Ethereum Merge: Everything you need to know

What is the Merge?

The Merge is an upgrade to the Ethereum network. It will merge the Ethereum Mainnet – the Ethereum blockchain where all transactions are processed – with the ‘Beacon Chain.’ To do this, Ethereum will shift away from proof-of-work (PoW) and adapt the proof-of-stake (PoS) mechanism.

“Hang on… proof-of-what?”

Proof of work was used first and adopted by Bitcoin. A network of miners gets to work validating transactions and adding them as new blocks on the chain. As a reward, they receive new cryptocurrency. It requires a vast amount of processing power; consequently, it is a very energy-intensive process.

So, what’s the difference between the two?

Proof of stake doesn’t involve any miners. Network participants are called validators, who earn a reward for validating transactions. The network chooses validators based on the size of their stake and how long they’ve been holding it. It’s therefore rewarding the participants that have invested the most in the blockchain.

Why does the Merge matter?

Ethereum’s energy consumption will be reduced drastically – up to 99% – which is a big deal, given how much focus there has been on the massive amounts of energy required to power cryptocurrencies. Aside from that, it also means participants with smaller computers could use the network. It will also make Ethereum more secure, as it will become increasingly complex and expensive to attack the blockchain.

With the end of mining, the overall supply of Ethereum will start to decrease over time and make the cryptocurrency deflationary.

What could go wrong with the Merge?

Given the scale of the operation and fragile investor sentiment, any potential issues could cause significant price volatility.

What could go wrong?

Delays: Although we’re getting close to the announced Merge date, holds cannot be ruled out if developers encounter issue.

Technical glitches: Significant technical matters could seriously damage investor confidence . High expectations: Investors have high expectations about the Merge, and even if things go to plan, the hype might evaporate.

How should traders prepare?

Investors holding ETH do not need to do anything. Active traders don’t need to do anything but should be prepared for high volatility and the possibility of a temporary trading halt.

Why could ETH rise?

Improved security, faster processing of transactions, and reduced costs are all positive effects of the Merge that will boost investor confidence. ETH becoming a deflationary cryptocurrency will also increase its appeal as a store of value – in other words, more investors could hold onto their ETHs for longer.

Why could ETH fall?

Technical issues could cause trouble for ETH – especially if they are serious. Overall, market sentiment also plays a significant role. The Merge created hype that hasn’t been seen in a long time in the crypto market. However, it remains to be seen if bulls will stay confident post-Merge or whether many will look to exit their long positions.