Key Takeaways
- Ethereum is about to complete its transition from Proof-of-Work to Proof-of-Stake, otherwise known as “the Merge.”
- The Merge will bring major changes to Ethereum, including a 99.95% reduction in energy consumption and a 90% cut in ETH issuance.
- It’s also likely to have major implications for the broader cryptocurrency ecosystem.
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The Ethereum Merge is one of the most important events in crypto history. Here are our team’s predictions on how the update will impact the cryptocurrency ecosystem.
Ethereum Prepares to Merge
It’s almost here: Ethereum’s big day is approaching fast and the entire cryptocurrency community is awaiting “the Merge” with baited breath. The number two blockchain’s long-awaited upgrade from Proof-of-Work to Proof-of-Stake has generated a huge buzz over the past few months, and that’s in spite of a grueling bear market that’s seen ETH and other crypto assets plummet from their highs.
A big question Ethereum enthusiasts are asking is whether the Merge will serve as a catalyst for ETH to rally, and there are good reasons to believe in the bullish thesis (ETH is about to see a 90% issuance cut and will potentially go deflationary, something never seen before in any major crypto asset). Just as importantly, the Merge will make Ethereum 99.95% more energy efficient, potentially giving the network the green credentials it needs for mass adoption.
Some have predicted that Proof-of-Stake and ETH’s yield generation properties will attract a flurry of institutional investors, but it’s worth remembering that the Merge is launching at a challenging time for the wider space. Even if ETH benefits from the transition, against the backdrop of soaring inflation, interest rate hikes, and waning interest in digital assets as a whole, it may struggle to reach new highs for some time yet.
Other valid concerns include the question of whether Ethereum will uphold its censorship resistance after the event, a subject that’s become a hot topic since the U.S. Treasury Department sanctioned the privacy protocol Tornado Cash. Another big question to come out of the Merge is whether the “EthereumPOW” plans to preserve a Proof-of-Work network will succeed (our take is that it won’t). Whatever happens with the landmark upgrade, the next few hours are likely to be very eventful. To help you get prepared, our editorial and research teams shared a few predictions on what could come next.
Ant Smith (SIMETRI Research Analyst)
It’s great that the Merge is finally here. The Proof-of-Work consensus mechanism that underpins Ethereum, Bitcoin, and other networks has given the industry a bad name due to its high energy consumption, not least over the past year. Ethereum is now free of that and can begin to move forward.
To the advantage of those holding ETH, environmental pressure will build for Bitcoin. Expect campaigners to refocus their sights and turn up the heat. A forced move away from Proof-of-Work consensus could mean the top crypto network faces an existential crisis. Proof-of-Work is key to Bitcoin’s security model, which is a large part of what makes it valuable. If Bitcoin has to ditch Proof-of-Work, it won’t be pretty and the fallout will be wide-reaching.
NFTs, too, have a significant challenge ahead. To my mind, this is one of the most important developments that could come out of the Merge. The versatile and ever-adaptable technology is key to unlocking the full potential of Web3, crypto, and blockchain. But due to the misconception that all NFTs go hand-in-hand with Proof-of-Work energy consumption, they are widely hated by the public. Ironically, the people who hate them would gain so much from the benefits they offer.
These won’t be the only bridges that need crossing. Once the Merge parties are over, the industry needs to have an honest look at the remaining barriers to wider adoption and fix them. The Merge may be great for Ethereum, but it won’t solve the rest of the industry’s problems.
Chris Williams (Crypto Briefing Editor-in-Chief)
The Merge will make the world’s most used blockchain significantly more energy efficient and cause an ETH supply crunch—what’s not to love, right? While I think it’s true that we could see a temporary “sell the news” scenario akin to other events like Coinbase hitting the Nasdaq, it’s difficult to see how a major crypto asset potentially moving deflationary won’t be bullish.
Now I realize that there are devout Bitcoiners who argue that Vitalik is a CEO and Proof-of-Stake leads to centralization, but I would challenge them by asking how many regular people can afford a mining rig (and if Bitcoin is so decentralized, why do you have to go to a custodian to do anything with it? We haven’t forgotten that some of the top crypto’s most prominent evangelists were shilling BlockFi right up until its collapse this summer). I also don’t buy that Proof-of-Stake will make Ethereum more prone to censorship, even if the concerns are somewhat valid.
