How Ethereum’s Merge will change the crypto landscape

Ethereum developers have recently given the approximate date for the Merge – September 19th, and the markets have already started to react. Here’s what we need to know about it.

What is Merge?

Since its conception, Ethereum was set to become a PoS blockchain, in order to allow it to scale and fulfil its ambition of becoming the “world computer”.  

Unlike PoW blockchains that secure themselves by requiring energy-consuming computations for every new block, PoS blockchains require their validators to stake a certain amount of crypto as a gauge of their honesty. PoS is considered less robust, but it allows a higher transaction throughput with less energy consumption.

The Beacon Chain launched in December 2020 was the first step of Ethereum transition. The PoS blockchain running in parallel to Ethereum allowed anyone to become an ETH2.0 validator by staking 32 ETH. Over 400’000 validators have registered since then, locking a total of over 13 million ETH. However, the only transactions that Beacon Chain has processed so far concerned its own state.

The Merge will transfer Ethereum transaction history and activity from the execution layer (Mainnet) to the consensus layer (Beacon Chain), effectively switching Ethereum from PoW to PoS.

What does the Merge mean for ETH?

Switching to PoS will reduce Ethereum’s energy consumption by 99%. This will put it on the radar of people and companies that so far have had ecological concerns, increasing the number of projects that will be built on it. More projects means more users, which in turn means more demand for ETH.

The supply of ETH will change dramatically too. As of now, Ethereum issues approximately 13’000 ETH/day as miners reward, and the Beacon chain – 1’600 ETH/day as validators reward. After the Merge it will be only 1’600 ETH/day, which, after subtracting the 1’600 ETH of base fees burned each day, will bring net ether inflation to zero, or even below.

With more demand and less supply ETH price is bound to rise, and the market start to slowly realize it.

What does the Merge mean for the crypto space?

Ethereum miners will suffer most from the Merge. With their services no longer needed after it, they will have to find a new occupation. Those that use GPUs to mine will be able to switch to other web3 protocols that require computation, or data center-oriented business. ASIC miners, however, are very algorithm-specific, and the only thing they’ll be able to mine after the Merge will be Ethereum Classic ($ETC), a 2016 fork off Ethereum that does not intend to change the consensus.

However, Ethereum Classic is small and won’t be able to absorb all the disenfranchised miners. This pushed some of them to take the matter into their own hands.

Last Tuesday mining pool AntPool announced its investment of $10 million into Ethereum Classic’s infrastructure and committed to more in the future. $ETC did not fail to react, gaining 80% in the following days.

The times will be difficult also for “Ethereum killers” – blockchains that define themselves by their differences with Ethereum, notably regarding consensus and scalability. Solana’s price is still at its yearly lows, as is Cardano’s.

With miners soon to be replaced by stakers, Ethereum liquidity staking protocols are clearly on the winning side. DApps like Lido ($LDO) or Rocket Pool ($RPL) enable anyone to stake any amount of ETH and give stETH tokens in exchange of staked ethers, allowing to use them as collateral in other DeFi protocols. $LDO has soared spectacularly in the last two weeks, gaining almost 400%; $RPL’s price has doubled.

Other Ethereum-based DeFi protocols are also on the rise, with Uniswap and Aave gaining 80% over the last month.

Ethereum layer-2 solutions are doing good too. PoS transition alone will not increase transaction throughput, it will only serve as base for the future upgrade called sharding. However, the sharding won’t happen until the next year (or later), and even after it Ethereum may still need more scalability, keeping companies like Polygon in business. $MATIC gaining 100% in the last two weeks proves the point.

The Merge will transform the crypto space, and most likely drive the next growth cycle; it is an important event to be followed closely.