Ethereum’s merger will affect more than just the blockchain

As with many things in life, events are not in silos. When any type of event or action occurs, planned or unplanned, it causes changes and reactions to surrounding components. Think of a rock thrown into a pond that creates ripples in the water while changing the aquatic environment below the surface. This thinking can also be applied to Ethereum Merge.

The Ethereum blockchain, with its native coin Ether (ETH), is a pillar of the cryptoasset industry – an industry that has become increasingly mainstream with each passing year. Ether is the second most popular altcoin, with people searching Google for “Ethereum” an average of 2.1 million times a month. ETH has risen to a value of more than $100 billion in terms of market capitalization, with the Ethereum blockchain a common choice for developers building decentralized applications (DApps). In a survey conducted by crypto exchange Bybit, Ether is the second most heard of alternative to Bitcoin (BTC), with one in six US adults saying they are familiar with it (15.4%).

The Ethereum Merger, or simply Merger, fundamentally changes the Ethereum blockchain in pursuit of greater scalability and security while requiring less energy usage. This move could cause ripple effects for the wider crypto industry.

What is the merger?

The merger is part of a multi-year transition for the Ethereum blockchain, sometimes referred to as Ethereum 2.0. This broader transition essentially aims to scale the Ethereum blockchain. The official starting point for the network’s transition occurred in late 2020 with the launch of the Beacon Chain, a proof-of-stake (PoS) version of Ethereum, although Ethereum’s main proof-of-work (PoW) blockchain also continued to operate.

Expected to take place on September 15th, the merger basically represents an end to the PoW chain, with all future efforts and attention focused on the PoS chain. PoW vs. PoS has been a long-standing debate in the crypto and blockchain sector. Among the mix of arguments include PoS blockchains that require less energy than PoW networks.

What will Ethereum (and crypto more generally) look like after the merger?

After the merger, Ethereum will be a PoS blockchain, with the PoW chain becoming a thing of the past. A difficulty bomb will reduce mining rewards, making on-chain mining unattractive. Discussions have arisen about miners resisting the change and continuing with a forked PoW version (or versions) of Ethereum, but the main Ethereum blockchain will be the PoS without miners.

After merging, Ethereum will call on validators instead of miners to run the blockchain. Validators must unlock 32 ETH to support the blockchain’s functioning while earning rewards for doing so. There are also other methods of contributing to the network via staking, such as services offered by crypto exchanges.

The merger is not the end of Ethereum’s broader transition journey. The event marks a little over halfway through Ethereum’s transition — 55% of the way to completion to be precise, according to Ethereum co-founder Vitalik Buterin. Sharding is the next big goal for Ethereum, which aims to improve scalability by segmenting the blockchain into parallel parts.

There are some misconceptions about the merger

Some common misconceptions have surrounded the merger. First, some thought that Ethereum would magically become faster and have significantly lower transaction fees. But this is not expected to happen anytime soon.

Similarly, some have wondered if the merger would result in a flood of unsettled ETH hitting the market. That’s not the case either. In reality, ETH is going to remain locked up until the Shanghai upgrade, which is scheduled for 2023.

Related: Buterin and Armstrong reflect on proof-of-stake switching as Ethereum Merge approaches

Third, some observers have suggested that price action will be easier to predict, signaling that the value of ETH will rise due to the upgrade or arguing that there will be a “sell the news” event that results in the price falling. This tactic plays on market psychology. If everyone is excited about an upcoming event, the related asset may rise in price until the event. Then, when the event occurs, prices may drop due to the event being anti-climactic and failing to live up to the hype and expectations.

As with many events in crypto, traders are looking to exploit competing predictions. A wildcard, however, is the downward price action the crypto market has already suffered, making it harder to predict anything with certainty.

Possible trading strategies for the merger

If you want to capitalize on bullish investor sentiment ahead of the merger, there is a reason to hold regular ETH, which is also known as holding “spot”. If your investment funds are large enough, you can even consider having the 32 ETH required to become a validator for the network, earning around 4% annual interest. This figure is expected to rise to approximately 7% after the merger.

If the price doesn’t rise fast enough for you to earn a 1000% return this year, at least your assets will continue to work for you during the market downturn. (Just remember that your 32 ETH will remain locked until the Shanghai upgrade sometime in 2023.)

As another strategy – if you want to secure a bag of spot ETH – you may want to consider using a smaller portion of your portfolio for a short position using futures contracts. Depending on how well you “time the market,” that small percentage of your portfolio may be enough to offset any short-term losses you experience on your spot holdings. If the market goes up, you can conversely lose the amount you bet on futures contracts. But your spot portfolio may be sufficient to cover these losses – if you choose to sell.

A third option, considering the market’s volatility, is to “sit” in stablecoins. This is a reasonable approach if you do not feel a great deal of confidence in the direction the market may take next. When it finally breaks out – which it will – you can try to take advantage of the extreme movement. If the price of ETH falls back to $880 – which it reached in June – you might want to go long. Or if it explodes to obscene heights, you can choose to go short.

Whatever you choose, remember that the majority of active traders lose most of their money. Your most likely chance of success is to pick a price point, make the purchase, and forget about it until favorable market conditions return.

Check if your centralized exchange will make airdropped ETH available

Centralized exchanges differ in how they will handle the merger. The decision that most users will likely be keeping an eye on is whether their chosen exchanges choose to give them their “airdropped” Ethereum.

Specifically, if any blockchain participants continue to operate the proof-of-work chain, Ethereum holders will suddenly have two versions of their ETH tokens – one set on the proof-of-stake chain and one set on the proof-of-work. Some exchanges, such as Bybit, have said they will offer support for both chains, allowing users to sell or withdraw tokens. Others – including Coinbase and Binance – have declined to make the same commitment. (And of course, users can also ensure they get access to ETH by holding it in their own wallets.)

Holding tokens in complicated financial protocols can also prevent the blockchain from recognizing ETH holdings. It includes lending protocols and liquidity pools. Users may want to withdraw ETH from such protocols a few days before the merge if they want to ensure their holdings are recognized.

Another issue to be aware of is downtime during the merge. The exchanges plan to mostly disable deposits and withdrawals of ETH and tokens on the blockchain – known as ERC-20 tokens – starting September 14. Most plan to reactivate these activities by September 16, although the date may change in case of unforeseen technical problems.

DApp users will also benefit

The crypto and blockchain industry is a hugely interconnected space. Ethereum itself hosts nearly 3,000 DApps on its blockchain at the time of publication, according to State of the DApps. An example of Ethereum’s significant impact on the overall crypto sector can be seen when looking back at the high Ethereum fees present in 2021, which may have deterred some DApp users.

DApp users, ETH transactors, and more may be affected by the merger, but more as part of the larger scheme of the Ethereum 2.0 movement. The merger itself is part of the broader Ethereum transition, which ultimately looks to increase security and scalability with reduced energy usage. The merger should have a significant impact on the energy required to run the Ethereum blockchain while operating slightly faster, but other benefits may take more time as part of the broader transition it appears.

ETH does not have a maximum coin supply, although it does have a cap on new ETH created per year. Ethereum Improvement Proposal 1559 put in place an ETH burning mechanism based on transactions, although the Ethereum blockchain also produces new ETH. The merger will reduce the amount of new ETH created annually, potentially affecting the asset’s price activity in the market.

The opinions expressed are those of the author alone and do not necessarily reflect the views of Cointelegraph. This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice.