Formerly known as Ethereum 2.0, the Ethereum merge will happen in a matter of days. What does this all mean? Here's a comprehensive breakdown of what the merge is, security concerns, shortcomings and how it affects investors.
What is The Merge?
A major technological feat that will unclog the ETH network and reduce its eco-footprint. It will involve transitioning ETH’s mining mechanism from proof-of-work (PoW) to proof-of-stake (PoS). The Merge has been hyped up as a revolutionary milestone because, well, it is. Technologically the process is extremely difficult and has taken a long time to successfully trial.
The main benefit of The Merge will be to reduce congestion on the ETH blockchain and improve its energy efficiency, which is a huge bonus for the sustainability of digital currencies.
In simple terms, network participants will no longer require expensive and complex ‘mining’ computers to take part in earning ETH, this opens up the possibilities for everyday people looking to get involved.
It will also allow for major updates to security protocol on the network and will implement measures to foster better community conduct.
A number of major stablecoin issuers have agreed that they will not support any other chain than ETH PoS once The Merge happens.
Because of the large percentage of stablecoins and liquidity in DeFi applications (D’apps), this ensures that any forked ETH chain would be DOA (dead on arrival). At this stage, any other forked ETH chains are said to not be followed in the industry, so this is something retail investors should look out for.
– Ray Brown, head of Marketing, CoinSpot.
Why was this merge needed?
With an energy inflation through the roof (particularly in Europe) and a climate urgency, it’s important to acknowledge the much-needed new consensus mechanism from Proof of Work (PoW) to Proof of Stake (PoS) offered via Ethereum 2.0.
It will reduce the energy requirements by 99.5%, addressing a major flaw in the sustainability of cryptocurrencies. The merge is a major milestone in the further adoption of blockchain solutions and works to make the Ethereum main chain future-proof.
– Marc Meyer, senior director, Products at small business working capital DeFi platform, Crowdz.
Is this likely to impact markets?
This is arguably one of the most anticipated events on the crypto calendar this year, so there will likely be plenty of hype and that’s been evident in the price action we’ve seen from Ethereum, climbing 80% from its cycle low and well-outperforming bitcoin.
Part of the reason we have seen the price action from Ethereum is because the merge is likely to decrease the overall supply of the asset, building its case as a store of value.
It’s not clear whether it will have a huge impact on the rest of the market, but it’s more likely to have an impact on assets built on Ethereum such as Chainlink and Uniswap.
– Josh Gilbert, markets analyst, eToro.
For the average retail investor, the ETH merge doesn’t really affect them a whole lot; aside from some potentially increased price volatility, investors should not worry about a change to their assets.
We may potentially see other cryptocurrencies like Bitcoin also experience some price volatility. However, as always, nothing is guaranteed and no one can truly predict what will happen price-wise.
– Ray Brown, head of Marketing, CoinSpot.
Who does it impact? The winners and losers
For ETH users and investors, The Merge is hoped to be a win. It’s supposed to mark the beginning of reduced gas fees and faster transaction speeds. The true extent of the changes are yet to be ascertained with some predicting there will not be a huge difference in gas fees.
For miners, The Merge is not great news. The change from PoW to PoS means miners will lose an income source from mining ETH’s old proof-of-work chain with computing rigs containing high-powered graphics cards, processors and CPUs.
Environmentally, The Merge signals a win. Moving to POS means significantly less energy is required to validate the ETH network, a stated 99.95% reduction. With the enormous amount of energy consumption being a major criticism of how Bitcoin operates.
– Ray Brown, head of Marketing, CoinSpot.
How will this impact the broader crypto world?
In terms of ecosystem impact, the merge will enable drastically increased transaction throughput, which sets the stage for crypto mass adoption.
At present, decentralized systems do not have high enough transactions per second (TPS) to be considered an alternative to Visa (NYSE:V) and MasterCard but the merge changes this, and does so while maintaining its decentralized infrastructure.
The Ethereum merge will help pave the way for a more open and inclusive financial system and will bring decentralized finance to the masses in a sustainable way.
– James Kouzinas, director, Business Development and Sales, Crowdz.
What are the shortcomings?
While The Merge is the first of many steps and currently addresses energy consumption issues, as well as security, it does not necessarily solve congestion and fees. This is set to be addressed after the merge with a process called sharding.
– Marc Meyer, senior director, Products, Crowdz.
What should investors keep in mind when considering investing in Eth pre/post Merge? (Responsible investing, security concerns)
The important factor for investors to remember is that The Merge is unlikely to have a big impact on the network in the short term.
With big events and so much anticipation, the ‘buy the rumour, sell the news’ adage comes to mind. Therefore, investors should remember to take a long-term mindset when looking at crypto assets.
A key factor that will determine its success is the security of the blockchain under a proof-of-stake as it moves away from proof of work. We’ve seen a lot of issues from proof-of-stake platforms like Solana and others, but bitcoin’s security as proof-of-work is unmatched.
– Josh Gilbert, markets analyst, eToro.
Are there any security concerns?
For investors, it’s essential to pay extra attention to trading activity related to ETH. Across the crypto sector, it is said to be likely that there could initially be issues including investors buying the wrong ETH tokens or transferring assets to the wrong chains. At CoinSpot, we’ll be ensuring that any outdated or incorrect chains are not available as options.
This period may also prompt an increase in malicious activity or scams, so we remind all investors to refrain from sharing personal information or login details with any third party. Trusted exchanges will never ask you for this information, including over the phone.
If you’re buying or selling ETH, we strongly recommend you only do so on Australia’s trusted and regulated exchanges, such as CoinSpot, especially during this time.
CoinSpot will always communicate any relevant updates or alerts to our community. This may include flagging any PoW-Eth tokens that pop up on the market claiming to be legitimate, as well as providing clear warnings about not depositing PoW-ETH tokens or any other forked derivatives.
– Ray Brown, head of Marketing, CoinSpot.
Does it impact Crowdz at all given the platform is built on the Ethereum blockchain?
No, it does not. Crowdz leverages L2 solution Polygon. L2 are symbiotic with Ethereum main chain. As Ethereum becomes cheaper and more efficient so do L2 solution with multiplier functions. L2 remains central to scalability of dApp as only a very small fraction of the population use blockchain.
– Marc Meyer, senior director, Products, Crowdz.
How will this impact CoinSpot?
For CoinSpot it’s business as usual. Customers’ assets on the platform will only be temporarily affected by a small halt in deposits & withdrawals until the updated network is deemed stable for our users.
Post-Merge, CoinSpot will continue to support our customers by distributing information as needed around anything that may impact our customer base.
– Ray Brown, head of Marketing, CoinSpot.