Ethereum: how should investors prepare for the Merge?
This upgrade will change the way the network is secure, its energy consumption, and the Ethereum tokenomics. Staking will now play an essential role. So how should investors prepare for future events to make the most of them?
Back to the Merge process
A series of upgrades are underway on the Ethereum blockchain to move it from a Proof of Work (PoW) consensus mechanism to a Proof of Stake (PoS) consensus mechanism. To achieve this, the steps are as follows:
- The creation and launch of the Beacon Chain took place on December 1, 2020. The Beacon Chain is what introduces the PoS on Ethereum. For this reason, it is called the “consensus layer”.
- Replace the consensus mechanism of the current PoW with the PoS chain (the date is at the time of September 19.) The existing Mainnet will then act as the “runtime layer”, as the current PoW that works, will be replaced by the Beacon chain
The consensus layer will deal with network security. The execution layer is where smart contracts are executed and where transactions are created. As the upgrade will connect these two channels to form one, the name of this event has been changed from ETH 2.0 to “The Merge”, which is the French merge.
What are the consequences of the Merge?
As the Beacon Chain has been in operation since December 2020, much of ETH’s offer is already stakée on the latter, receiving rewards for the operation of the network. Currently, there is over 12 million ETH on the Beacon Chain Smart Contract.
This represents almost 10% of ETH’s current offer. In addition, this ETH is blocked in the long term, because there is no date regarding the possible date to take its Ethers as part of the PoS ETH chain.
After switching to the PoS, there will no longer be any mining rewards. As a result, ETH emissions will drop significantly. More than 10% of the supply is already locked in staking. According to Etherscan, a total of 13,347 ETH was added to the current offer on July 21. If we remove the block rewards (mining) and leave only the rewards from the staking, the daily net result would be negative. This means that more ETH would be burned as fees than rewarded, which would decrease ETH’s total supply.
How to enjoy the Merge?
None of the following constitutes financial advice, and investors must always be extremely cautious when trading cryptocurrencies. By analyzing the data presented, there are a few investment strategies that an investor could adopt:
Buy from ETH
With the publication of an almost definitive date for «The Merge» there is a short period where the offer of ETH will continue to increase. After that, it will become “deflationary”. If the investor believes that the ETH will have a relevant place in crypto markets over the long term and that its demand will increase, the price of the ETH will increase mechanically.
We have already seen a similar price action occur, but there is still room for more upside, as the incentive to increase the amount of ETH staked (and out of circulation) will increase over time.
Buy liquid ETH
As the staking locked ETH on the Beacon Chain are blocked for an unknown period, and the minimum amount needed to be sent is relatively high (at least 32 ETH), pools have been created to help users take their Ethers. Some of these pools then created an ERC-721 token as a negotiable receipt from this stake ETH.
Examples are the stETH token of the Lido protocol and the rest of the Rocket Pool. When the user accesses the platform to take the ETH, his token is minted in a ratio of 1:1 compared to the ETH.
The purchase of the Stake version would allow the investor to benefit from an additional 2-3% return and the accumulated interest that comes with it if he is willing to wait for the launch of the unstacking function after the implementation of the PoS on the Ethereum blockchain. There is no deadline for the deployment of this functionality (unlocking), but the approximate schedule is 6 to 12 months after the Merge.
In the long term, the price of the ETH could thus increase with the Merge - if Ethereum retains its leading position and dominates the crypto market and the blockchain industry continues to develop - as the token will move from an inflationary to a deflationary issue. With supply decreasing and demand remaining the same (and most likely increasing), an increase in the price of Ethereum is the logical next step.
To increase earnings, buying a liquid version of the ETH can bring additional benefits if the investor can wait longer, as the liquid version often has a discount compared to the spot price of the ETH.
Here are some keys to better take advantage of the upcoming Merge, keeping in mind the risks associated with such an investment. However, many observers agree that Ethereum is well positioned to remain one of the leaders in the crypto market over the long term.
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