It’s time for the “merger”.
The system-wide upgrade of the Ethereum blockchain, which has been going on for years, is set to roll out on Wednesday, marking one of the crypto industry’s most historic events to date. Prior to the revamp, investors jumped into ether, the native token of ethereum.
Over the past three months, ether has jumped 32%, significantly outperforming bitcoin, which has fallen 9%. While analysts say the anticipation of the merger helped push the price up, some experts see the real benefit coming after the merger.
“We believe that post-merger, Ethereum’s bull case is going to be much stronger for a number of reasons,” said Katie Talati, head of research at asset management firm Arca. The main factor, she says, is that the supply will drop, creating a shortage.
The hallmark of Ethereum’s big makeover is that it will take far less energy to verify transactions, which has long been a major issue for the crypto industry. The proof-of-stake model, which replaces the proof-of-work model, forces validators on the network to stake their ether tokens, or “stake” them, essentially taking them out of circulation for an extended period of time, to secure the network.
“For probably six to 12 months – there are no set guidelines from the developers on Ethereum yet – you won’t be able to withdraw your Ethereum once you stake it to validate the network,” Talati said. .
Reducing energy consumption by more than 99% will also go a long way to lowering the barrier to entry for institutional investors, who are struggling with the optics of contributing to the climate crisis. The White House released a report last week warning that proof-of-work mining operations could hamper efforts to mitigate climate change.
Still, some skepticism has crept into the market.
Ether is down around 6% in the past 24 hours following the latest official US inflation reading, which punished risky assets on Tuesday and led tech stocks to their worst day ever. more than two years.
Whether to buy now or wait and see how the merger unfolds depends on the time horizon of the investor to hold the coins, said Jaydeep Korde, CEO of Ethereum infrastructure builder Launchnodes. . Korde tells CNBC that traders who plan to hold their stake for the long term — on the order of two to three years — should be in good shape.
“If you look at the shorter term in terms of trading, I think it’s a lot more volatile,” Korde said. He cited global economic conditions, geopolitics and inflation as playing into the immediate risk.
“Ethereum will experience the challenges of this volatility, like all other asset classes,” Korde said.
Juicing institutional interest
With the upgrade, Ethereum will not become faster, cheaper, or more scalable. One developer even told CNBC that if the user experience was the same, that would be a sign that the merger was a complete success.
The real draw for investors is the reduction in energy consumption, especially as bitcoin mining continues to face a decline in its growing energy consumption.
Since its inception nearly a decade ago, ether – like bitcoin – has been mined through a proof-of-work model. It involves complex mathematical equations that a huge number of machines strive to solve, and that uses an abundance of energy.
The new proof-of-stake method forces users to leverage their existing ether cache as a way to verify transactions and secure the network.
According to an estimate on the Ethereum Foundation blog, the merger will result in at least a 99.95% reduction in total energy consumption.
Bank of America said in a Sept. 9 note that the important post-merger energy reduction “may allow some institutional investors to purchase the token that was previously prohibited from purchasing tokens running on blockchains by leveraging proof-of-work consensus mechanisms ( PoW)”.
Institutional money is essential to the maturation of digital assets. Research firm Fundstrat wrote in a note that a successful merger would cement Ethereum as the “first blockchain network.”
Ethereum has distinguished itself from rival chains, as an operating system for the industry. The vast majority of apps are built on Ethereum, and the merger is the first in a series of planned upgrades that should ultimately result in faster and cheaper transactions.
The cryptocurrency’s reduced supply, which some investors believe could be a boon for the price, is the result of a new verification model that replaces miners with “validators”.
The rewards for validators are much smaller than those that went to proof-of-work miners, meaning less ether will be minted as a result of this upgrade.
Additionally, under an upgrade that went into effect last August, the network “burns” or permanently destroys some of the digital currency that would otherwise be recycled and put back into circulation.
Talati says people can look back three to six months and say, “That was the inflection point and the turning point for Ethereum.”
The bitcoin network experiences a similar type of supply reduction roughly every four years.
Bitcoin’s production decreases exponentially over time, thanks to something called “halving” or “halving”, when the size of the price for miners is halved. The halving was baked into bitcoin’s code by its pseudonymous founder, Satoshi Nakamoto, as a way to avoid cryptocurrency inflation.
“Bitcoin can no longer issue shares,” Fundstrat’s Tom Lee previously told CNBC. “It doesn’t do stock splits or dividends, so the only way to increase bitcoin’s network value is if the unit price goes up.”
There have been three bitcoin halvings to date. The last one, in May 2020, preceded a steep rally that continued through the end of 2021, before the onset of the crypto “winter”.
For ether, the Ultrasound Money website simulated upcoming supply changes. In his model, annual issuance drops from 5.5 million tokens to 600,000 and estimates supply growth drops from 4.1% to 0.1%.
Regardless of the shifting dynamics accompanying the merger, the crypto market is likely to still be driven in part by a heavy dose of pure speculation and events that have nothing to do with token or network fundamentals. of blockchain.
This year’s strong selloff – ether is down 56% even after the recent rally – is tied to rising interest rates and the Federal Reserve’s efforts to rein in inflation.
Investors have shunned risky assets, even those that are meant to act as inflation hedges, so the merger may not immediately change investor sentiment.
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