The Ethereum Merge: What traders need to know

Olymp Trade Team

A little background

Ethereum is a blockchain network that primarily functions as a versatile platform for other blockchain apps to be built upon. Pre-Merge, Ethereum’s network was governed by a proof-of-work consensus mechanism.This protocol dictates that new blocks in the blockchain are created by network participants using computational power, or “work,” to solve an extremely difficult mathematical problem. While this may be fine for networks with a small amount of users, larger networks see a high volume of daily transactions that, when governed by a proof-of-work consensus mechanism, are throttled by the sheer amount of time it takes to verify the next block in the chain.

As Ethereum grew in popularity among startups, DeFi fans and corporate entities alike for building blockchain solutions, its limited transaction speed and massive volume of transactions created a bottleneck in the network, severely limiting functionality and causing transaction fees to skyrocket. As a network facilitating over 1 million transactions per day, something had to change for Ethereum.

What is the Ethereum Merge?

Ethereum’s main task for the past several years has centered around scalability: increasing the network’s transaction speed, reducing the load of each transaction on the network and changing the consensus mechanism to proof of stake.

In a proof-of-stake consensus mechanism, participants who own the network’s native cryptocurrency stake their tokens into smart contracts to become block validators, who are responsible for participating in block creation and checking that new blocks are valid. In Ethereum’s case, each participant needs to stake 32 ETH (worth $1,730 at the time of writing) in order to become a validator. At the moment, about 13.6 million ETH (or $23.6 billion) has been staked.

A proof-of-stake consensus mechanism only needs these validators to validate and create new blocks, rather than computing power to hash extremely difficult mathematical problems. Undoing any finalized transaction would require obtaining and burning a third of the total staked Ether, which is near impossible and economically unviable for validators, whose 32 ETH stake has limitations on withdrawal. This is expected to boost the security of all decentralized apps and ERC-20 tokens built upon the network.

Another benefit of the Merge on the Ethereum network concerns its energy consumption. Pre-Merge, the Ethereum network consumed 112 TWh per year — about as much as the Netherlands. Post-Merge, the network’s energy consumption is set to drop by an impressive 99.95%. The final major perk of the Merge is that it allows future updates aimed at increasing Ethereum’s scalability to be implemented.

How will the Ethereum Merge affect traders?

While there is much speculation as to the future of the network, it is expected that the Ethereum update will cause the network’s native token to become a deflationary cryptocurrency, rather than an inflationary one, due to the limited number of tokens that can be produced every year as well as tokens being burned off to curb supply. The supply of Ethereum’s native crypto in circulation will decrease over time, generating more demand than is supplied. This is a positive indication for the Ethereum price in the long term.

That being said, how the asset’s price will react to the Merge is unknown. Many believe that the event will spark a growth phase, but it’s important to note that the Ethereum Merge was announced years ago and that this is a major topic in the crypto and blockchain circles, so any major action has already been priced in. Another thing to consider is that miners may be wanting to liquidate their stores of Ether, which will flood the market and bring down the price in the short term.

There are also potential difficulties that may arise as Ethereum 2.0 is launched, which will also have an effect on the price of Ether in the short term. It is likely that the merge will temporarily affect transactions being made in Ether and all ERC-20 tokens, where some transactions may not reach the receiver’s wallet, so the prospect of temporarily disconnecting the ERC-20 network to protect users’ funds is currently being discussed by the Ethereum team.

Following the upgrade, Ether may finally break off from other cryptocurrencies in that the new staking feature makes it a bond. This may attract institutional interest, which would spark explosive growth.

Ethereum’s recent price action

Ether has been traded in an uptrend since mid-June, 2022. The cryptocurrency strengthened from $880 to $1,720, a price growth of more than 200%. The RSI indicator shows an absence of divergence and is not near the overbought zone, confirming the current trend. Ether is strengthening more intensely than  Bitcoin, which has been trading in a flat phase in recent months. This indicates an increased demand for altcoins, probably triggered by the Merge. However, we should not forget the saying: Buy on rumors, sell on facts.

Conclusion

Whether you’re a fan of Ethereum or not, it cannot be denied that the Merge will make big waves in the crypto, blockchain and DeFi sectors. The update will change the network permanently and pave the way for a brighter future for both Ethereum and the blockchain space as a whole, showing the world that blockchain is scalable.

Now that you know about the Merge, you’ll have an easier time understanding Ethereum’s price movements in the coming weeks. If you’re ready to make the most of the upcoming price volatility, we recommend checking out our article on scalp trading in crypto. For those still familiarizing themselves with the concept of cryptocurrencies, our articles comparing crypto and Forex trading and outline of the types of cryptocurrency are sure to give some valuable insight. See you on Olymp Trade!

Risk warning: The contents of this article do not constitute investment advice, and you bear sole responsibility for your trading activity and/or trading results.