How Ethereum Merges Will Affect Crypto Investors
The Ethereum blockchain, the largest behind bitcoin, is about to undergo the start of a major upgrade.
Called the “merger,” Ethereum is switching to a more energy-efficient method of validating transactions that take place on the platform, known as proof of stake.
The upgrade is similar to how the transition from using dial-up modems to fiber optics allowed the Internet to be used for a wider variety of things, such as video, online storage and music streaming, Greg King, founder and CEO of Osprey Funds, tells CNBC Make It.
Here’s a look at what the merger means and how it will affect crypto investors.
What is Proof of Stake?
The merger will transition the blockchain from a proof-of-work (PoW) model to a proof-of-stake (PoS) model. Both are algorithms used to allow users to add new cryptocurrency transactions and keep track of them on a blockchain network.
The current proof-of-work model requires enormous amounts of energy to power computers that try to solve complicated mathematical equations to validate transactions.
Proof of stake, on the other hand, requires users to have a “share” in the blockchain, as the name implies.
This means that Ethereum users have to make a fairly hefty investment upfront to authenticate transactions. However, this model is expected to be much less energy-intensive.
How will this affect investors and potential investors?
While the Ethereum merger is not expected to speed up the network or reduce transaction costs immediately, investors may see benefits down the road.
“While no outcome is certain, the merger could be bullish for crypto investors in the long run because of the foundation it lays for future speed upgrades, fees and ecosystem development,” says King.
Faster transactions and lower fees could also eventually lead to more users, which could affect the value of ether, Ethereum’s native cryptocurrency, which investors use to transact on the platform.
If the number of investors increases, the supply of ether should decrease, says Vladimir Gorbunov, CEO and founder of the MetaFi ecosystem Choise.com. And as the supply of Ether decreases, the value of individual coins could increase, which would be welcome news for investors.
Ether is valued at around $1,600 per coin as of September 14, 2022, according to Coin Metrics — down from an all-time high of around $4,892 last November.
How will this affect the environment?
As previously mentioned, the merger is expected to make the blockchain more energy efficient.
Currently, Ethereum’s carbon emissions are on par with Singapore, and its total energy consumption is comparable to the Netherlands, according to the website.
The merger is expected to reduce Ethereum’s carbon footprint by over 99%, which could make the platform more attractive to environmentally conscious investors.
Will the merger make Ethereum less vulnerable to hackers?
“The merger will definitely make Ethereum more secure,” says Gorbunov. After the merger, the required initial investment to validate transactions on the blockchain will cost around $55,000 or 33 ETH, he says.
It’s a cost everyone, including hackers, has to bear to get into the network in the first place. Because of that barrier, Gorbunov expects Ethereum to become much safer.
However, the blockchain will always be vulnerable to hackers, warns King.
“After the merger, Ethereum’s susceptibility may vary due to the underlying design change of the network, but the security risk will always remain the same,” he says. “Cyber security risk is always important.”
Remember that ether, like many cryptocurrencies, is a highly volatile asset that is subject to unpredictable fluctuations in value with no guarantee of making money. Experts recommend that you do not invest more in these types of assets than you are willing to lose.
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