The Ethereum Merge and What It Means for the Crypto Market

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By Sam Gazeley | 4Q 2022 | IN-6704

The cryptocurrency market has been awaiting a momentous occasion: the Ethereum Merge. Now that it has happened, the crypto industry can take stock and see if the blockchain revolution has been changed for the better.

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What Did the Merge Actually Do?

NEWS


After several postponements, the Ethereum Merge occurred on the morning of September 15, seeking to upgrade the Ethereum blockchain, powering innovations in the crypto ecosystem, such as Non-Fungible Tokens (NFTs), with the potential of increasing crypto prices over the next few years.

Effectively transforming how cryptocurrency exchanges occur on the blockchain, the Merge sought to transition from a proof-of-work model (a competitive nodal network) toward a proof-of-stake model (selective nodal network with priority for those holding more currency). The reduction in competing nodes within the blockchain removes significant amounts of energy inefficiency and provides a more sustainable solution in a market already under heavy scrutiny for its power consumption.

Now with the shift to a proof-of-stake model, mining rewards are no longer issued to miners, which has, so far, driven a 90% decline in ETH issuance annually. The expectation is that when supply and demand economics kick in, this will result in an increase in the price of ETH. However, with typical financial markets unpredictable and volatile during the best of times, this is even more the case when it comes to crypto markets.

Making the Crypto Market Sustainable

IMPACT


It has been estimated that the Ethereum Merge has enabled the Ethereum network to cut its power consumption by around 99%, without loss of performance, in contrast to the proof-of-work model leveraged by the Bitcoin network. This is now viewed as a significant advance in the cryptocurrency market toward aligning blockchain-based transactions with an increasingly eco-conscious industry.

Not only is this a significant leap forward for aligning the crypto sphere with the ecological values of the larger payments market overall, but it will also provide an attractive incentive for proof-of-work applications and miners to leverage clean, renewable energy sources. Such an act would help to draw in much sought-after financing from Environmental, Social, and Governance (ESG)-conscious corporations eager to make green investments.

Furthermore, sustainable crypto-mining would help to bring in the regulatory support required to augment and scale the cryptocurrency market capacity to achieve its full potential in the payments sphere, beyond simply transacting and NFTs, as businesses can more easily and confidently build on top of the Ethereum network without concerns around energy consumption and sustainability regulations.

Implications for the Future

RECOMMENDATIONS


As well as heightened security and better protection against fraudulent activity, the Ethereum Merge has impacted a wide portfolio of tools and services that operate on the Ethereum blockchain. Some of these include Decentralized Finance (DeFi), Decentralized Applications (dApps), and a wide swath of NFTs. Given how present Ethereum is in the market and its considerable share of the crypto market, the Merge is also influencing the wider ecosystem, as it relates to lighting the path for broader crypto industry developments and its associated relationship with climate change.

However, the Merge is not the end of the road for Ethereum, as there are several further stages to take place, referred to as “the Surge, the Verge, the Purge, and the Splurge,” with the overall goal of increasing transaction speed, security of the overall chain, and further decentralization of the platform. The next phase on the roadmap is the process of sharding, which is currently scheduled to occur in 2023, now that the Merge is complete.

The sharding process will introduce shard chains, which are similar to regular blockchains, but with the key difference that they only contain a microcosm of the overall blockchain data. Ethereum seeks to increase its scalability by sharding in order to level up its amount of throughput and bring about a reduction in both transaction costs and timescales. This will be brought about due to the specific subset of data provided by shard chains and the ability of the nodes to verify transactions more efficiently.

This is, of course, no small endeavor and the process of sharding is a scaling solution that is longitudinal in timescale, as well as a significant effort to perform. The trade-off in terms of enabling Ethereum to better store and access data is compelling, however, and could result in another win chalked up for the crypto community overall if it is successful.

It is clear that the crypto market is seeing a number of positive developments that are fast propelling it further into the upper echelons of the payments market. Rather than expanding use cases and simply broadening scope, key organizations are looking to solve problems and criticisms of the technology to better consolidate position and orientate for grander scale projects in the coming years. The Merge has clearly been an overall success and demonstrates the possibility of blockchain-based currencies fulfilling and aligning with ESG goals—a major criticism of the offering—and with further works in the pipeline, the world of crypto is certainly on an upward trajectory.

 

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