The Merge will expose Bitcoin’s heavy energy consumption (and that might lead to problems), but it’s going to have an impact on every other major crypto network too. In the past, the Layer 1 space has been fiercely competitive—and Ethereum was starting to lose its ground to newer projects like Solana. But if all goes smoothly, it’s going to be positive for the whole crypto ecosystem. The top smart contract network is about to introduce several major improvements, and that will help every blockchain that’s hoping to hit mass adoption with the same technology. The entire industry should be rooting for its success.
With all that said, and I say this as someone with high hopes for ETH to soar, don’t expect “five ducking digits” to happen overnight. The market takes time to digest events like this, and I haven’t even got to the ongoing winter or J. Powell and the Fed’s tightening policy yet. Similarly, I don’t see a “flippening” playing out anytime soon, but then this is a space where anything can happen (did you see 3AC’s blow-up or dog coin mania coming? Me neither).
For now, everyone’s talking about the short-term trading opportunity and that questionable EthereumPOW fork plan, but I’d encourage readers to zoom out: just like crypto itself, the Merge is a long-term play. Don’t miss the forest for the trees.
Jacob Oliver (Crypto Briefing U.S. Editor)
In the short term, I’m unsure what to expect from Ethereum following the Merge—I had anticipated an increase in ETH’s performance in the lead-up, but the market data has not borne that out. So, while I’m hesitant to place any short-term bets, here’s what I do think: Ethereum is not going anywhere anytime soon.
Ethereum—in my mind, anyway—is the blockchain of blockchains. Second only to Bitcoin in market cap, it is the largest Turing-complete blockchain in operation and has been for some time. It has been at the forefront of every notable iteration of blockchain use cases, from DeFi to NFTs to gaming. Assuming the Merge goes smoothly (and by all indications, it should), it will only strengthen Ethereum’s reputation as a nimble network that is more than capable of adapting itself.
Long term, I see nothing but benefit to holding an ETH bag (not financial advice; I’m only speaking for myself). Combine its steady adoption with the expected reduction in ETH issuance and you have a pretty decent recipe for long-term value accrual. That said, I think ETH’s real value is going to be driven more by Ethereum’s reputation as the blockchain that developers want to build on. By demonstrating that it can adapt to key concerns surrounding blockchain technology (for example, the importance of its anticipated energy reduction cannot be overstated from a narrative standpoint), Ethereum telegraphs to the world that it there is no need to build a competitor when the established decentralized option is already there.
From that perspective, I won’t be surprised to see $10,000 ETH in my lifetime; I just don’t know how long we’ll have to wait.
Nivesh Rustgi (SIMETRI Research Analyst)
Many crypto commentators have raised concerns that Ethereum’s move to Proof-of-Stake could lead to increased centralization. While Proof-of-Work promotes the distribution of assets as miners have to sell them to cover running costs, there’s an argument that Proof-of-Stake promotes hoarding. There’s no incentive for validators to sell their ETH post-Merge, which may lead to centralization issues over the long run.
Nevertheless, even if Ethereum loses its decentralization, the industry has become pretty tolerant to centralization (look at Solana and BNB Chain). Plus, running a non-validator node will remain cheap even after the Merge, just as it is with Bitcoin.
Moreover, the shift provides an opportunity to look at liquid staking protocols such as Lido, Rocket Pool, Stakewise, and Swell Network. After the Merge, more investors will be looking to stake their ETH, and liquid staking provides a nice opportunity to earn extra yield through DeFi. It’s worth keeping an eye on this space as it grows.
Overall, while the centralization concerns are valid, I’d urge readers to be careful not to fall into the “Bitcoin maxi” trap. That being said, I’m obviously bullish on the reduction in ETH issuance and will look to buy dips over the next year.
