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The Ethereum platform has had a major upgrade, known as “The Merge.” For investors, this means new opportunities—and new risks.
Even if you aren’t a crypto investor, you’re likely familiar with the two biggest cryptocurrencies: bitcoin and ethereum. These two heavyweights make up 39% and 18% of crypto’s total market capitalization, respectively, and other crypto coins trail by a wide margin.
The Ethereum platform—the brainchild of Russian-born Canadian computer programmer Vitalik Buterin—was launched in 2015 with the aim of offering more capabilities than Bitcoin, itself launched in 2009 as a peer-to-peer transaction system. Both Bitcoin and Ethereum are blockchains—decentralized digital ledgers that securely and transparently record transactions. But while Bitcoin was made specifically to function as peer-to-peer money, Ethereum and its legion of software developers have pioneered blockchain innovations such as smart contracts, non-fungible tokens (NFTs) and decentralized apps (dApps).
Ethereum has broken more new ground with a big move dubbed “The Merge,” which has changed how the blockchain validates, or verifies, transactions. That might not sound like a big deal, but the transition will dramatically reduce Ethereum’s carbon footprint, allowing the use of the blockchain to scale sustainably. This change has been praised by some for its environmental benefits, but criticized by others who think that it lowers the platform’s standard of security. Let’s take a look at The Merge and how it could affect the value of the platform’s cryptocurrency—ethereum, or ether (ETH).
Ethereum has changed how its transactions are validated, how new “blocks” of data are created for its blockchain, and how new ether coins are put into circulation. Until recently, Ethereum, like Bitcoin, used “mining” for this purpose, along with its associated consensus mechanism, known as proof-of-work (PoW). “Miners” solve a complex numeric problem using specialized computer rigs. This method is highly secure, but it has drawn criticism because it is extremely energy-intensive. Pre-Merge, Ethereum mining was using as much energy as the country of Uzbekistan—about 60 terawatt-hours per year.
The Ethereum community decided to switch from the proof-of-work consensus mechanism to proof-of-stake (PoS). This transition—called The Merge—will help the platform to scale sustainably: According to estimates, its energy consumption per year will fall by more than 99%.
The Merge—which happened on Sept. 15, 2022—involved combining two blockchains: the original Ethereum blockchain (called “Mainnet”) and the PoS layer (called “Beacon Chain”), which has been operational since 2020.
Until December 2020, the original Ethereum blockchain recorded transactions and smart contracts. The creation of the Beacon Chain was a parallel experiment, separate from the Mainnet. While the Mainnet continued to record transactions, the Beacon Chain was achieving consensus on its own, and it underwent continuous testing. When The Merge finally happened on Sept. 15, everything went smoothly.
Now, the Beacon Chain is the main Ethereum blockchain, and it will function as the consensus layer for everything the platform requires, including transactions and account balances. So, the Beacon Chain has taken over the mantle and is now the official “Ethereum.”
No. Misinformation that a new coin—Eth2—will replace ETH has done the rounds, but the truth is that the token of the Ethereum blockchain after the transition remains ether (ETH). While the term “Eth2” was used to refer to the impending shift in Ethereum’s consensus mechanism, it was merely used for convenience and does not refer to a new coin. Post-Merge, there is no longer Eth1 or Eth2—just the singular ETH.
Unless you are a node operator, meaning you work on the blockchain, you don’t have to do anything after The Merge. Ethereum’s transactional history, account balances, smart contracts and more have been assimilated into the new Ethereum blockchain. Your funds will not be impacted, and as an investor, you don’t need to do anything. The ETH coins you hold will remain in your wallet, and you will be able to access, buy, sell and transfer ETH as you normally would.
Some investors are concerned they may have to upgrade or migrate to Eth2. However, this is not the case. Beware of scams that attempt to dupe unsuspecting investors into sending them their tokens in exchange for Eth2 tokens. There is no such token as Eth2.
Ethereum’s transition to POS creates both opportunities and risks for investors.
Although the blockchain has gone through rigorous tests and The Merge has been successful, investors may be wary until it has proven itself over a period of time. Ethereum’s transition is like a major change in the management of a large company—while the new management may be experienced and “battle-tested,” there are always known and unknown risks that could crop up. Investors have seen relatively high levels of volatility in the price of ether leading up to and in the week after The Merge.
Despite the risks, the transition to PoS provides the opportunity for ETH holders to earn passive income by “staking” their coins—locking them up—in exchange for being rewarded with extra coins. By staking your coins, you help keep the Ethereum network up and running smoothly, while earning passive income for doing so. The annual percentage yield (APY) for staking ETH is currently estimated to be about 5%. There are various ways in which Canadian investors can stake their coins.
If you want to start, be sure you understand how staking works and the risks involved.
Aditya Nain is an internationally published author, educator and business owner. His firm specializes in investment research, writing and content. Connect with him on LinkedIn for daily posts on investing, business and life.
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Most crypto investors & speculators cannot really see the implications of this merge given the current economic environment. Once the macroeconomic is favorable & more uses cases for ETH lead to more activity on chain it’ll be reflected in the price of ETH. Might take 1-3 years for that to happen but it’ll be gradual then all at once.
One can devise of this conclusion based on the volume on NFT marketplaces, DeFi, trading platforms and overall sentiment. Once those avenues of speculation and risk taking get re-introduced with easing of monetary policies and a better consumer, ETH will be the main beneficiary.
It’s not a matter of “if” but a matter of “when”.