Ethereum is arguably the largest ecosystem within crypto. Thousands of projects and decentralised applications (dapps) rely on the Ethereum blockchain to store data and manage their dapps.
As the Ethereum ecosystem has grown, scaling solutions have been called upon to keep dapps fast and cheap to use in terms of transaction or ‘gas’ costs. At its core, this is the main reason for transitioning from proof-of-work (PoW) to proof-of-stake (PoS).
Also essential is making the network more energy efficient. This has particular importance in the current global macroeconomic circumstances, in which energy prices are high and emission reductions are expedient. The Ethereum Foundation estimates energy usage will drop from around 112 terawatt hours per year to just 0.1.
Bullish assessment
In terms of the ETH ‘tokenomics,’ the merge and the PoS shift could be positive for the price of ETH for several reasons. Firstly, the issuance - the amount of new ETH entering circulation - will drop significantly, with estimates currently around a 90% fall.
Secondly, a minimum fee must be paid to the network to execute transactions. This fee will get ‘burned’ during the process, removing it from circulation. The burning of ETH from circulation will leave less of the crypto asset circulating in the system over time.
Thirdly, holders can begin staking – a form of passive reward for helping to secure the network. Again, this will take ETH out of the circulating supply.
In short, ETH could go deflationary. Less supply and more demand for ETH could cause the price to rise post-merge as the scarcity begins to weigh on the token’s circulation, akin to when central banks raise interest rates and slow processes such as quantitative easing.
Bearish assessment
CoinShares recently released its weekly fund flows report, which showed a net outflow of ETH among institutional investors – albeit relatively small. This could signal nervousness about technical issues that could arise with the merge.
Similarly, ETH net deposits on exchanges are currently higher compared to the seven-day average, according to CryptoQuant. Higher deposits typically correlate with rising selling pressure.
These moves could signal caution on the part of investors or changing investment cases ahead of the PoS shift. It is impossible to gauge the real reasons behind decision making though, so performance post-merge will illustrate whether this was a blip or a part of a trend.
Whether the price of ETH will rise or fall on completion of the merge, only time will tell. What is important though from a network development point of view is that a significant milestone, years in the making, will finally be achieved.
Simon Peters is Crypto Market Analyst at eToro.