How should investors prepare for the Merge? This upgrade will change how the network is secured, its power consumption, and Ethereum's tokenomics. Staking will now play an essential role. So how should the investor prepare for future events to make the most of them?
Back to the progress of the Merge
A series of upgrades are underway on the Ethereum blockchain to move it from a Proof of Work (PoW) consensus mechanism to a Proof of Stake (PoS) consensus mechanism. To do this, the steps are as follows:
The creation and launch of the Beacon Chain took place on December 1, 2020. The Beacon Chain is what introduces PoS to Ethereum. For this reason, it is called the “consensus layer”.
Replace the consensus mechanism of the current PoW chain with PoS (the date is for the time being September 19th.) The existing Mainnet will then act as the “ execution layer”, as the current PoW that works, will be replaced by the Beacon channel.
The consensus layer will take care of network security. The execution layer is where smart contracts are executed and where transactions are created. As the upgrade will link these two chains into one, the name of this event has been changed from ETH 2.0 to “ The Merge ” i.e. Merge in French.
What are the consequences following the Merge?
As the Beacon Chain has already been running since December 2020, a good portion of ETH supply is already staked on it, receiving rewards for running the network. Currently, there are over 12 million ETH on the Beacon Chain smart contract.
This figure represents almost 10% of the current supply of ETH. In addition, this ETH is locked for the long term, because there is no date regarding the possible date to unstake its Ethers as part of the ETH PoS chain.
After switching to PoS, there will be no more mining rewards. Therefore, ETH emissions will drop significantly. In addition, 10% of the supply is already locked in staking. According to Etherscan, a total of 13,347 ETH was added to the current supply on July 21.
If we remove the block rewards (mining) and leave only the staking rewards, the daily net result would be negative. This means that more ETH would be burned as fees than rewarded, which would decrease the total supply of ETH.
How to take advantage of the Merge?
None of the following constitutes financial advice, and investors should always exercise extreme caution when trading cryptocurrencies. Analyzing the data presented, there are a few investment strategies an investor could adopt:
Buy ETH
With the publication of an almost definitive date for “The Merge ” there is a short period where the supply of ETH will continue to increase. After that, it will become “deflationary”. If the investor believes that ETH will have a relevant place in the crypto markets in the long term and that its demand will increase, the price of ETH will mechanically increase.
We have already seen similar price action occur, but there is still room for more upside, as the incentive to increase the amount of ETH staked (and out of circulation) will increase over time.
Buy liquid ETH
As the ETH locked in staking on the Beacon Chain is blocked for an unknown period, and the minimum amount needed to be sent is relatively high (at least 32 ETH), pools have been created to help users stake their Ethers. Some of these pools then created an ERC-721 token as a negotiable receipt of this staked ETH.
Examples are the Lido protocol's stETH token and the Rocket Pool's rETH. When the user accesses the ETH staking platform, his token is minted in a ratio of 1:1 against ETH.
Example with Lido Finance (source: Lido Finance)
Ethereum: how should investors prepare for the Merge?
However, since it is a receipt for future redemption, it is traded at a discount to the price of ETH. This discount is not fixed, the market determines its value, as we can see in the Footprint chart below:
Source: Footprint Analytics
Buying the staked version would allow the investor to enjoy an additional 2-3% return and the accrued interest that comes with it, if they are willing to wait for the launch of the unstacking feature after the implementation of PoS on the Ethereum blockchain.
There is no deadline for this feature to roll out (unlock), but the approximate timeline is 6-12 months after the Merge.
In the long term, the price of ETH could therefore increase with the Merge - if Ethereum maintains its leading position and dominates the crypto market and the blockchain industry continues to develop - because the token will go from an emission inflationary to a deflationary issue. With supply decreasing and demand remaining the same (and most likely increasing), an increase in the price of Ethereum is the logical next step.
To increase gains, buying a liquid version of ETH can bring additional profits if the investor can wait longer, as the liquid version often has a discount to the spot price of ETH.
Here are some keys to better take advantage of the coming Merge, keeping in mind the risks associated with such an investment. However, many observers agree that Ethereum is well positioned to remain one of the leaders in the crypto market over the long term.
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