As the dust settles on “the merge” – the major upgrade to the Ethereum blockchain – the time has come to take a look at how it unfolded and what the initial results were.
Successful execution
From a technical perspective, the biggest upgrade to the Ethereum protocol to date has been an incredible achievement. The culmination of countless hours of work by hundreds of people over several years, this project experienced several delays throughout its schedule.
The skeptics – and there were many – confidently declared that this was simply not possible. Attempting such a thing on a network that didn't have much value wouldn't be that remarkable. However, to do so on a live network holding a valuation of over $160 billion is remarkable. Some had compared it to having to replace a car's engine while the car is still moving.
The skeptics are not the only ones who were surprised by the fluidity of the result. In a recent interviewVitalik Buterin, co-founder of Ethereum, said: “The whole transition went even smoother than almost everyone – including myself – expected.”
Business as usual
As is usually the case in crypto, there has been too much hype surrounding the merger. This hype has resulted in the development of misconceptions in many people's minds regarding the end result.
Marketing 101 with Chipotle’s “Proof of steak”: IMG SRC
The successful execution of this project certainly builds confidence, but it is only the first in a series of planned upgrades needed for Ethereum to realize its potential. The merger did not resolve network congestion or high network fees.
As crypto investor and analyst Miles Deutscher reminded us a few weeks before the merger, this is the first of five major upgrades to the protocol en route to an Ethereum scalability level of 100,000 transactions per second.
Next comes the “push,” followed by the “edge,” “purge,” and “insanity.” This next phase is planned for 2023, but it should be kept in mind that previous experience demonstrates that delays are likely.
At an Ethereum conference in Paris in July, Buterin also acknowledged that Ethereum would remain a work in progress after the merger. He estimated at the time that the project would be 55% complete once the merger was completed.
Buy the rumor, sell the news!
Along with the hype surrounding mergers, from a markets perspective it was essentially a case of “buy the rumor, sell the information.” Starting in June, Ethereum continued to see steady unit price gains. The price peaked a few days before the merger was implemented, before declining over the following days.
“Sell the News” events are nothing new in crypto. That said, the merger might go down in history as one of the more classic examples, given the years-long lead time before the upgrade and the level of anticipation associated with it.
Show me the (institutional) money!
It's practically a cliché in crypto at this point, but the statement that “institutions are coming” was long anticipated and never materialized to any substantial degree.
Prior to the merger, many in the Ethereum community had raised the likelihood of an immediate bailout by ETH institutions post-merger, on the grounds that they would be attracted by the yield on offer. With the move to proof of stake, it is possible to stake Ethereum tokens for a continuous period in order to secure the network. As a reward for staking, users receive a yield of around 5%.
This did not happen in the first two weeks after the merger. The macroeconomic environment has been challenging ahead of the protocol upgrade. The Dow Jones Index had its worst day since the pandemic panic of 2020. Following the rise, we saw continued fear in the stock markets and, on top of that, the foreign exchange and bond markets were plunged into chaos.
Additionally, the Ethereum community may have forgotten that institutions evolve slowly, carefully, and conservatively. Along with unfavorable market conditions, regulators' statements immediately after the merger may have scared them.
Regulatory concerns
Just a coincidence or deliberately timed? The same day Ethereum moved to a proof-of-stake based consensus mechanism, comments by SEC Chairman Gary Gensler appeared in the Wall Street Journal that seemed relevant to Ethereum (although he said he wasn't referring to any specific digital asset).
He claimed that any crypto involving staking (which Ethereum now does after the merger) could be considered a security on the grounds that investors expected a return based on the work of a third party.
Any reference to the Ethereum Foundation, the lead developer of Ethereum. The team or co-founder Vitalik Buterin being hauled into court for offering unregistered securities (as happened with Ripple) would send any potential institutional investors running for the hills.
Following actions taken by the SEC against certain crypto projects over the past two years, many project initiators have attempted to distance themselves from crypto projects. But the question is, how can the guardians of the Ethereum project distance themselves from the project when Buterin estimates it is only 55% complete at this point?
This issue has many people wondering if Satoshi's traceless disappearance from Bitcoin means he had securities law on his mind, making him a genius, or if it's just a coincidence.
Centralization problem
Ethereum's move to proof-of-stake has also raised concerns in terms of centralization of staking. Rather than staking directly, users can delegate their coins to services like Coinbase, Lido Finance, and Kraken. Of the first 1,000 blocks validated after the merge, 420 of them were validated by Coinbase and Lido Finance.
With the Tornado Cash saga fresh in the minds of those in the crypto space, this concern may not be misplaced. Former Ethereum co-founder Charles Hoskinson, who later founded rival project Cardano, drew attention to the fact that 42% of blocks are held by two centralized entities, locked indefinitely in proof of stake.
ETH Staking Breakdown: IMG SRC
Critics say the merger steered Ethereum toward greater efficiency at the expense of decentralization. On the other hand, defenders of the project argue that the proof-of-work system it left behind was more centralized due to the centralizing effect of the economy of scale associated with mining.
Ethereum sprouts green references
Alongside Bitcoin, Ethereum has attracted widespread criticism for its massive energy consumption. Grid power consumption is now minimal, having been reduced by 99%. Following the implementation of the merger on September 15, global electricity consumption was reduced by 0.2% in one fell swoop.
Non-fungible tokens (NFTs) have reached new levels of popularity in 2021. This development has brought many new users into the digital asset space who, until then, had shown little interest in cryptocurrency. However, many potential users rejected the idea on the grounds that Ethereum-based NFTs had an outsized carbon footprint. With the merger, this objection disappears.
Some have argued that this development alone could lead to a new wave of adoption.
Improved monetary policy
The merger brought a number of supply shocks to Ethereum that could prove favorable for token holders. On a mining-based system, miners would sell a few billion dollars' worth of Ethereum each month to cover operating costs. This commercial pressure disappeared with the move to proof of stake.
At the time of writing, staking itself is removing 12% of Ethereum token volume from the market. There is every reason to believe that the proportion of ETH staked will increase in the future, further decreasing the circulating supply.
As the Ethereum network sees more usage, more ETH will be burned in transaction fees, once again reducing the circulating supply. Overall ETH issuance has been reduced, as shown in the chart below.
All of these changes point to tokenomics that could lead Ethereum to become deflationary. All of this contributes to the digital asset performing better over time, as reduced supply in the face of potentially increasing demand will put upward pressure on the price of the Ethereum token.
Negligible inflation rate on post-merger Ethereum: IMG SRC
Positive outlook
While we have identified some issues in terms of regulatory issues and possible centralization, as long as the project can navigate its way through these issues and continue with its planned development, the outlook for Ethereum following the merger is largely positive. .
Even though institutional investments didn't happen immediately after the merger, that doesn't mean they won't happen as we move forward. Institutions need regulatory clarity. If they get it, there's a good chance that Ethereum will be on their list of assets to gain exposure to.
Investing in accordance with environmental, social and governance (ESG) policy is a major issue for corporate investors. The green transformation of Ethereum will undoubtedly make the project much more attractive to institutions on this basis.
One of the key metrics of any digital asset project is the credibility of the development team. There is still a lot of work to be done, but based on what has been accomplished with the merger, there will be a lot more confidence that the Ethereum project can be grown to a point where it can actually leverage the potential that many believe. is having.