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Digital Assets

Digital Asset Weekly | The Ethereum Merge

By:

Hugh Meyer

Friday Focus:   The Ethereum Merge

As the second most valuable blockchain on the planet, Ethereum is already well known by people who invest in crypto. Anyone who follows Ethereum or other blockchains has likely heard the phrase "The Merge." The Merge is a massive tech upgrade going into effect potentially late in 2022, to change the underlying nature of the Ethereum blockchain.

This massive upgrade is intended to cut Ethereum's energy consumption by a considerable amount, reduce the issuance of new ETH by at least ¾ the current amount, and introduce a way for long-term investors to bring in larger yields as long as they hold ETH. This could have a significant impact in both the short- and long-term.  The Merge is a major change that acts as a reminder that crypto is a competitive and dynamic market.

What to Expect from the Ethereum Merge?

The Merge associated with Ethereum is meant to change the blockchain's consensus mechanism. This is the primary part of technological code that allows the blockchain to process all transactions and remain synced worldwide. This code is the component that holds the blockchain together, so a successful upgrade is mandatory. If the Merge works and happens when it is scheduled, it will completely change Ethereum, and its coin, ETH, at the same time. As a result, the blockchain and currency will likely both become more appealing, especially to institutional investors who may be on the fence about investing in Ethereum or not. Once the upgrade occurs, two different things will happen:

Reduced Energy Consumption

Information about the Merge indicates that one of the main changes it will cause is a 99% decrease in the blockchain's energy consumption. Right now, the consensus mechanism uses something called proof-of-work, which means thousands of machines are going through computing challenges to keep the network integrity intact. This is the same method used by crypto giant Bitcoin. While proof-of-work is well-known and established with excellent security, the computing challenges require the use of a substantial amount of energy. Therefore, the Merge will move from proof-of-work to something known as proof-of-stake. This lets Ethereum investors who have been in the game for a long time have the chance to post ETH as collateral that ensures the network's security. Many newer blockchains use proof-of-stake as a consensus mechanism, although none as significant as Ethereum have chosen to do so. The reduction in energy consumption will make Ethereum more ecologically friendly, which may bring in investors who are concerned about the carbon usage of Bitcoin.  

Less Issuance

In any blockchain, the individuals who secure the network are compensated. Most of the time, this payment is in the form of new crypto issues through the network. For example, those who mine bitcoin receive additional new bitcoin on the Bitcoin blockchain. For Ethereum, the issuance rate at present is about 4% each year. However, proof-of-stake lets transactions be validated at a much lower cost than proof-of-work. Less ETH needs to go out as compensation than would go to someone mining bitcoin. When the Merge occurs, there is expected to be an issuance reduction of at least 75%.

Why this Matters to you!

The Ethereum Merge is likely to have many kinds of impacts. First, it will help investors diversify in crypto as long-term stakeholders. Second, the new process will reduce energy use and be better for the environment. Third, less issuance could make Ethereum even more sought-after and increase the returns of anyone already involved in Ethereum. And, of course, yield opportunities will increase for those interested in the blockchain. All in all, the Merge is a colossal happening that many are waiting on. It's only one part of the overall change to the Ethereum blockchain that could make it stand out from its competitors.

Sources:

https://decrypt.co/resources/what-is-ethereum-2-0

https://www.coinbase.com/learn/crypto-basics/what-is-proof-of-work-or-proof-of-stake

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