STAKIN’ IT TO THE STREETS

The Ethereum Merge succeeded. What happens next?

Like an incredibly high stakes iOS update for the crypto industry, the long-awaited Ethereum Merge — an upgrade seven years in the making — successfully overhauled the second-biggest cryptocurrency’s blockchain last Thursday. Now Ethereum, which powers a $30-billion universe of DeFi apps and exchanges, has transitioned from energy-intensive Proof-of-Work (PoW) mining to a 99.95% more efficient Proof-of-Stake (PoS) system to verify transactions. So, what were the immediate impacts of the Merge and what can we expect next for Ethereum? Let’s dig in.

The Merge was a success, but Bitcoin and Ethereum slumped roughly 5% and 15% since the upgrade. Why? 

• For starters, some analysts claimed that Merge enthusiasm had already been “priced-in” after the top two cryptocurrencies each rallied more than 10% in early September in anticipation of the event — the same logic that led some sell-the-news traders to short ETH in derivatives markets. 
• Meanwhile, markets have been skittish this week in the leadup to the Fed’s latest interest-rate hike decision after August’s worse-than-expected inflation report. On top of that, recent developments from the White House, Treasury and SEC are fueling regulatory anxieties. 

The Merge reduced worldwide electricity usage by 0.2%, per one estimate shared by Ethereum co-creator Vitalik Buterin. 

• No longer relying on the energy-intensive PoW system pioneered by Bitcoin, Ethereum now secures its network and verifies transactions via “staking” (hence, Proof-of-Stake) or users locking ETH into the blockchain in return for percentage-rate rewards. 
• Researcher Justin Drake estimated that prior to the Merge, ETH’s PoW mining accounted for 0.34% of global electricity consumption and that the 0.2% reduction reflects that the majority of ETH mining GPUs are shutting down after finding the migration to other PoW chains unprofitable.

Ethereum could become a “deflationary asset” over time, which might make ETH more attractive as a store of wealth. 

• Another upgraded efficiency for Ethereum involves a 90% reduction in the amount of new ETH issued daily to validators for staking and keeping the blockchain secure. Previously, miners required more ETH to justify higher energy outputs. 
• That change, coupled with last year’s EIP-1559 upgrade — which permanently removes, or “burns,” a small amount of ETH for every transaction — means Ethereum’s supply has already decelerated and should eventually decrease. ($8.5 billion of ETH has been burned so far.)
• In theory, reducing supply should cause prices to rise, assuming demand is constant.

Ethereum’s forthcoming “Shanghai” upgrade is expected to enable users to finally withdraw staked ETH sometime next year. 

• Right now, $21 billion of ETH is staked and locked into the network until Ethereum’s developers add a withdrawal feature for people to claim their ETH plus any staking rewards. While “liquid staking” assets like stETH or cbETH currently enable more experienced crypto traders to trade derivative tokens based on their staked ETH, direct withdrawals for staked ETH aren’t yet possible. 
• Shanghai’s additional features are still being debated by Ethereum’s core developers. As one of them told Decrypt, “top priorities differ by person. Everyone has a different list.”

Why it matters… With the Merge now in the rearview, next year’s Shanghai upgrade is a reminder of Ethereum’s years-long and impressively detailed roadmap, which involves an eclectic mix of rhyming phases and sci-fi sounding scalability upgrades, including the wildly named “proto-danksharding”(!). Before the Merge, Vitalik Buterin said he considered “Ethereum to be 40% complete” — so how much closer to completion does he consider his invention now? We’ll ask him the next time we talk to him.

Learn about the Merge

William P. Eason