The merger, Ethereum’s transition from proof-of-work to proof-of-stake, is one of the most anticipated events in crypto history. Some even say it will enable Ethereum to reach 100,000 transactions per second and a price of $10,000, let’s see what this milestone actually means for Ethereum, the king of smart contracts.
Ethereum has been a proof-of-work blockchain since its release in 2015. Although this consensus mechanism is time-tested and secure, it is inefficient, environmentally unfriendly, and has been relentlessly criticized by politicians and corporations.You can learn more through Asicminerspace.
Proof-of-stake is the solution to all proof-of-work problems. Instead of using powerful hardware, Proof of Stake requires validators to use their Ethereum as collateral. For example, a validator “stakes” 32 ETH, which means it is locked while they validate. If they approve all valid transactions and reject all illegal transactions, they will receive a portion of the transaction fee. However, if they act maliciously, some of their ether will be burned and not returned. This approach is estimated to be 99.95% more energy efficient than proof-of-work, a 2000x improvement.
Since December 2020, Ethereum has had a proof-of-stake blockchain called the beacon chain to ensure proof-of-stake is viable and to catch problems before Ethereum fully switches to the new consensus mechanism. Prior to this, validators had been able to stake 32 ETH in batches and not withdraw until some point after the merger.
A merger is when the main Ethereum chain is merged with the proof-of-stake chain, and proof-of-work is completely deprecated. When this happens, this can lead to some unintended consequences. Other proof-of-work cryptocurrencies that use a similar algorithm to Ethereum may become more popular. In addition, the need for hardware such as graphics cards will be reduced.
Since Proof of Stake is more efficient than Proof of Work, the Ethereum protocol will be able to significantly reduce its block reward and still incentivize validators appropriately. Currently, around 13,000 ETH are minted every day. With proof-of-stake, that number will drop to around 2,000. This lower issuance, coupled with some transaction fee consumption from EIP-1559, means that Ethereum could become a deflationary currency. When supply decreases while demand remains the same or increases, prices rise accordingly.
Additionally, upon the merger, the staking reward rate will almost double from current levels to between 9-12%. This will give Ethereum stakers the opportunity to make huge gains from the volatile asset. Even if more people started staking, that would increase the demand for ETH and reduce the supply, causing the price to go up no matter what.
Contrary to popular belief, the merger itself will not result in a substantial improvement in transactions per second or transaction fees. Initially, the shard scaling solution was planned to be released at the same time as the merge, but the decision was made to delay the release due to the high number of layer 2 aggregation solutions available.
The merger could be the biggest cryptocurrency-related event of the year, as it will finally allow ESG-conscious companies and organizations to get involved in Ethereum. Ethereum becoming deflationary will also lead to a huge price potential, possibly above $10,000.