Ethereum And The Merge: What Will Happen?

Ethereum and the ecosystem around it are eagerly waiting for the biggest shift in the history of the second-largest crypto – the transition from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus algorithm.

However, experts are beginning to gather on both ends of the spectrum – while some of them are predicting a positive price change and further adoption, the others raise concerns of market-wide drops, as Ethereum would see a total of 13.3 million ETH tokens being released from the ETH 2.0 deposit contract. Nevertheless, Ethereum’s price exploded 36% in the last 30 days, and now sits 114% higher than its June low of $882 per ETH, making it one of the best-performing altcoins in the top 50.

Why the upgrade?

It turns out that in order for Ethereum to sustain its network and make it faster, more scalable and more environmentally friendly something has to change from the current model. The answer is a radical change in which the altcoin leader conducts transactions. In a Proof-of-Work consensus setup, like in Bitcoin, transactions are being verified by lending out raw computer power, called mining. Proof-of-stake eliminates mining and substitutes it with staking.

The staking consensus would allow for Ethereum to really cement its place as the #1 place for decentralized finance applications and Web3.0 apps, as prior to the upgrade, the cost per transaction on Ethereum made some heavy swings, which made small-scale transactions unviable. The "DeFi Summer 2020", when DeFi applications exploded to the scene (Uniswap, Aave, MakerDAO, Compound, etc.) showed how PoW blockchains simply couldn’t handle the transaction throughput, which further caused transaction costs to skyrocket.

However, many new projects emerged, addressing the scalability issues Ethereum was having - Solana (SOL), EOS (EOS), Avalanche (AVAX), Fantom (FTM), Cardano (ADA), Polygon (MATIC), Oasis Network (ROSE), and Near Protocol (NEAR-USD), to name a few. Interestingly, all of them use Proof-of-Stake (PoS) consensus mechanism.

Ethereum is set for a rollercoaster price ride

It turns out that Ethereum owners have planted themselves a time bomb when ETH migrates to PoS consensus because many investors entered the staking contract at a much higher price tag per ETH than now, which means their deposits are already on a loss, so they would seek to minimize their losses and sell their holdings.

Furthermore, a total of 13.3 million ETH would be available for selling, which makes 11% of the entire Ethereum supply. Such a large portion of a currency entering circulation is a sure predecessor of devaluation in the short term due to selling pressure. However, the dump would be a process, which could take up to 12 months, so the price may react just slightly and correct itself.

On the flip side, market analysts consider that ETH holders are not going to sell. It turns out that about 33% of staked ETH is through liquid staking platforms like Lido, which give out their native tokens in return for the staked Ethereum – tokens, which could be traded immediately, without a vesting schedule.

Furthermore, ETH staking rewards should double to about 8% APY, which is very attractive for large-scale validators. The elimination of miners will be replaced by smaller block rewards to staking validators. While this situation may be discouraging for some investors, large validators like trading platforms and institutions are relying on yield rather than price gains, in contrast to retail investors.

The new situation would onboard new players on the Ethereum train, including banks, assets managers and governments. And with the addition of the deflationary mechanism, introduced with EIP-1559, as well as the reduced ETH minting would act as a price booster due to the scarcity effect the second-largest crypto would feel.