As of September 15, the Ethereum “Merge” is complete.
If you don’t know what the Merge is, there are a few key things to understand. In the Merge, Ethereum swapped out an energy-inefficient blockchain method (proof-of-work) for an energy-efficient blockchain method (proof-of-stake). Technical complexities aside, the big takeaway is that this will reduce Ethereum’s energy consumption by 99.95%.
Yes, you read that right: 99.95%.
That’s a major change—but what does it actually mean for the asset? And for people like you, who may or may not invest in it?
Likely impacts of the Ethereum Merge
- Ethereum becomes a more scalable asset. One of the main critiques of crypto has long been its energy inefficiency. DigiEconomist founder Alex de Vries once avowed that he’d “never seen anything that is as inefficient as bitcoin.”
Regardless of which side you take on the is-crypto-an-environmental-menace debate, anything that can reduce its energy footprint by nearly 100% without sacrificing functionality was clearly not starting at peak efficiency. And inefficiencies at scale tend to be deadly. Increasing its energy-efficiency by such major strides means Ethereum will now be able to grow a) without destroying the planet, and, consequently, b) without alienating potential new investors who see energy inefficiency as a big investing risk.
- It opens more people’s minds to Ethereum. To date, crypto has largely been favored by early adopters. Mainstream money managers—financial advisors, family offices—have generally shied away from it.
One possible consequence of the Merge is adding a level of centralization to Ethereum. In proof-of-stake, blockchain transactions are more likely to be written by people with more ETH to stake. Thus, the more ETH you have to begin with, the more blocks of transactions you’ll end up writing.
Some people worry that this will create “financial centers” within Ethereum will lead it to the same kind of wealth inequality that we see in fiat currency. Whether or not that’s true, the combination of energy efficiency and a certain level of centralization is attractive to more mainstream money managers.
- Impact on the crypto market. The principle I’ve developed after watching crypto moves for the last several years is, “Buy rumors, sell news.” Rumors tend to precede official announcements of major events, and the days leading up to events like the Merge often see notable price pumps.
Plus, we’ve seen crypto following the NASDAQ to a certain extent, which is heavily composed of growth stocks. September and October are generally low months for growth equities, and it just so happens that these months coincide with official news of the Ethereum Merge. Thus, the dip we’ve seen in the last few weeks should come as no surprise, and could be a good basis for buying.
What’s next for Ethereum?
Now that the Merge is official, what factors could play a major role in the future of Ethereum?
- Regulation. Tighter regulation of crypto is always lurking on the horizon, and the SEC has started to file more hefty lawsuits against crypto actors it deems malicious. The regulatory dust will settle eventually, but we should expect a rocky road for the next six months or so.
- Security issues. The other major question around the Merge is whether proof-of-stake is resilient from a security perspective. On one hand, the fact that proof-of-stake puts so much control in the hands of the biggest holders could build a de facto firewall against outsiders with bad intentions.
But proof-of-stake is simply a less tested model, and so we don’t have as much raw data about potential vulnerabilities as we do about proof-of-work. If Ethereum survives the next few months without a bunch of hacks, it will bode well for the future of the network.
At the very least, the Merge should put a major dent in the environmental toxicity narrative that surrounds crypto. It could well open it up to a new class of investors who were concerned about the risks presented by total decentralization and environmental recklessness. Beyond that, it’s all about Ethereum’s performance—if this new engine runs as smoothly and securely as the old one.
