, something that traders are particularly keen to know about.
“Ethereum is positioned to become deflationary after the Merge,” says Aaron Samsonoff, chief strategy officer and co-founder of InvestDEFY, a creator of structured crypto products.
He expects an approximately 90 percent drop in new Ethereum token issuance after the change. Deflationary currencies tend to rise in value as lower supply meets stable or rising demand.
When will the Ethereum Merge happen?
While developers have estimated a Sept. 15 date, the Merge’s precise timing is uncertain and subject to complex technical factors. Any significant glitches could cause another delay.
The Bottom line
Ethereum 2.0 will be a big deal but no matter what happens, the real issue will be whether Ethereum and the rest of the chains are actually adopted for use in mass market applications, i.e. whether they will find wider use cases beyond those in Crypto today.
At TrustSwap, we’re betting they will and you can be sure our company will remain at the forefront of the Crypto value chain, adding value to customers.
The Ethereum Merge explained (Video)
One more thing.
For those of you that prefer videos for content consumption, I found a really good explainer video about the Ethereum Merge from The Defiant that breaks it down really well.
Stay tuned to our channels for more news about the Ethereum Merge.
