As with many things in life, events are not hushed up. When any kind of event or action happens, planned or unplanned, it causes changes and reactions in the surrounding components. Think of a stone thrown into a pond which creates ripples in the water and also changes the aquatic environment below the surface. This ideology can be applied to the Ethereum merge as well.
The Ethereum blockchain, along with its parent coin Ether (ETH), is a pillar of the crypto asset industry – an industry that has become mainstream with each passing year. Ether is the second most popular altcoin, with people searching Google for “Ethereum” an average of 2.1 million times a month. With ETH rising to a value of over $100 billion in terms of market capitalization, the Ethereum blockchain serves as a common choice for developers building decentralized applications (DApps). In a survey conducted by Bybit crypto exchange, Ether is the second most heard alternative to Bitcoin (BTC), with one in six adults in the United States saying they are familiar with it (15.4%).
Ethereum Merge, or simply Merge, fundamentally transforms the Ethereum blockchain in the pursuit of greater scalability and security while requiring less energy usage. The move could create ripple effects for the wider crypto industry.
What is Merge?
The merge is part of a multi-year transition to the Ethereum blockchain, sometimes referred to as Ethereum 2.0. This widespread transition is essentially scaling the Ethereum blockchain. The official starting point of the network’s transition occurred in late 2020 with the launch of Beacon Chain, a proof-of-stake (PoS) version of Ethereum, although Ethereum’s main proof-of-work (PoW) blockchain is also in the works. continues.
Expected to happen on September 15th, the merge basically represents the end of the PoW chain, with all future efforts and attention focused on the PoS chain. PoW vs PoS The crypto and blockchain sector has been an ongoing debate for a long time. The mix of arguments includes PoS blockchains requiring less energy than PoW networks.
What will Ethereum (and crypto more broadly) look like after the merger?
After the merger, Ethereum will be a PoS blockchain, with the PoW chain becoming a thing of the past. A difficulty bomb will reduce mining rewards, making mining on the chain unattractive. Miners are in discussions to resist the change and continue with the forked PoW version (or versions) of Ethereum, but the main Ethereum blockchain will be PoS without miners.
After the merger, Ethereum will call on validators instead of miners to run the blockchain. To do this validators must lock 32 ETH in order to support the function of the blockchain while earning rewards. Other ways also exist to contribute to the network through staking, such as services offered by crypto exchanges.
The merge is not the end of Ethereum’s massive transitional journey. According to Ethereum co-founder Vitalik Buterin, the event is more than halfway into Ethereum’s transition – 55% of the way to completion to be exact. Sharing is the next major goal for Ethereum, which aims to improve scalability by splitting the blockchain into parallel parts.
There are some misconceptions about merge
Some common misconceptions revolve around merges. For one, some believed that Ethereum would magically become faster and that transaction fees would be significantly lower. But don’t expect it to happen immediately.
Similarly, some have wondered whether the merger would result in an influx of unconditional ETH into the market. It is not so. In fact, bets will remain closed until the Shanghai upgrade scheduled for ETH 2023.
related: Buterin and Armstrong Reflect on Proof-of-Stake Shift Near Ethereum Merge
Third, some observers have suggested that the price action will be easier to predict, suggesting that the value of ETH will rise because of an upgrade or logic that it will become a “sell the news” event that will result in a price drop. This strategy plays on market psychology. If everyone is excited for the upcoming event, the related asset can climb in price until the event. Then, when the event occurs, prices may drop due to the event being anti-climatic and not meeting the hype and expectations.
Like many events in crypto, traders are trying to capitalize on competing predictions. However, a wild card is already declining price action in the cryptocurrency market, making it more difficult to make any predictions with certainty.
Potential Business Strategies for Merge
If you want to capitalize on bullish investor sentiment prior to the merge, there is a case for holding regular ETH, also known as a “spot”. If your investment amount is substantial, you can also consider holding the 32 ETH required to become a validator for the network, earning around 4% interest annually. This number is expected to increase to around 7% post-merger.
If the price doesn’t move fast enough that you can win a 1,000% return this year, your asset will at least continue to work for you during a market downturn. (Just keep in mind that your 32 ETH will be locked until Shanghai upgrades in 2023.)
As a second strategy – if you want to hedge your bag of spot ETH – you can consider dedicating a smaller portion of your portfolio to short positions using futures contracts. Depending on how well you “time to the market,” that small percentage of your portfolio may be enough to offset any short-term losses you experience on your spot holdings. Conversely, if the market goes up, you could lose the amount you put on the futures contracts. But your spot portfolio may be enough to cover those losses — should you choose to sell.
The third option, given the volatility of the market, is to “sit” in stablecoins. This is a reasonable approach if you do not feel too confident in the direction the market may be headed. When it finally breaks – which it will – you can try to capitalize on the extreme movement. If the ETH price drops back to $880 – which it reached in June – you might want to go long. Or if it explodes to obscene heights, you can choose to go lower.
Whatever you choose, keep in mind that most active traders lose most of their money. Your most likely to be successful is to choose a price point, make your purchase, and forget about it until favorable market conditions return.
Check if your centralized exchange will make airdropped ETH accessible
Centralized exchanges differ in how they handle merges. The decision most users will want to keep an eye on is whether their chosen exchange chooses to give them their “airdropped” Ethereum.
Specifically, if some blockchain participants continue to operate the proof-of-work chain, Ethereum holders will suddenly have two versions of their ETH tokens – one on the proof-of-stake chain and one on the set-of-work . Some exchanges, such as Bybit, have stated that they will offer support for both on-chain, allowing users to sell or withdraw their tokens. Others – including Coinbase and Binance – have declined to make similar commitments. (And of course, users can also ensure that they will be able to access their ETH by keeping it in their own custodial wallet.)
Placing tokens in complex financial protocols can also prevent the blockchain from recognizing ETH holdings. This includes lending protocols and liquidity pools. If users wish to ensure that their holdings are recognized, they may wish to withdraw their ETH from such a protocol a few days prior to the merge.
Another issue to take note of is the downtime during the merge. Exchanges plan to mostly disable deposits and withdrawals on their blockchains – known as ERC-20 tokens – starting September 14. There are plans to resume those activities by September 16, though the date may change. Unexpected technical problems.
DApp users will also benefit
The crypto and blockchain industry is a very interconnected space. According to State of DApps, Ethereum itself hosts approximately 3,000 DApps on its blockchain as of the time of publication. An example of the significant impact Ethereum has on the broader crypto sector can be seen considering the high Ethereum fees present in 2021, which may have stumped some dApp users.
DApp users, ETH traders and more may be affected by the merge, but more as part of the larger plan for the Ethereum 2.0 movement. The merge itself is part of a wider Ethereum transition, which ultimately leads to increased security and scalability with less energy usage. The merge should have a significant impact on the energy required to run the Ethereum blockchain while operating slightly faster, but other benefits may take longer as it appears to be part of a wider transition.
ETH does not have a maximum coin supply, although it does have a cap on new ETH created per year. Ethereum Improvement Proposition 1559 put an ETH burning mechanism based on transactions, although the Ethereum blockchain also produces new ETH. The merger will reduce the amount of new ETH created annually, potentially affecting the price activity of the asset in the market.
bill jing Head of Financial Products at Bybit, leading the effort to research and design innovative instruments in the CEFI and DeFi worlds.
The opinions expressed are those of the author alone and do not necessarily reflect the views of Cointelegraph. This article is for general information purposes only and should not be construed as legal or investment advice.