Ethereum Merge Countdown: What Should Investors Know?

What is Ethereum?

Ethereum is the blockchain network that powers Ether, one of most important cryptocurrency tokens in the world.

According to CoinDesk, Ether was launched in 2013 at just US$0.31 and is currently priced at US$1,500.

Ether falls behind only Bitcoin when it comes to cryptocurrency popularity. But while Bitcoin has gained traction as a new-age digital currency, with some even describing it as "digital gold," the Ethereum network is known for its uses as a blockchain-powered, open-ended decentralized software platform.

The Ethereum platform helps power many decentralized software systems across the globe.

What is the Ethereum merge?

Ethereum will move its blockchain validation system from proof-of-work to proof-of-stake on September 15.

The change is taking place due to the intensive computer power that proof-of-work requires to “reach consensus on transactions in the network,” according to Alex Tapscott, managing director of Ninepoint Partners.

Under the proof-of-stake system, miners of the digital asset “rely on Ether holders who can act as validators to perform a similar kind of function,” the blockchain expert told the Investing News Network (INN).

“It's roughly the equivalent of swapping out the engines of a jetliner traveling at 700 miles an hour across the Atlantic for electric motors (that don't) disrupt the in-flight entertainment system or the drink cart,” added Tapscott, who co-founded the Blockchain Research Institute.

The expert called the merge a daring proposal by the developers behind Ethereum. However, he emphasized, the move is not a total leap of faith, but rather a change to a proven system.

Tapscott explained that a proof-of-stake network version of Ethereum has already been running for over a year. It is called the Beacon Chain, and it is the blockchain that Ethereum will be merging with.

But the significance of the endeavor still stands.

“We're not talking about just one big company here, we're actually talking about a whole decentralized network. When we're talking about something of this magnitude, it has never been done before in the crypto space,” said Marcus Sotiriou, analyst at digital asset broker GlobalBlock (TSXV:BLOK,OTC Pink:BLVDF).

Will the Ethereum merge impact Bitcoin?

Taylor of Purpose Investments told INN he is interested in seeing how the rest of the cryptocurrency market will react to the Ethereum merge. “We all know how volatile crypto is,” he said.

Sotiriou told INN he expects the Ethereum merge to have a significant long-term impact on the entire blockchain market. He said that after the merge takes place, Ethereum will be able to be staked, and investors will have the ability to receive a yield on the cryptocurrency.

“There's now a benchmark yield for the whole DeFi sector for other protocols to be based on,” the analyst said.

According to the GlobalBlock expert, the lack of a benchmark yield is what led to the liquidity crisis of the past year. “No one’s had anything to price risk against,” he explained.

The analyst said the merge has critical potential for the investment community: “Now we've got Ethereum, which allows us to have this benchmark yield, where we can all of a sudden have a well-adopted fixed-income market within the DeFi space that allows investors to actually price risk based on a benchmark.”

What are the risks of the Ethereum merge?

In a report, Purpose Investments suggests it will be important to watch how miners react to the Ethereum merge. “It’s possible that disgruntled miners will push for the continuation of a separate proof-of-work Ethereum that will run independently,” the firm explains in the document.

Tapscott told INN it's possible that not everyone operating under the current Ethereum blockchain will go along with the merge. "If you're a miner, and your bread-and-butter business is to earn mining rewards from doing this, then all of a sudden you're going to see your revenues decline,” he said.

The expert said that although indications show most people involved with Ethereum are ready for the change, “maybe at least some market participants, and mainly miners, will decide to keep the proof-of-work chain alive — to essentially do a contentious hard fork and end up with another Ethereum.”

While that might sound dramatic, Tapscott said this type of action isn't uncommon in the blockchain market. He pointed to the variances of Bitcoin, Bitcoin Cash and Bitcoin SV as prime examples of this effect.

“It's possible that we end up with two Ethereums on (September 15), but I have 100 percent conviction that the proof-of-stake Ethereum will become the canonical Ethereum, and that's where everyone is going to move to; that's where all the action is going to happen long term,” Tapscott said.

Both Tapscott and the report from Purpose Investments downplay the possibility of a fork, indicating that even if there is a divergence, proof-of-work would represent a low total market cap within Ethereum.

Of course, the merge itself will also have to happen smoothly. Soloway told INN it will be critical for the transition to go well so as not to damage the image of cryptocurrencies.

This critical event will act as proof that these networks are able to adjust on the fly while supporting their various partners and applications, Tapscott said.

“That is something that will be required if this technology is going to continue to scale to meet the promise and the opportunity that I think a lot of people believe it has,” he added.