ETH MERGE - What you need to know
What you need to understand about the upcoming merge on mid Sept!
ETH 2.0 Merge has been one of the most talked about topic in the crypto digital assets community.
WAGMI is here to help you understand the important details better! And you will not need *much* knowledge about technology to grasp the concept.
Why is it important? (Why do I care?)
Ethereum is currently the second biggest blockchain in the ecosystem next to Bitcoin in terms of market cap, but has the biggest daily use case with NFTs, DeFi, and all the other platforms built on top of it.
They are the first builder of smart contract, programmable money and this is the biggest upgrade to the system and perhaps will be one of the most monumental event in the history of crypto digital assets.
It will change the fundamentals of Ethereum as an asset and that is very important to know as an investor.
So, what is it?
The merge is basically Ethereum combining two existing blockchains into one changing its consensus mechanism from Proof of Work (which is like Bitcoin) to Proof of Stake.
A consensus mechanism is the way of how a blockchain’s node – the computers that run the blockchain and keep the records of all transactions – reliably reach this agreement.
Diving deeper.
Beacon chain, an empty Proof of Stake consensus blockchain launched in December 2020, can merge with Ethereum blockchain and replace the proof of work mechanism.
Ethereum’s PoW validation will be replaced by PoS consensus mechanism
Imagine two lanes merging in a highway. PoS lane being the main lane and PoW is the lane merging into it
Before the merge, there are 3 testnets (Ropsten, Sepolia, Goerli) that were used for trials before the actual merge, these testnets exist for researchers to test on
On Sept 15-16 2022, Ethereum mainnet blockchain will merge with the beacon chain. And Ethereum will switch from using PoW to beacon chain’s PoS.
This fundamental change in blockchain has never before seen in Crypto Asset history.
As a majority of readers are investors, this is the most commonly asked question
What happens to Ether (the token) in Ethereum Blockchain?
The impact on Ether the token has multitudes.
First of all, you do not need to do anything if you hold ETH - the merge happens automatically, you don’t even need to approve any updates (like updating your phone)
Next, the tokenomics impact of the merge:
reduced ETH issuance; the amount of ETH that is issued every year is reduced by 90%
PoW issuance from mining is at 4.3%
PoS issuance is at 0.43%
Potential impact on price: reduced selling pressure from miners who need to pay for their overhead (electricity, wifi, rent, etc) and reduced issuance can make ETH token truly deflationary (lower supply = higher demand / price)
How?
PoS mechanism brings greater efficiency in terms of cost while also providing higher level of security. Before the merge, PoW miners provide security and get more ETH issued.
In Proof of Stake, ETH holders simply stake their tokens and their token would get burned if they process an invalid transaction
This concept can push ETH into what people call “Ultra Sound Money” status
While the US dollar increases its supply over time, BTC have a capped (max) supply, ETH post merge might have a continuously decreasing supply
On the other hand, ETH will also have yield built into the protocol.
ETH gets its yield from the staking rewards that PoS brings to ETH and if you stake your ETH you can get a 4.1% risk-free yield (not given by any third party DeFi application
Once the beacon chain merges, stakers will receive additional yield from the transaction fees!
Last but not least, The ESG (Environmental, Social & Governance) Narrative
By not using any miners to run the network, Ethereum essentially reduces its electricity consumption by 99%
ETH secures its blockchain with staking ether, instead of consuming energy through VGA mining rigs.
This might attract ESG conscious funds that are looking to invest in crypto.
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