This article explains the major impending upgrade for Ethereum known as the merge. This much anticipated upgrade is one of the largest, and most complex upgrades in the history of technology.
Ethereum & Sound Money
For a concise article on the monetary outlook for Ethereum, check out our article on the triple halving [here]. The time has come. The much-anticipated upgrade we have written about countless times is upon us. In approximately 8 hours Ethereum will be switching from the old proof-of-work model to proof-of-stake. But why should you care? After all, Ethereum is just “internet money” and not a tangible object according to some.
Ethereum is important because it provides a way for users to store value, transact, achieve yield, and more, without the consent of large, centralized banks. Ethereum has grown in value because the ETH token is not only a store-of-value, but it provides utility for the holder. ETH is needed to lock up digital dollars for yield, transfer value from one location to another, buy NFTs, buy other tokens, the uses are endless.
When your dollars have a use case, demand increases. With a steady supply, but increased demand, prices rise over time. Ever since the world has gone off of the gold standard, dollars have inflated into oblivion. The Fed encourages inflation to drive GDP growth numbers, creating a false illusion of a successful economy, when in fact our economy is at its worst in relevant history. When a money supply can be infinitely increased with no regard, easy money takes hold, and the dollar loses value rapidly. Hard money is needed more than ever.
Ethereum proof-of-stake will drive tokens to be locked into the contract for yield. These tokens are not available for trade reducing the readily available supply. Add this concept to the token burning mechanism, and you have a token that could possibly become deflationary. The Ethereum merge looks to drop the Ethereum inflation by about 90%. Less tokens dropping onto the market will create a supply shock during high demand cycles (likely when this recession ends). This is sound money.
The merge completes the triple halving. Less inflation due to the proof-of-stake mechanism which is a fixed rate of around 4-5%. The burning mechanism mentioned above causes some tokens to be removed permanently from the supply as transactions occur. With more use of the blockchain, more tokens will be burned reducing the supply. Proof-of-stake is the final part of the picture since users will have the option to lock up tokens for the yield mentioned .
These locked tokens will be temporarily removed from the supply available for trade and transactions. As less tokens become available, the price will likely increase causing a major price uptrend. Any bullish event that causes increase in demand will cause ETH price to soar since so little tokens will be available for direct trade. As the token price increases, staking will become more lucrative causing more people to stake tokens for fear of missing out. Users will likely want to keep their tokens staked for long periods since the rewards are more hard money.
Ethereum can be viewed as a version of money since it has direct value. Gold has value as well, but your gold can’t send money to a friend, or secure a decentralized finance transaction. Another very important aspect of this upgrade is that it will reduce energy consumption cause by Ethereum mining by approximately 99.9%. .
The beauty of this upgrade is that the Beacon chain (proof-of-stake chain) is already set up. Validators for the network will need to make some changes to adapt to this upgrade, including either selling their mining equipment, or using their miners to mine another token. Etheruem miners are fairly specific so this will likely cause some initial losses to validators. Normal holders will not have to do a thing, they will simply hold their tokens and the tokens will be automatically compatible with the Beacon chain.
Once this upgrade takes effect, Ethereum will have a low carbon footprint, and users will have a more user-friendly experience. The next upgrades will focus on scaling the chain through sharding and layer-2s. Once these changes are completed, Ethereum users will experience much lower fees and faster speeds. This update if successful makes us even more bullish on Ethereum for the long term. Please remember to do your own research, none of this is financial advice. Stay safe out there!