In a few days (15th of September, 2022), the Ethereum blockchain plans to shift from PoW (proof-of-work) to the PoS (proof-of-stake) consensus mechanism. Experts are terming this; the Ethereum Merge. Since 2020, the PoS blockchain (Eth2) has been in Beacon Chain. Beacon Chain is the testing state. Thanks to the Ethereum Merge, the Eth1 and Eth2 will act as one blockchain. The execution layer comes under Eth1, and Eth2 will handle the consensus layer.
What Is The Ethereum Merge?
In the PoS model, a randomly-chosen validator will confirm new blocks and gain associated rewards. In the new model, the validators should stake 32 Ether. The users can enjoy the staking rewards even by joining a staking pool. Meanwhile, the PoW mechanism facilitates competition among miners using high-performance ASIC machines to gain the rights for transaction validation.
The PoS is more environment-friendly than the other because PoW requires higher electricity and computing power to validate a new block. It also necessitates more expensive equipment and PoS can counter it by delegating the validator role to others (someone with Ether to stake). In the PoW, the power lies with those who had expensive equipment for mining.
The Domino Effect Of Ethereum Merge
Spike In Staking Activity
Already, there is 30 billion dollars worth of Ether on Eth2. It is the biggest PoS blockchain in valuation (even before replacing Eth1). Some set up individual validator notes for direct staking. This process requires specialized hardware and software apart from 32 Ether. A few have been sending Ethereum to staking pools (a mining pool) wherein the users pool all their resources and share the benefits. This pool increases the probability of being selected.
For comparison, in August 2022, Ethereum had a $30 billion value staked; the second highest was Solana, with just a little over $10 billion. After this Merge, users will get more comfortable staking as the investment need will be less.
There could be more improvement in Ethereum after the Merge. As of now, Ether staked on Eth2 directly cannot be withdrawn. Although some services offer liquid synthetic assets for users’ staked Ether, a 1:1 peg is impossible. Soon with Shanghai Upgrade, the Merge can let people withdraw ether staked on Eth2.
Combining all these, soon, Ethereum will become a more profitable asset to stake or hold.
The Entry Of Institutional Investors
Since it will be a valuable asset, institutional investors will start ramping their staking too. Ether’s price would decouple from other cryptos and can become similar to bonds and other commodities with carrying premiums.
With the transaction fees and rewards into account, experts consider that Ether will gain up to 15% yields yearly, in addition to Ether’s price increase. Of course, there is a market risk of Ether’s price falling and damaging the fiat returns. However, Ethereum will be a good bond alternative to traditional ones with the price increase. As of today, a US treasury bond for one year has a yield of 3.5% only. There is already a fast increase in institutional stakes.
Distributing Hashrates Will Disappear
Currently, most miners have pools that collect assets and distribute hash rates between blockchains. Primarily they focus on Ethereum and Bitcoin. However, after the Merge, the hash rate of Ethereum mining would either disperse to others or disappear. The chances of them moving the hash rate to Bitcoin are very minimal, as ETH is known for being ASIC- resistant. Thus, the equipment people used for mining one would not fit the other.
Bitcoin miners use ASIC processors, and Ethereum miners use GPUs. While GPU is not strong enough to mine Bitcoin, the Ethereum blockchain is ASIC-resistant. Thus, the hash rate used by Ethereum will be the type that cannot be performed with ASIC. So, if you are a GPU miner, this is terrible news. However, you are not alone, as Ethereum mining is 97% done with GPU. How about just mining what’s left of GPU-mineable coins? Well, there is just 4.1 billion dollars worth of coins, which is just 2% of the total value of Ethereum.
If you are a GPU miner, you can now use services that can use distributed GPUs for specific tasks. The miners can earn ERC-20 or Ether in return. A few examples of such services are Render Network and Livepeer. If you are open to non-crypto rewards for GPU use, you can try working for data centers, heavy-duty processing, gaming computers, and others.
Wrapping Up: The Impact On Crypto Markets
Since Ether’s price and future value increase, this Merge will significantly affect the crypto markets. However, it is impossible to predict how the change will move. It is imperative to keep an eye and ear open for any market changes.