July 11, 2022
After years of waiting, Ethereum will take its first big step into the future this week with The Merge. The long-awaited upgrade to the world’s second most valuable blockchain will take effect on or around Sept. 15, depending on how quickly the chain moves.
The first step of The Merge, the Beacon Chain, went live in December 2020. Since then, Ethereum developers have been hard at work on preparing Ethereum (and its billions of dollars worth of value) to a new and more sustainable system to verify transactions.
The immediate effects of The Merge?
Well, many won’t be obvious if you’re an average HODLer — transactions will still be slower than competing networks and Ethereum users will probably still pay hefty transaction fees. However, with The Merge, Ethereum will finally leave behind its exploitative past of GPU mining in favor of a more energy-efficient method called Proof-of-Stake.
According to Digiconomist, the Ethereum network in its current GPU mining-centric way is alleged to use 83 Terrawatt-Hours of energy per year, which is comparable to the power consumption and carbon footprint of Finland. After The Merge, and Ethereum’s pivot to Proof-of-Stake, its energy usage will fall by 99.95% according to research published by the Ethereum foundation.
That lower energy consumption will be accomplished by replacing GPUs with staking. This also means that the five million Ethereum mined per year by crypto miners, which is worth roughly $8 billion in revenue as of this writing, will no longer be up for grabs. Instead, roughly a million ETH will be paid in rewards to stakers, who volunteer their coins to the network and use computer software to accurately confirm transactions and secure the network.
In the near-term, this means that Ethereum HODLers staking their Ethereum might see a small boost to the yield from Proof-of-Stake rewards after The Merge — and even if the rewards are just 4%, that means staked Ethereum will double every 17 years.
Speaking of long-term, The Merge will bring about a number of other things which will develop in due time. Most important among them are a change in Ethereum’s underlying monetary policy — it will become deflationary, which means less Ethereum will be in circulation. It should, in theory, result in a higher value per token as supply contracts.
And, in due time, more expansions will aim to make Ethereum more usable and scalable. The Merge sets the stage for a number of updates expected to take place throughout 2023 or 2024 called Sharding, which will help expand Ethereum’s compute and storage capacity. The Ethereum Foundation says that these subsequent upgrades will help Ethereum go from confirming 15 transactions per second to more than 100,000 transactions per second.
Ultimately, it all hinges on the success of The Merge — and price action has largely revolved around anticipation for the upgrade. Ethereum was up 4.6% this week to $1,705, but well below the price it notched earlier this year.
We’ll report any developments as they arise.