skip to Main Content
Get your free newsletter: Actionable insight each morning for self-directed investors. 
Home » News » Crypto » The Ethereum Merge: five things traders need to know

The Ethereum Merge: five things traders need to know

*

The Ethereum Merge is the culmination of years of coordination by the Ethereum Core Developers, client teams and researchers. It effectively reshapes the world’s largest programmable blockchain. It sees the Ethereum network switching from the energy-intensive Proof of Work consensus mechanism to the Proof of Stake mechanism. The Merge will see these two layers merging, ending PoW and transitioning everything to PoS.

#1: The Merge will make ETH into a unique asset

Ethereum is likely to acquire characteristics that resemble traditional forms of value – e.g. value accrual via cash flows. In the PoS mechanism referred to above, which eliminates ETH mining, the value of the network will accrue to both validators and token holders. A validator will earn rewards for validating transactions and adding them to blocks, and token holders will earn through the burning mechanism. The average percentage of fees burned for ETH is estimated at 85% – even the most attractive equity dividend pay outs are below 50%. ETH will begin to resemble a fantastic dividend earner. The burning mechanism give Ethereum a monetary premium, bolstering its role as a collateral asset.

#2: The Merge will make the ETH network more cost effective to use

The Merge sets the stage for further upgrades that will lower the expense of using the network – example, sharding, the act of splitting a network’s data into smaller portions to ensure easy storage of data and avoid network congestion. Fast transaction processing will bring down costs and also reduce risk, as users will not need to use bridging tactics, moving assets between blockchains. The plan is that users can stay inside the ETH moat for all their DeFi requirements.

#3: The Merge will make the Ethereum network more secure

There has been plenty of publicity about high profile network hacks over the last 12 months; the Merge makes the Ethereum network more secure by simply making it more expensive to attack. According to some estimates, hacking a blockchain running on the PoS mechanism will cost between 10-20x more than one using PoW. Democratising network participation will also help here, by making sure single node validators get the same chance at earning rewards as, say a whale. It will be much tougher for a bad actor to acquire the 51% tokens they will need to launch an attack (estimated at over USD 11 billion post-Merge).

#4: The Merge will bring more institutional players into Ethereum

The Merge is likely to pave the way for more institutional participation in ETH. While some early adopters, like hedge funds, are already active in the market, ETH is likely to be more attractive for bigger players post-Merge. The prospects of earning yields in the range of 5.5-13.2% via staking is going to be attractive for funds seeking real yields. The deflationary supply of ETH will diminish the risk of Ethereum dropping to zero. On-chain applications and L2 solutions will also likely leverage improved security to produce another explosion of applications deployed onto the network. For traders it could also mean more efficient pricing and liquidity. Trading firms are likely to see short term gains with high volume trades and position adjustments.

#5: The Merge will radically reduce Ethereum’s carbon footprint

One of the big criticisms of Bitcoin has been the vast amount of energy consumed by the network – the equivalent of a small country like the Netherlands. PoS will mean a 99.95% decrease in energy consumption due to the removal of PoW physical GPU node processors and their replacement with lightweight servers running validator clients. This is likely to make Ethereum look more attractive when compared to other L1 chains.

Related

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stocks in Focus

Here are some of the smaller companies we are following most closely. They all represent significant growth stories in our view. Our in-depth reports go into more detail on why we like them.

Get your free daily newsletter: 

Thanks to our Partners

Our partners are established, regulated businesses and we are grateful for their support.

Pepperstone
FP Markets
IG
Spreadex
WisdomTree
ActivTrades
Back To Top