The Secret to Making Money on the Ethereum Merge
Lesson 6: What the Merge Is Exactly and What It Isn’t
Are you ready for the Ethereum Merge?
The Merge is the event for the Ethereum blockchain where the process of consensus and the validation of transactions will move from POW (Proof-of-work) to POS (Proof-of-stake). Ethereum is a Layer 1 blockchain which acts as the main network, or mainnet, providing for execution of transactions and the exchange of data. The subjects of the Merge are the Ethereum mainnet (which uses POW) and the Beacon Chain (which uses POS).
The Beacon Chain was created on December 1, 2020 and runs in parallel with the Ethereum mainnet. The Merge is therefore the event by which the Beacon Chain will be the central consensus and validating network for Ethereum.
The Merge will achieve two milestones:
- By moving to POS, it will reduce energy consumption by ~99.95%; and
- It will “set the stage” for upgrades to scalability, or the ability for the network to process more transactions per second (TPS).
At the time of writing, the Merge is expected to happen on September 15, 2022.
Why is this a significant event?
While Bitcoin maintains a majority share of the cryptocurrency market that hovers around 40%, Ethereum (~20% of the market) is the main blockchain providing Web3 utility. The main takeaway is that Bitcoin exists for speculative, financial purposes. Ethereum exists to provides utility through its applications and related Layer 2 blockchains.
As the main utility provider, traffic on Ethereum often gets very heavy. Under the POW system, Ethereum has been very slow historically at processing transactions. It is estimated that under POW it has a 45 TPS rate. Although it has employed sharding strategies and passed off validation responsibilities to its Layer 2 platforms, it is inefficient with speed of execution and cost. Some examples of Layer 2 blockchains for Ethereum include Polygon, Arbitrum, and Loopring. All told, the entire Ethereum Layer 1 and Layer 2 ecosystem can process over 1 million transactions per day.
The Merge will help set the stage to increase scalability of transaction processing speed. Two main misconceptions about the Merge:
- Allegedly, moving to POS will allow Ethereum to process 100,000 transactions per second. But this is debatable given concerns about maintaining decentralization. As Ethereum.
- notes, the Merge will not result in “noticeably faster” transaction speed.
- The Merge will not reduce the cost of transactions (or gas fees), it will act as the prerequisite for doing so. According to Ethereum,
The Merge deprecates the use of proof-of-work, transitioning to proof-of-stake for consensus, but does not significantly change any parameters that directly influence network capacity or throughput.
In short, the Merge is better described as the precursor to the real improvements needed by Ethereum to solve the problem of scalability. Successful completion of the Merge will therefore mean Ethereum’s upgrading process will be about 55% complete.
How to Apply This
Because there is a small chance that the Merge might result in a breakdown of the Ethereum mainnet, a lot of investors are cycling out of ETH. So anyone invested in ETH will have to weigh the risk of this happening versus the potential gain if the Merge is successful (bearing in mind that there is still much more Ethereum needs to do with regard to scalability and increasing TPS).
This article is a part of the Crypto Industry Essentials educational program presented by The Art of the Bubble.
Though this article is credited to me, it contains some written material by Sebastian Purcell, PhD from his The Art of the Bubble education series on cryptocurrencies.
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