December 3, 2023

The upcoming Ethereum Merge is expected to take place a week from now it is time to explain what it is and explore some of the aftershocks. The highly anticipated merge is estimated to make Ethereum network 99 percent more energy efficient. 

The network upgrade will move Ethereum from proof of work to proof of stake technology. This means that instead of maintaining the network through energy-intensive mining it will rely on trusted node validators to verify transactions. 

Although the proof of stake consensus has existed for a number of years, Ethereum is one of the largest block producers in the world and has never used this mechanism.

With major Web3 organisations now coming out in support of the Ethereum merge to proof-of-stake what are the concerns, questions, and opinions of some of the leading Defi projects. 

New opportunities for the community

Simon Furlong, Co-founder of Geode Finance expresses positive sentiments about the merge, “Moving to PoS provides new opportunities for the Ethereum community and beyond. New industries such as liquid staking have emerged off the back of this transition, allowing anyone to participate and earn income from validating the Ethereum network. Even institutional players are looking at staking as a potential investment opportunity.”

Increased control for major ETH holders

As we inch closer to the date of the merge there are still lots of open questions about how the Proof of Stake network will work in practice for Ethereum. Some of these won’t be known until the network has been running. What doesn’t kill us makes us stronger or so the many projects within the Ethereum ecosystem hope. 

The Ethereum merge will initially cause disruption to many of the existing Ethereum clients. Taariq Lewis, Founder of VolumeFi explains that the major ETH holders will have more control over the network. 

“Ethereum will become more centralized. Let’s be clear. The largest holders of ETH will now control the network. Expect Coinbase to be a massive winner given its current holdings of ETH. You could say that Ethereum will be a Coinbase network and it will be interesting to see how that dynamic plays out. Users have little incentive to move their ETH off of Coinbase in the name of decentralization. Centralization of Ethereum is the future.”

“Like all software, the merge will cause disruption and failure for many clients that have not yet upgraded their software. Expect this to disrupt many applications that were not ready, but it won’t kill the network. It will cause excitement and some news buzz that will make for great popcorn eating,” says Lewis.

Large removal of ETH supply 

As per the official Ethereum website “After The Merge, only the 1,600 ETH per day will remain, dropping total new ETH issuance by 90 percent”. 

0xWailord, a data analyst from Integral explains, 

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“Ethereum issuance will now go to stakers and not miners. This represents a large removal of supply from the market. Miners will no longer receive ETH rewards that they have to sell to finance their operational costs. This means over 10,000 Eth in daily sell pressure could disappear overnight. Instead, the ETH issuance will go to stakers and won’t be available for withdrawal for at least six months.”

For Co-founder of Geode Finance Simon Furlong, this is positive news for the Ethereum community with fewer costs associated with securing the network. Referring to the reduction in issuance he says,

“This instantly lowers ETH sell pressure. The lower issuance combined with EIP-1559, an Ethereum Improvement Proposal that went live on mainnet just over 1 year ago (5th August 2021) which causes a percentage of each transaction fee to be burnt, means that there is a high possibility that Ethereum’s supply will become deflationary.”

Ethereum transaction fees are already at lows for the year. 

“If gas prices remain this low, the ETH burned per day won’t surpass issuance and ETH will remain inflationary. However, around 15-20 ETH burned should be more than ETH issued and it becomes deflationary. There could be any number of catalysts for this, but crypto continues to develop products and attract users. As more users come in either through DeFi or other avenues like NFTs, usage of blockspace increases, which pushes burned ETH higher. I think L2s will also contribute, as they store more data on chain from larger user volumes,” explains 0xWailord from Integral.

The impact on current blockchain miners

As miners seek to save their current operations major crypto exchanges such as Coinbase, Binance, OKX and others have committed support for a potential PoW token. Furlong believes that there is a chance that miners will fork and continue the PoW chain. 

“They have invested a large amount of money into their infrastructure – I think it will be difficult for them to just shut up shop. The problem is there aren’t really any PoW blockchains left, other than Bitcoin and that’s a very saturated market,” says Furlong. 

However Furlong also notes the risks with an Ethereum PoW fork stating, 

 “There are many issues with an Ethereum PoW fork and it should be treated with extreme caution. Asset-backed stablecoins such as USDC will not be copied over to Ethereum PoW – their reserves will not double and they cannot de-peg 50% by supporting both chains. Defi loans that use USDC and similar assets as collateral will suddenly have nothing backing them. Even liquid staking products like stETH will be worthless under PoW as the assets backing them are staked on the beacon chain, which is the Ethereum PoS chain.” 

In the past, blockchain technology has been criticised for its negative environmental impact. Supporters of the Ethereum merge hope that it will help shift the narrative away from the environment to allow for further innovation in the future. 

The merge, alongside other upgrades across the various blockchain ecosystems, paves the way for more movement into mainstream adoption.

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