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Market Insights

Ethereum merge: here it comes

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One of the most anticipated events on the crypto calendar is nearly upon us. The Merge is scheduled for September 15th. If all goes well, this marks the beginning of a new phase for the Ethereum network.

What is The Merge?

It’s a solution to a long-term problem within many blockchains and crypto networks. Proof-of-Work is the name given to the process of ‘mining’, the energy-intensive process of solving algorithmic equations to validate transactions. That’s a problem for two main reasons.

  1. It's energy-intensive
  2. It’s slow

Ethereum’s solution to both of these issues is The Merge, the name given to the process of shifting the Eth network from proof-of-work (mining) to proof-of-stake.

Ethereum Co-founder Vitalik Buterin put this change into context with Naval Ravikant earlier this year:

Just to give some concrete numbers, today Ethereum is on average doing about 15 to 20 transactions a second. These are complex transactions. A lot of them are significantly more complex than what Bitcoin does. If you just did money transfers, then it could go up to about 50 transactions a second with current settings. But if we just move to Layer 2s, then we could go up to about 5,000 transactions a second.

You keep the same blockchain, but instead of using the blockchain directly, you use these extra protocols that package up the information and use the blockchain in different ways. You’re still doing the same stuff. You’re still getting the same security guarantees. But you’re using the blockchain more efficiently. There’s more compression, and more of the computation is being done off-chain through other protocols.

Vitalik expects that the Ethereum network will be about 55% complete post-merge, and a four-part upgrade is expected to follow in coming years, creating a more scalable system. By the time the network is complete, he says it will be able to handle 100,000 transactions per second.

Is The Merge priced in?

The burning question! It’s almost impossible to say for certain, although worth noting that hype and hopium heading into the event has seen Ethereum double in value since the mid-June lows.

Ethereum

Given the current strength of the US dollar, the aggressiveness of the Federal Reserve’s hiking path and liquidity withdrawal, it’s hard to get hopes up for higher price targets. Crypto is more comparable to an emerging market economy, and the availability of dollars and credit has an impact across the entire financial system, including Ethereum.

From a technical perspective a break below the 29th August 1422 low opens the door to the July 26th 1356 support.

The major hope for the future is that The Merge will lead to a more energy-efficient network, capable of handling large numbers of transactions at low-cost.

The value of the network will likely depend on corporate adoption, and the likelihood of corporates apportioning significant funds and resources onto a still developing blockchain technology is low, at least until they see evidence that these issues have been resolved.

Let’s not forget the prospects of regulation either. It can be a pain but regulation is key to bringing larger institutions to the table. The lack of regulation allows creativity to prosper, but it also effectively locks crypto networks out of mainstream use cases.

Although it’s been around for a decade, Ethereum still has a lot of these teething problems to work through. Any repeat of the network congestion issues that led to excessively high transaction (gas) fees will surely delay corporate involvement.

The Merge is a significant stepping stone on the path to full maturity, but the tech still has plenty of growing up to do.

Not investment advice. Past performance is not indicative of future results. Trading cryptocurrency may not be available depending on your country of residence.

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