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When Ethereum was initially conceived, co-founder Vitalik Buterin had planned to transfer Ethereum to a proof-of-stake (PoS) system. He knew that if the network gained steam, the proof-of-work (PoW) system would lose practicality. Ethereum has since become one of the largest blockchains in the crypto space, and the need for a PoS system has become apparent. Ths transfer from a PoW to a PoS consensus model (commonly referred to as “The Merge” or “the Ethereum Merge”) may happen very soon. Here is what you need to know about The Merge before it happens.
Why is the Ethereum Merge Important?
The Ethereum Merge is important for several reasons. Specifically, The Merge could have an immediate effect on the narrative and psychology of Ethereum supporters. The PoS system can make it easier and more cost-effective to validate. This change would relieve some of the cost burdens from users who transact. It is also likely to reduce energy consumption by up to 99.95%, according to the Ethereum Organization.
What is the Ethereum Merge?
The Ethereum Merge is a large part of the Ethereum Vision, a series of planned upgrades that are planned to be mostly finished by 2024. These upgrades were previously known as ETH2.0 but were renamed to The Merge. This event is the second of a three-step process of upgrades. The first upgrade added the beacon chain, which is currently a testnet for the Ethereum chain. However, The Merge occurs when the beacon chain becomes the consensus layer for the Ethereum mainnet. All the data on the current Ethereum mainnet will be transferred to the beacon chain, which will become the new mainnet.
How Will the Merge Affect Ethereum and the Crypto Market?
The Merge will have an immediate effect on Ethereum. For starters, Ethereum will now have a PoS consensus, replacing the PoW system and positively affecting the narrative behind Ethereum. These upgrades could also impact the price of ETH. If investors see that these changes are beneficial, then they could buy the token and increase the price. Conversely, it could have a negative impact and the price could go down if the upgrades don’t meet or exceed expectations.
In terms of the overall crypto market, several changes could occur quickly and over time. As Ethereum gas fees began to rise significantly in late 2021, many new blockchains gained popularity for their emphasis on speed and cost. These blockchains, such as Solana and Avalanche, could be negatively impacted if The Merge plays out well for Ethereum. If The Merge is successful, it could eliminate the need for these other blockchains to a certain extent. This could drive the price of ETH up and other blockchains down. The inverse could also be true.
How to Trade the Ethereum Merge
The Merge could essentially have three outcomes — the price of ETH increases, decreases or stays the same.
For the price to increase, The Merge would have to be successful in improving the narratives behind ETH — like the dramatic decrease in energy usage — and building hype for upcoming upgrades. If this happens, then investors could flock to the token and drive up the price.
If there is a technical or another type of mishap with The Merge itself, then many could be hesitant to invest in Ethereum and might sell their positions, lowering the price.
Finally, the price could stay the same. Some believe that the hype and transparency surrounding The Merge mean that the event is likely already priced in. Investors already know what is going to happen on the day of The Merge, so unless something out of the ordinary happens, the price may not change by much. However, even Buterin thinks it's not priced in yet.
The way that you should trade The Merge is reliant on your sentiment towards it. If you think it will be successful and is not already priced in, then you could consider buying it. If you see it going poorly, then you may want to look into staying away.
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When is the Ethereum Merge?
The Ethereum Organization stated that there is a soft deadline of Sept. 19, 2022, for The Merge. However, many speculate that it will happen on Sept. 15, 2022, at 3:00 a.m. UTC based on when the timing of the terminal total difficulty (TTD) reaches a certain level. The Bellatrix update was completed so now the Merge is the next step and is coming extremely soon.
What’s Next for Ethereum?
While Ethereum is hoping to solve some of its issues with The Merge, another large issue still looms. The issue of capacity has more recently arisen in the Ethereum community. The chain is handling so much information that it is having trouble processing it and storing it on the blockchain. This problem will hopefully be handled by a brilliant highly technical process called sharding. The upgrade, planned to happen in 2023, will distribute data storage across the blockchain and lower the amount of data stored on a single node. This extremely technical idea has been difficult to put into practice, so it will take a while for the final implementation to launch.
Sharding will hopefully further increase the security and scalability of Ethereum by spreading the load across multiple blockchain shards.
So, Is Ethereum a Good Investment Right Now?
The Merge is bound to bring large changes to the Ethereum blockchain. However, in terms of investment, these changes could have distinct impacts on the price of the token. If you think that The Merge will provide benefits to Ethereum users that are not already priced in, then it may be worth investing. Conversely, if you think The Merge will cause havoc for the chain or is already priced in, then you may want to stay away from an investment.
A decision to invest in ETH comes down to your personal take on The Merge.
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About Caden Pok
Caden has been involved with crypto since 2018, when he began investing, trading, and mining tokens. He took part in undergraduate research studying cryptoeconomics at the University of Michigan, where he will graduate Phi Beta Kappa with a bachelor’s in economics in 2025. He is experienced with DeFi technology and multiple blockchains, currently investing in Ethereum and Bitcoin.