Will the Ethereum Merger Really Lead to a Rally?
| BARCELONA, SPAIN – Ethereum mining software.
Important takeaways
- Ethereum
ETH the merger is finally complete when the cryptocurrency switches to the proof-of-stake (PoS) mechanism to verify transactions on the blockchain.
- There is concern now that the SEC may introduce regulations on proof-of-stake cryptocurrencies, which will affect almost the entire crypto space, except for Bitcoin
BTC .
- The price of Ethereum has fallen since the merger due to fears of possible regulation.
You may have heard about the Ethereum merger in recent weeks. The merger refers to the long-awaited upgrade from a proof-of-work mechanism to the proof-of-stake model. The move was intended to fix some of Ethereum’s problems by improving transaction speed and making transactions cheaper. However, it appears that the price has dropped since the transition went through on September 15.
Ethereum is the second largest form of cryptocurrency based on market capitalization, behind only bitcoin. So when something happens to ethereum, it affects the entire cryptocurrency space.
We’ll look at what proof-of-stake is all about and what the merger means for ethereum investors.
Why did Ethereum merge?
A major criticism of cryptocurrency is that it has a negative impact on the environment. The White House has called for cryptomining standards to reduce energy use. With the government of China cracking down on crypto mining, the US has become a hub for miners. The White House administration has gone so far as to float the idea of exploring possible options to limit energy-intensive mining, such as bitcoin, if the process doesn’t become greener.
The biggest problem with mining crypto is the amount of energy required to verify transactions on blockchains that require proof of work. Ethereum decided to shift from the energy-intensive proof-of-work to the more environmentally friendly proof-of-stake system. The Ethereum Foundation has claimed that the transition reduced Ethereum’s energy consumption by 99.95%.
The merger itself went like this. On December 1, 2020, Ethereum launched its own proof-of-stake Beacon chain. On September 15, 2022, the original Ethereum Mainnet merged with the Beacon Chain to exist as one chain.
This merger is positive news for those who are socially responsible investors due to the significant reduction in energy consumption. The merger should make it easier to introduce upgrades to the network in the future. However, lower fees have not yet taken effect on the Ethereum network.
What is Proof of Stake?
The Proof-of-Stake concept is quite technical and we did our best to break it down in a previous post here. Cryptocurrencies are decentralized, meaning they do not have the control of a financial institution to verify transactions. This is why many cryptos either use proof-of-stake or proof-of-work to validate crypto transactions. Both are essentially different algorithms that allow users to add transactions and record them on a blockchain, an immutable public ledger.
Before the merger, you had to go through the energy-intensive process known as proof-of-work (PoW) to create Ethereum tokens. PoW is the original consensus mechanism for verifying transactions that bitcoin used. Under the PoW mechanism, miners compete to solve complex mathematical problems. Whichever miner solves the problem first is allowed to add a block of transactions that earns them rewards. The consequence of this process is that mining equipment all over the world calculates the same problem, which consumes a significant amount of energy since mining requires a lot of electricity.
The proof-of-stake mechanism allows crypto users to stake crypto on the blockchain so they can create their own validator nodes. The validator stakes his crypto on the network for a certain period of time to be allowed to verify transactions. The PoS protocol elects a validator node to check a block of transactions for accuracy. The node then adds the exact block to the blockchain in exchange for crypto rewards. On the flip side, if a validator adds an inaccurate block, they lose some of their stake crypto.
Proof-of-stake requires validators to have an actual stake in the blockchain. So to become a validator on the network, one has to put up a decent investment (32 ETH). The PoS protocol elects users known as “validators” to verify transactions on the blockchain. Legitimate and accurate validations are rewarded with new ether blocks. This means you need more than a decent graphics processing unit (GPU) to be a validator on the network now.
Many Bitcoin supporters still feel that proof-of-work is more secure and that the blockchain should not switch over. Ethereum, on the other hand, has been talking about this move for years now. Another concern with the PoS protocol is that vote control may be in the hands of a few key players who are able to put more Ether to stake in the first place.
How did the Ethereum merger go?
By all accounts, the September 15 merger itself appears to have gone just fine, despite concerns from various experts. However, many users may have had high expectations that simply haven’t been met yet. After the merger, Ethereum’s high fees and congestion. Some say the merger merely laid the infrastructural foundation for future solutions to these problems. It is hoped that faster transactions and a reduction in fees could lead to more investors on the Ethereum network.
The price of Ethereum dropped in value after the merger. The price was down around 20% around the morning of September 21st (1,245.65) and is now up more than 5% per coin since.
Nothing changed drastically for Ethereum users since The Merge was just an infrastructure upgrade. This means that wallets, addresses and transactions still work the same. So if you had Ethereum in your trading account – or wallet – it’s still there, right where you left it. Ether, the cryptocurrency native to the Ethereum blockchain, will continue to trade on all platforms.
However, investors must watch out for possible fraud. Many appear on social media targeting crypto users in general. Be wary of phishing scams posing as crypto exchanges or crypto wallets sending you instructions or asking for information.
The network should theoretically become safer now that it is now more expensive to validate transactions on the blockchain. If you want to activate validation software, you need to stake 32 ETH (a hefty price that varies depending on the price of 1 ETH). This should be a big enough barrier to ensure safety.
What does the Ethereum merger mean for investors?
Ethereum investors are concerned after the head of the SEC, Gary Gensler, indicated that the cryptocurrency can be considered a security now just a day after the merger. Gensler’s comments on the stake rewards were: “From the coin’s perspective, it is another indication that under the Howey test, the investing public expects profits based on the stakes of others.”
Many investors are now worried about the future classification of Ethereum. While the SEC still hasn’t made an official statement on whether they consider Ethereum a value rather than a commodity, it’s very alarming news that could shake up the entire crypto space.
If Ethereum were to be considered a security, ether and every application on the blockchain would have to be registered with the SEC. It would also mean that Ethereum was trading as an unregistered security for a long time, which could lead to some hefty fines for Ethereum and possibly the platforms that allowed trading. Registered securities must disclose their management team, provide financial information and share potential risks.
Why does the SEC care about Ethereum now?
Proof of Stake means that users can earn Ether by locking in their coins to validate transactions. When you validate with your coins, it is believed to indicate that investors expect profits based on the efforts of others. The SEC did not specifically mention Ethereum, but the timing caused people to worry about the future of Ethereum.
As you can imagine, all this drama with the SEC can lead to serious problems. We cannot comment much on the subject until further announcements are made, but this news has continued to affect the already damaged prices of crypto.
How does the merger affect cryptocurrency?
The cryptocurrency space has been concerned with how SEC regulations could affect the market. If this merger were to lead to SEC regulations, it would shake up the entire crypto market. Increased scrutiny and regulations have also been an ongoing fear for crypto enthusiasts.
Cardano
How should you invest?
It is important to remember that investing in any form of cryptocurrency is risky as it is still a volatile asset. The price of Ethereum reached an all-time high of $4,865.57 in November 2021, according to CoinDesk. Digital currency Ether is down 63.21% in 2022 as the crypto market has experienced high volatility and sharp downward swings since the beginning of the year.
Investing in crypto at the best of times can be difficult because there are so many coins to choose from with different features. This is why Q.ai created the Crypto Kit. This set uses investments via trusts and funds to gain access to a selection of major crypto projects. Using the power of AI to make much more informed decisions with real-time market data. While we cannot guarantee the high returns seen over the previous year, we can promise that the kit will help you reduce some of the risks associated with the current crypto environment.
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