Stefan Stankovic (SIMETRI Research Analyst)
I have a strong opinion on the “the market is forward-looking” and “everything’s priced in” thesis. Almost nothing is ever priced in, and markets are—on a longer time horizon—as forward-looking as captains steering ships by looking at the rearview mirror. These sayings were brought to you by the same people who gave you the ridiculous “Efficient Market Hypothesis.” No one ever made money listening to them.
The Merge is not priced in, just like the last Bitcoin halving, the Coronavirus crisis, the money printing, and the Russo-Ukrainian War were not priced in. With that in mind, Ethereum does not exist in a vacuum and will still have to endure horrid global macroeconomic conditions after the Merge.
The supposedly “forward-looking” markets often forget that the “don’t fight the Fed” mantra applies both ways: shorting when the money printer goes brrr is just as ill-advised as longing when the money shredder goes bzzz. Therefore, I don’t think the Merge alone will be enough to kick off the next bull market, but it will turn ETH into one of the highest EV trades once the next (inevitable) round of quantitative easing kicks in.
During quantitative tightening, Ethereum is just another asset sitting on the far right-hand side of the risk curve. But eventually it will become an ESG-friendly, yield-bearing, deflationary asset representing a stake in the world’s fastest-growing decentralized blockchain network during quantitative easing. Institutions will salivate over it, and the pump will be glorious.
Tim Craig (Crypto Briefing Assistant Editor)
I think it’s tough to argue that a successful Ethereum Merge won’t be a huge bullish catalyst. Aside from the 99.95% energy reduction boosting the network’s green credentials and potentially attracting new investment from ESG-conscious funds, the move away from Proof-of-Work will drastically reduce ETH emissions. After the Merge, whenever the base transaction fee exceeds an average of 15 gwei (not a tall order by any stretch of the imagination), ETH will become deflationary.
With that said, I don’t expect ETH to shoot up in the short-term after the Merge—especially with such a dismal macroeconomic backdrop. I think previous Bitcoin halvings should act as a good heuristic for what we can expect since the primary price catalyst for both events is a significant reduction in supply.
As with the 2016 halving, there’s a good chance that ETH will experience a temporary selloff after the Merge as traders reposition themselves. However, once the supply reduction eventually kicks in (anywhere between two to four months should be sufficient), I think we’ll see ETH start to creep higher. As long as network usage (and by proxy, ETH demand) remains high, the math dictates that the price of ETH should rise.
While that might sound overly bullish or provoke questions like, “why hasn’t this been priced in,” it’s important to remember that a lot could still go wrong. Setting aside possible technical setbacks with the Merge itself, Europe’s energy crisis, a global recession, or some other unknown factor could temper demand for Ethereum blockspace, and thus ETH demand. But if nothing drastically decreases network usage, I have a hard time seeing ETH trading lower than it is today a year from now.
Tom Carreras (Crypto Briefing Reporter)
It’s difficult to say how the Merge will impact Ethereum and the crypto market in the short term. We’ve already seen ETH struggle to reclaim its August highs, and recent market activity is hinting that the Merge could be a “sell the news” event (is it normal for an asset to suffer a sharp price drop in the hours leading up to a major event like this?) But in the long term, the 90% decrease in ETH issuance obviously seems bullish. Ethereum’s staking system is also likely to attract new investors looking for juicy yields.
Many people have used the Merge to compare Proof-of-Stake and Proof-of-Work. Some Ethereum community members have suggested that Ethereum should follow in its footsteps, if only to reduce the blockchain’s energy consumption. I don’t think that’s realistic, or even necessary: in fact, I believe it’s quite healthy for the top two cryptocurrencies to sport different consensus mechanisms. If we want the crypto space to truly be decentralized, it seems beneficial for its biggest projects to use distinctive technologies.
But for me, the most important aspect of the Merge is that it will help Ethereum prepare to scale up. Ethereum’s high fees, bottlenecks, and congestion issues were exposed during the 2021 bull run, leading to the rise of other smart contract networks like Solana and Avalanche. While I doubt these newer projects will disappear, I think Ethereum’s upcoming scaling solutions will take a significant portion of their market share.
Disclosure: At the time of writing, some authors of this piece held ETH, BTC, SOL, and several other fungible and non-fungible cryptocurrencies.
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