Ethereum, “The Merge”: What Investors Are Saying

At long last, this is the summer of Ethereum. So with the current downtrend in crypto, this might be a good time to buy some ETH, if you believe cryptocurrency and blockchains will be a thing (and who doesn’t?).

The great upgrade, called “the merge”, is happening. Ethereum will be bigger, better, faster, stronger.

The merge is the second step in the Ethereum roadmap. The merge switches Ethereum from proof-of-work to proof-of-stake, using ETH itself to secure transactions as opposed to using ASIC mining machines. This will reduce the energy consumption of Ethereum by a supposed 90% and make the system more secure.

Worth noting, it is only a consensus layer change, not an execution layer change, notes Chris McCann, Partner at Race Capital. “What this means is transaction time will not change, gas fees will not change, and there will likely be no cost reduction or bandwidth improvements either,” McCann says.

“I am hurt by Ethereum gas fees, but another point of view – crypto offers you possibilities to work with those fees,” says Ales Kavalevich, CEO of BDC Consulting in Dubai. “Returns may be high even with these conditions. Crypto audiences who use Ethereum are ready to spend 4 times more than the BNB Chain (Binance Smart Chain) audience based on the average transaction amount. So, you are kind of a rich man if you use Ethereum.”

Ethereum is what’s made the so-called Web3 possible. Everyone who uses a MetaMask wallet for DeFi, Dapps and NFTs knows all about the Web3 world, and Ethereum’s importance to it.

“The Ethereum 2.0 roll-up could take two or more years to reach full development,” says Kavalevich. “Stakes are extremely high. I didn’t expect any fast changes, but I’m pretty sure Ethereum will fly far away from its competitors after they are finished with all the new stuff.”

ETH is down 52% year-to-date, compared to BitcoinBTC
which is down around 35% as of Tuesday afternoon.

Pro cryptocurrency traders have been staking their ether ETH tokens for the 25% annual percentage yield promotion, according to data from blockchain analytics firm Nansen. On June 3, $1.37 million worth of ETH flowed into wallets categorized by Nansen as “smart money,” more than any other token tracked by the firm.

The Ethereum Foundation has decided to pay upfront, increased staking rewards for participating. To incentivize participants to stake more and reach the goal sooner, The Foundation is guaranteeing 25% APY for the next 12 months.

“Staking” ETH — or any crypto that allows for that — is like yield payments. When investors stake their digital assets, they agree to hold the coins for longer periods of time (average hold times are less than two weeks on many coins) in order to participate in running the blockchain and maintaining its security. In exchange for being a long term holder, investors can earn “rewards” that are calculated in percentage yields that often look like the kind of yield any bond fund manager would dream of owning.

Ethereum’s move to a proof-of-stake network allows for staking, which makes Ethereum’s token a yield bearing investment now.

“If you’re able to generate a yield on a cloud network…there are a bunch of people thinking about ETH as a cloud computing infrastructure play,” says Martin Green, CEO and co-chief investment officer of Cambrian Asset Management in California. Cambrian is a quant firm and trades dozens of digital assets. The firm has some $250 million under management in institutional portfolios.

“Some people are making a distinction between DeFi yields where you take credit and counterparty risk that puts your principal capital at risk versus just doing ETH staking, where you are not taking credit or counterparty risk,” Green says. “Once Ethereum goes through this merge and upgrades to Ethereum 2.0, an investor owns a stream of transaction fees paid by users just like if you were investing in AmazonAMZN
for their AWS cloud service. Ethereum will have a cash flow stream. That’s the biggest difference now.”

The upgrade should increase the capacity of the network and lower fees for users over time, meaning the number of transactions on the blockchain should go up. If the throughput of Ethereum goes up and the transaction processing speed increases and becomes cheaper for users, Ethereum could recover market share from other smart contract networks. In part, those networks exist because the Ethereum network was at capacity.

The good news for alt-Ethereum investors, the merge shouldn’t ruin the prospects for SolanaSOL
and other layer-one blockchains anytime soon.

“Solana has already been a proof of stake network since it first launched,” says McCann. “The merge will not have any effect on transaction costs so I do not believe it will have much of an effect on any of these alternative blockchains.”

One measure of a blockchain’s prowess is the number of validators. A validator is someone who is responsible for verifying transactions on a blockchain. Once transactions are verified, they are added to the distributed ledger, adding to transaction transparency.

Ethereum has more than 300 thousand validators, says Kavalevich. “These people are the main investors and believers. Solana and PolkadotDOT
have around a thousand validators, and CardanoADA
has around three thousand validators. That’s a little fraction of Ethereum. The main risk is if the Ethereum upgrade takes more than three years to complete. In that case, competitors will gain more traction, but I really don’t see it. There’s a part of the market that believes in the strong fundamentals of Ethereum. They expect a $10,000 price in 2030. Ethereum is very strong,” he says “I’m bullish for the long term.”

The writer of this article owns Polkadot and Cardano.