Revolution or simple step in the crypto universe?

Ethereum’s ‘Merge’ update could send the cryptocurrency to new heights. Explanations.

Tensions are rising around the Ethereum “merger”, which hopes to increase scalability, security and sustainability. Could this game-changing technology drive Ethereum to new heights?

Crypto-enthusiasts are waiting for the second-largest cryptocurrency by market value to come closer to a massive upgrade that will strengthen its infrastructure and make it more sustainable. Thus, Ethereum aims to get closer to realizing its vision of a digital future on a global scale.

What is Fusion?

The Ethereum merger, in its simplest form, is an attempt to go from a “proof of work” model to a “proof of stake” model.

Source: ethereum.org

In the current “proof of work” model, miners complete complex puzzles to validate transactions. This process requires a lot of energy to operate computers, making it both expensive and unsustainable due to its environmental impact.

With the planned “proof of stake” model, users will be able to validate transactions based on the number of coins they bring or deposit. In return for their efforts, users can be selected to complete transactions and obtain rewards.

The merger is expected to strengthen Ethereum’s positioning as an energy-efficient global Proof of Stake blockchain network.

With the merger, Ethereum blockchain would completely switch to the proof of stake model, called the Beacon Chain, making mining obsolete.

The merger is expected to be completed in the second quarter of 2022, but a specific date has not yet been set. Ethereum founder Vitalik Buterin was able to provide more information on the exact timing during the ETHAmsterdam event on April 22nd.

The impact of the merger

The merger is expected to strengthen the positioning of the Ethereum blockchain as an energy-efficient global Proof of Stake blockchain network.

Power consumption will decrease by 99%

It is expected that power consumption will be reduced by 99% when miners are no longer involved. Miners, who typically buy expensive hardware including computers, graphics cards and other equipment to build Ether mining rigs, rushed to hit Ethereum ahead of the merger. One of the effects of the transition to a more sustainable blockchain could be that investors and projects will be more willing to adopt the Ethereum blockchain. For example, Tesla, which has been reluctant to buy more cryptocurrencies due to its environmental impact, could turn to Ethereum. Many institutional investors with ESG criteria as part of their mandates may also be more likely to look to Ethereum because of its environmentally friendly aspects.

An asset with a return

Rewards currently going to miners through the proof of work system will go to users through the proof of stake model.

Through some form of passive investment in the network, users will be able to achieve an estimated return of between 10% and 15%, making cryptocurrency potentially attractive as a “carry” trade, where some investors will potentially be tempted to earn a regular income. Some sophisticated investors may also borrow in USD and to some extent hedge the downside potential, just to take advantage of the benefits of Ethereum.

Investors must deposit at least 32 ETH (worth approximately $ 98,000) to participate in the bet, although some services offer bets to investors with only 0.01 ETH. Ethereum’s sustained appeal and return after the merger could attract a large number of institutional investors as long-term investors.

Reduced costs, increased security and scalability

As the current proof of work model is extremely energy intensive, the proof of stake system should significantly reduce overall costs and continue to reduce them as users participate in the blockchain.

Staking, which is cheaper than mining, should attract more people to become validators, increasing the decentralization of the network.

The planned updates improve the security of Ethereum, as validators need to invest large sums of ETH in the protocol. So if they make fraudulent changes, the protocol can automatically destroy their ETH.

The Beacon chain will also assign validators to different parts of the blockchain, making collaboration between them virtually impossible.

Finally, staking, which is cheaper than mining, should attract more people to become validators, increasing the decentralization of the network.

To scale, Ethereum needs more transactions per. second and more nodes. The upgrade was to improve speeds beyond the current limit of 15 to 45 transactions per second. Validators only need to examine their own portion of the blockchain, which will make nodes easier and allow Ethereum to grow while remaining decentralized.

Insights from industry experts

Industry experts tend to express very positive opinions about the merger, as it is expected to strengthen the Ethereum blockchain and make it more attractive to investors.

Source: Bloomberg Data, FlowBank

Former BitMex CEO Arthur Hayes believes Ethereum could hit $ 10,000 by the end of the year, though he predicts in the short term that the crypto may come under pressure due to the fallout from the war in Ukraine and the slowdown in global growth.

Billionaire cryptocurrency enthusiast Marc Cuban is also positive about Ethereum. He is particularly optimistic about the aspects of smart contracts, which will be improved thanks to the greater scalability and security after the merger.

Bloomberg Intelligence’s Mike McGlone sees ETH end the year between $ 4,000 and $ 4,500. Coinpedia’s latest forecast at the end of March predicts that ETH will trade between $ 4,890 and $ 10,870 by the end of the year.

Although these views are highly bullish, it is important to note that crypto enthusiasts often have aggressive pricing targets that may not be realistic in a lower risk scenario.

According to the over-the-counter technology platform Paradigm, option activity also indicates that there is great interest in call options with a strike price of $ 10,000 for expiration in December 2022. (latest price: $ 3,050), indicating that investors are betting on , that Ethereum could hit 5 digits by the end of the year.

Effect on the DeFi ecosystem

Ethereum acts as the base layer for almost 3,000 decentralized applications. Altcoins include meme currencies like Shiba Inu and metaverse tokens like MANA. Ethereum also enables NFTs, DAOs and other crypto technologies. Ethereum’s blockchain upgrade should help nourish the entire ecosystem, especially if Ethereum increases in value, as users may be more likely to buy Ethereum and then trade it against NFTs and other digital assets.

Fusion concern

Switching to a proof-of-stake system presents major challenges and many things can go wrong. There may be software bugs, hacks, or miners can set up an alternative Ethereum network.

A sudden drop in network mining can also lead to a pre-merger security issue.

An error occurred in 2020 during an update where Ethereum was split in two, wreaking havoc on the DeFi ecosystem.

Due to the risks involved, most centralized crypto exchanges should stop Ethereum deposits and withdrawals around the merger as a precaution. DeFi apps could do the same.

Ethereum miners may abandon mining shortly before the merger, believing they can make more money selling their equipment than waiting until the last minute. A sudden drop in network mining can also lead to a pre-merger security issue. In this case, developers may interrupt the merger if they notice an excessive decrease in mining activity. It is likely that proof of employment and proof of share will exist side by side for some time after the merger until things have fully stabilized.

Finally

The merger offers a new version of Ethereum that should drive a wider use of blockchain technology, as the increased security and scalability make it even more attractive to DeFi. For investors, sustainability and betting make it more attractive as a long-term investment, as investors who invest are more likely to keep it than miners who have to sell Ethereum to pay for energy and mining equipment. This exciting upgrade comes with its own risks, and although the price of Ethereum may reach new heights, it must first be proven that this new technology works fully.

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