The Ethereum Merge
This blog post will cover:
- PoW and PoS
- Why everybody is waiting for ETH 2.0
- The reasons why the process took so long
- What's next?
- Issues and concerns
- ETH price prediction
- Quick update: what's going on now?
The Ethereum Merge is almost here! It means that the current Proof of Work (PoW) consensus mechanism of Ethereum will be replaced with Proof of Stake (PoS). This will be achieved by the merging of the Ethereum mainnet with the Beacon Chain that provides the PoS system.
Just in case you still don’t understand what this fuss is all about, we’ll try to explain it here.
PoW and PoS
Let's very quickly refresh our memories on the basic PoW and PoS concepts. In order to maintain consensus on the PoW algorithm, miners compete with each other during the process of finding blocks by using special expensive equipment with significant computing power and high power consumption. In the PoS algorithm, participants hold a particular number of tokens for a certain time period. This algorithm does not require expensive hardware and electricity. You are welcome to read more about these two algorithms in our article.
Why everybody is waiting for ETH 2.0
Switching the Ethereum blockchain to the PoS consensus algorithm will reduce energy consumption by 99.95%. This will decrease the mining impact on the environment and comply with environmental standards.
The reward for finding the block will be reduced and replaced by a reward for staking ETH coins. This will lead to reducing the total ETH coins issue by 90%, therefore, changing the project tokenomics to a deflationary one. The annual inflation rate will be less than 1%. ETH will acquire the function of value accumulation.
The reasons why the process took so long
The reason for another pause in the merge of chains was the presence of errors in the results of The Merge test in the Ropsten network. One such error was the loss of a large number of blocks, which the dev team didn’t expect at all. As a result of the merge, the “complexity bomb” protocol should be activated, which exponentially increases the difficulty of adding blocks to the chain. This, in turn, should motivate miners to switch to the staking of ETH coins.
According to developers, premature implementation of the protocol could lead to degradation of the mainnet. The developers planned to once again check all the data before the merge of chains and launch of the “complexity bomb”.
According to Preston Van Loon, the merge process was planned to be completed in August before activating the “complexity bomb”. During the virtual Eth Shanghai summit, Vitalik Buterin confirmed that August was the most likely month to switch to PoS protocol, but in case of errors the process could be postponed to September or October 2022.
The next major update for Ethereum after the launch of The Merge will be the Shanghai hard fork (which follows previous London and Berlin forks). The EVM (Ethereum virtual machine) will be upgraded, and the option to withdraw ETH locked in staking will be opened to increase scalability.
In 2023, an update for the sharding technology implementation is planned. This is the most effective way to proceed transactions though. The upgrade will increase the number of transactions per second and improve network security.
Issues and concerns
Switching Ethereum to PoS became the cause of the following concerns:
- Possible centralization. Increase of staking position due to % of rewards and gradual growth of influence in the network.
- The risk of ETH holders being not interested in coins’ usage and spending, as their balance directly contributes to their welfare.
ETH price prediction
The outlook for the price change of Ethereum coins after the Merge update will mostly depend on the development of the crypto market. The Merge and PoS may positively or negatively affect the Ethereum price.
The successful completion of the Merge update should definitely have a positive impact on the price of Ethereum coins. A reduction in the issue of coins and a reduction in inflation to 0.5-0.2% could be an important fundamental and long term growth factor. Together with the Burn protocol, could lead to a supply deficit that would trigger growth in the long run. Also, the increase in transaction processing speed and lowering of transaction costs in the future may lead to an increase in popularity and development of DeFi on the Ethereum blockchain. In addition, this could cause a positive news background around the popular cryptocurrency.
A strong decrease in the ETH price may occur in the short term, or at the moment of announcement about the merge with the mainnet. It's a regular situation on the market when the position differs significantly from one side to another, which causes dump, pump, or the collection of stop orders.
Quick update: what's going on now?
There have been no major changes since Ethereum switched to the PoS consensus algorithm. The total capitalization of the project has decreased and the value of the cryptocurrency has lowered, which is comparable to the global downward trend. In general, ETH remains strong enough, which indicates investors' confidence in the continued development of the blockchain and its ecosystem on the new protocol. There has been a significant reduction in electricity consumption to maintain consensus by abandoning mining.
Emissions have also declined, but ETH remains inflationary. TVL, DEFI protocols in the Ethereum blockchain show a slight increase, confirming users' belief in sustainability and growth. Network transaction costs remain at a transitional level, generally due to low user interest in making transactions as part of a bearish trend, rather than a shift to a new consensus algorithm.
Today, the coin firmly holds the position of the second most capitalized cryptocurrency in the world. It is also the platform number one among those projects which support smart contracts. Ethereum-based projects and apps are very popular with venture capital investors. By switching to PoS, Ethereum will become much faster and safer. This will make its future brighter taking into account the growth of mass adoption of cryptocurrencies. However, it’s important to remember that after the launch of The Merge update, there are still areas and directions that need improvement.
SimpleSwap reminds you that this article is provided for informational purposes only and does not provide investment advice. All purchases and cryptocurrency investments are your own responsibility.