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Will the Ethereum Merge Cause a Price Hike?

June 17, 2022

Christina

Will the Ethereum Merge Cause a Price Hike?

Could ETH hit $10,000 by the end of 2022? Some experts are saying that ETH, or the Merge, will cause a massive increase in value.

For many investors in the crypto space, the talk about Ethereum transitioning from a Proof-of-Work (PoW) mechanism to a Proof-of-Stake (PoS) mechanism is nothing new.

Ever since its initial release in 2015, vocal co-founder and leading Ethereum figure Vitalik Buterin vouched to make the switch to PoS in under a year. That journey proved to be more complex than originally thought, and multiple delays have dogged the Ethereum community. 

However, fast-forward to 2022, and what’s now being called “the Merge” looks imminent. So, what does it mean for investors?

Recap: Proof of Work (PoW) vs. Proof of Stake (PoS)

In order to function autonomously and avoid double-spend transactions and security threats, blockchains need to come to a consensus about the veracity of new transactions before adding them to the ledger. To do this, original blockchains, notably Bitcoin and Ethereum, use a consensus mechanism called Proof of Work (PoW). 

PoW is extremely efficient and secure yet consumes vast amounts of energy as it requires participants in the network (known as “miners”) to solve complex equations by lending extensive computational power to the network. You may already be aware that Bitcoin has come under scrutiny many times for its hefty carbon footprint and that it consumes the same amount of energy as a medium-sized country every year.

In a growing blockchain space with new chains being launched frequently, it’s pretty clear that this consensus method is unsustainable. Proof of Stake (PoS) takes a different approach, using around 99% less energy than PoW. Rather than having miners on the network, PoS uses “validators” to validate transactions by lending collateral (stake) to the network. Rather than expending computational energy, validators prove their worth by securing the network with the tokens they have invested in it.

For a more detailed explanation of PoW and PoS, you can read EQONEX’s Proof of Work article here. However, the TL;DR is that PoS is more sustainable, scalable, and less energy-intensive than PoW, hence Ethereum’s quest to transition its energy-intensive blockchain to PoS.

When Is Eth2 or “the Merge” Likely to Take Place?

The question of when Ethereum will transition to PoS has been on the lips of ETH investors for years now. However, the second-largest cryptocurrency by market cap has been making steady progress in recent months. Eth2, now called “the Merge” is slated to go live in Q4 2022. Currently, Ethereum is running two parallel chains, the original chain and the “Beacon Chain,” which runs on PoS. The upgrade to PoS will require the two chains to be merged, at which point, the original PoW chain will no longer run.

The first trial merges on Ethereum’s test network Ropsten was successfully completed on June 8 and has been called the “dress rehearsal” for the eventual switch on the main network. Due to the complexity surrounding upgrades to Ethereum’s code, the Merge will require multiple tests on various testnets. The Ropsten Merge marks the first successful trial in several before the final Merge is attempted. Even then, the transition won’t be completed until several more milestones are reached. 

The Merge Phase 1 is expected to take place in August 2022, with large rollouts occurring throughout 2023 as smaller “shard” chains are deployed on the network.

Without getting overly technical, shard chains break down large amounts of data into smaller chunks, allowing the network to become more agile and process transactions at a greater speed with less congestion. If all goes according to plan, PoS Ethereum should be bullet-proof and battle-hardened by the end of next year.

ETH to $10k?

The Ethereum switch to PoS is widely regarded as a positive move for the network. As the first and most popular smart contract chain, Ethereum is home to thousands of decentralized applications, most notably in the decentralized finance (DeFi) sector. With the original PoW chain suffering from scaling issues, lengthy transaction times, and excessively high transaction fees, the applications built on top of it cannot maintain substantial user bases. 

A PoS system will allow Ethereum and its many applications to offer transactional speed and minimal fees to scale for mass adoption and accommodate a meaningful amount of users. Many experts believe that the move will likely be positively reflected in the price of ETH and related altcoins.

Another potential benefit to ETH investors is that the upgrade should decrease the new ETH supply. This will be combined with an increase in the amount of circulating ETH staked with the new chain. Should demand for ETH remain the same or increase, a decrease in supply will likely cause an upswing in the asset’s price.

As Galaxy Digital research analyst Christine Kim told FirstMover, “Supply should contract rather than expand over time… that’s a huge boost to Ethereum’s investment narrative as a store of value and as a hedge against inflation.” 

The Merge will also be popular among DeFi investors whose respective coins stand to benefit from an increase in ETH’s price. Some crypto insiders are anticipating ETH’s price to mark a new all-time high after the Merge, believing that ETH could hit $10,000 a coin by the end of 2022. It should be noted, however, that the reverse can always be true, and there is still much work to be done before the PoS switch becomes a reality. 

What Else Do I Need to Know?

As far as ETH investors are concerned, there’s not much else they need to know; nothing happens to their existing ETH, and they don’t need to do anything special to prepare for the Merge. Instead, investors can consider it a software upgrade with all the heavy lifting going on behind the scenes. 

If you want to be more active in the upcoming Merge, you can choose to stake your ETH with the network. Staking your tokens gives the potential for earning a passive income through staking rewards. However, it requires a certain amount of lock-up period. Find out more about the risks and rewards of staking your ETH tokens here.

Finally, as with all emerging tech, cryptocurrencies are not without risk. No chain has ever attempted to switch from PoW to PoS, and Ethereum has a lot of stakeholders and moving parts to coordinate.

There’s always the possibility of something going wrong even after years of carefully considered strategies and development work. While there’s every chance that investors in ETH could ride the upside effects of the transition, keep in mind that cryptocurrencies are risky assets, and you should never invest more than you can afford to lose.









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