Catalyst: The biggest blockchain upgrade is coming to Ethereum
Ethereum ($ETH) — the second-largest crypto by market cap — is about to glow up. The biggest blockchain upgrade is coming a.k.a. the merge…
Proof of what?
Proof of stake (PoS) and proof of work (PoW) are the two main methods blockchains use to verify and add transactions (i.e. the consensus mechanism). There are many technical differences but to keep it simple…
- PoS uses 99% less energy, and processes transactions faster and cheaper.
- Many of the newer blockchains (i.e. Avalanche, Near, Cosmos) uses PoS or a variation of it (i.e. Solana uses proof of authority).
Ethereum has been prepping a shift to PoS for years now — which is being tested on the Beacon Chain. While the merge isn’t confirmed, there are 5 indicators for a June date — when the full network will convert to PoS.
But upgrading a network managing billions in smart contracts can be risky — a reason why it has been delayed many times.
The upgrade will have big impacts on ETH supply…
With PoW, miners are rewarded with the network’s crypto (i.e. Bitcoin) for verifying transactions and securing the network.
In PoS, miners are replaced by stakers — who lock up their tokens to keep the network safe — and earn the staked token in exchange.
The merge is expected to reduce rewarded ETH by 90% — ETH inflation falling from 4.3% to 0.43%:
- Before: 12,000 ETH per day is issued to miners.
- After: 1,280 ETH will be issued to stakers.
The theory: Supply goes down, prices go up. Think of this as the Fed printing less money.
But staking has another impact. Stakers lock in their ETH — which becomes untradeable — lowering the available Ethereum supply available on the market.
By staking, investors can earn 4.8% on their ETH — which is expected to rise to 10-15% post-merge — incentivizing more stakers.
Investors: Crypto bull market incoming?
Every ~4 years, the amount of BTC rewarded to miners is cut by half (a.k.a. Bitcoin halving) — which reduces new supply and has started new crypto bull markets in past halvings.
While the BTC halving reduces new BTC supply by 50%, the Ethereum merge reduces new ETH supply by 90%.
- Halving x3: Per Bankless, it would take three Bitcoin halvings to reduce a similar amount of supply from the ETH merge.
- Meaning: The Ethereum merge could have 3x the impact of a single Bitcoin halving.
Best case — ETH goes on a big run. Worst case — a major network issue occurs during the merge. Typical crypto risks.
Crypto is still down big in recent months — but if Bankless is correct, this could be a major catalyst.