The true impact of the Merge on Ethereum

The crypto market does not yet seem to have really reacted to the Ethereum Merge, but there are many comments making the rounds on the net. 

There has been some volatility on the price of ETH today, but nothing that has broken it out of the range of the past three days. 

However, according to Swell Network CEO and co-founder Daniel Dizon, the ‘Merge Trade’ has actually just begun. The market may only discount the successful Merge in the coming days due to macroeconomic developments such as the Fed’s monetary policy. 

According to Dizon, from a fundamental point of view nothing would really change for ETH, because the Merge is a technological change that is about ecosystem and network, energy efficiency, decentralization and growth. These are things that over time could further strengthen Ethereum’s positioning as a dominant layer 1 blockchain, while what matters financially for ETH is that it is becoming a potentially deflationary cryptocurrency. This should add structural upward pressure on prices in the long run, so much so that Dizon states: 

“We think it will not be long before sidelined capital continues deploying capital back into ETH.”

One should not be surprised, then, that the impact of the Merge on the price of ETH in the short run has not been there, because it may, instead, be there in the long run. 

The Ethereum Merge affects the entire ecosystem

Focusing specifically on the technology aspect instead, Luno’s Vice President Corporate Development & Global Expansion, Vijay Ayyar, points out that the move of Ethereum PoS is also a huge confirmation that the technology works, so much so that it could pave the way for the growth of many more PoS-based networks. 

It also paves the way toward a more efficient and scalable Ethereum ecosystem in the long run, with a more environmentally sustainable network. 

He stated: 

“The Merge could help improve how cryptocurrencies are viewed and attract institutional and retail investors. This allows Ether to move toward becoming a deflationary asset, this will also bring its net coin supply inflation to zero or less. Further, most new blockchains are already adopting PoS based consensus and this will only increase.”

There are, however, those who go beyond these considerations, venturing even broader assumptions. 

CoinSpot’s Head of Marketing Ray Brown does so, arguing that the Merge could also lead to the development of greater global interest in Web3 projects, as Ethereum is responsible for creating smart contracts that power several crypto initiatives, DeFi and NFTs. 

Indeed, “given the anticipated increased efficiency of the network, this will provide a solid foundation for future innovative projects.”

Thus, the impact of the Merge may not be limited to the technological aspects of the Ethereum network, but may go as far as fostering the leap from Web 2.0 to Web3, thanks to what can be invented again on this network from now on. 

The risks of the new Ethereum network update

However, not everyone is optimistic. According to some, there would be more security problems and more risk for investors. 

While it should be stressed that the criticism coming from the Bitcoin world is far from unbiased, the technical criticism cannot simply be brushed aside. 

The risk is that PoS may make the Ethereum network less secure. However, there are very divergent opinions on this hypothesis because, on the one hand, there are those who argue that to date PoS networks in general have been shown to be less secure than PoW networks, while on the other hand, there are those who argue that PoW favors the centralization of mining. 

Indeed, there have been several PoS networks that have had serious problems, even recently, while on the other hand, Bitcoin, for example, has not shown any security problems for many years now. 

One doubt also concerns the possible PoW fork of Ethereum that would create a new duplicate network, but apparently this risk seems to remain decidedly low for now.

It is worth noting that Ethereum is offering very high rewards indeed to those who find any bugs, which bodes well. 

The impact on Bitcoin 

There are also those who argue that the Merge could also have an impact on Bitcoin’s value. The hypothesis is that thanks to the move to PoS Ethereum may be able to become dominant over Bitcoin, but in truth this is a hypothesis that has been circulating for years and has never yet even come close to coming true. 

The fact that, as speculated, with PoS Ethereum may become more popular does not at all mean that Bitcoin will reflexively become less so. On the contrary, now that they are also technologically completely different, each could go its own way without stepping on the other’s toes. 

The Merge makes Ethereum decidedly greener

eToro’s crypto market analyst Simon Peters recalls that the Ethereum Foundation estimated a reduction in Ethereum’s annual power consumption from about 112 terawatt-hours to just 0.1, or more than 99.9%. 

Peters comments on this figure saying: 

“This has particular importance in the current global macroeconomic circumstances, in which energy prices are high and emission reductions are expedient.”

This could be a long-term advantage of Ethereum over Bitcoin, but probably not for the specific use that is now being made of BTC in global financial markets. 

However, it is estimated that with the introduction of PoS that eliminates mining, and thus the need to create new ETH to lavishly reward miners, the issuance of new ETH could go as low as 90%, making ETH much less inflationary than it is now. To this should also be added the burn of part of the fees. 

The influence on the value of ETH

Also of interest is the fact that the more ETH staking increases, the more they are actually withdrawn from the markets, effectively creating a downturn in supply. 

ETH, therefore, could also become deflationary, although this is currently only a hypothesis. 

On the other hand, in the short term, CryptoQuant points out that net deposits of ETH on exchanges are currently higher than they were last week, and generally higher deposits correlate with an increase in supply and thus selling pressure.

Therefore, there are no certainties, except that the trend over the short term is quite different from the trend over the long term. 

Macro events are certainly continuing to heavily affect the crypto markets, and it is perhaps these, rather than the Merge, that are currently having an impact on prices. Over the months, however, things could change, but it is still too early to tell.