The Price of ETH will Rise after the Merge- Experts

[TL; DR]

---

• The shift of Ethereum from the proof-of-work consensus mechanism to the proof-of-stake will reduce the ETH issuance rate.
• 
  
• Burning of ETH and staking will further reduce the circulating supply of ETH.
• 
  
• After the Merge , investors who are environmentally conscious are likely to invest in ETH.
• 
  
• The Merge will create a bullish momentum on ETH.

Introduction

---

Ethereum, the widely used blockchain, is set for a great upgrade, the transition from the proof-of-work consensus mechanism to the proof-of-stake one. This will bring many changes to the blockchain as well as opening more investment opportunities. So far, Ethereum has carried various tests in readiness for the launch of the Merge.

This article explores the effects of the Ethereum Merge on the price of ETH. Already, the price of ETH has been increasing and stabilizing in the last two months due to the anticipated upgrading.

What is Ethereum?

---

As you may know, Ethereum is the second largest blockchain. This is because bitcoin holds the first position due to its larger market capitalization. However, Ethereum has more use cases than bitcoin, the reason why many investors are interested in the Merge. Mostly, there are many decentralized blockchains and applications existing on the Ethereum network. Thousands of decentralized applications (dApps), in the metaverse, gaming and social media sectors exist on it.

At the moment, Ethereum uses the proof-of-work consensus mechanism which involves validators to verify transactions through solving complex mathematical problems, a process also called mining. Through the Merge Ethereum is shifting to the proof-of-stake validation mechanisms where qualified stakers will verify transactions on the network.

As mentioned above, with the proof-of-stake consensus mechanism stakers will be able to validate transactions. The system simply selects the most qualified staker at any time to verify the transaction. The minimum staking amount for validators is 32 ETH. However, investors who stake more ETH will have better chances of validating more transactions than those with less staked amounts.

Effects of Merge

The Ethereum Merge will bring various benefits to the Ethereum community and to investors, both in the short term and long term. While some of the changes bring direct impact on the price of ETH, the other developments have indirect effects.

How the Merge affects ETH supply

The key determinants of the price of any product or asset are its supply and demand.

Triple-Halving Event

Many investors and crypto analysts believe that bitcoin’s maximum supply of 21 million is the reason why people prefer it against most altcoins. Its limited supply impressed many investors to the extent that they call it digital gold.



On the other hand, ETH has an unlimited supply, something that seems to hold back its price. The rate of ETH mining is also very high, resulting in ever increasing circulating supply. Through the Merge, Ethereum will decrease the circulating supply of ETH by means of the triple halving event.

Triple –halving refers to the changes the Merge brings to the Ethereum blockchain which decrease ETH’s daily issuance by about 90%. This is a remarkable feat considering that the current daily issuance of ETH is over 13 500. What this means is that the Merge will reduce the daily production of ETH to about 1,350. As a fact, this reduces the supply of ETH by 364,500 per month. More interestingly, this translates to a decrease of 4.4 million ETH per annum.

According to Ethereum, the issuance of ETH results in 4.3% inflation rate per year. After the Merge, the annual ETH issuance rate will decrease to 0.49%. Similarly, this figure, 0.49%, will be the annual inflation rate of ETH. This gives us an 89.4% decrease in annual ETH issuance.

The other factor that will help to reduce the supply of ETH is the burning mechanism. By the way, burning refers to a process of permanently removing a certain quantity of a cryptocurrency from circulation within a period. Ethereum estimates that at least 1,600 ETH will be burnt per day reducing the annual inflation rate to “zero or less post-merge.”

Staking reduces circulating supply of ETH

ETH’s high-yielding staking will likely result in an increase in its price. Staking will reduce ETH’s circulating supply and put bullish pressure on the cryptocurrency. Staking is the process of locking a token in a smart contract for a certain period. After the Merge, ETH’s staking rewards will increase by about 8% APY.


During that time, the staker will earn a reward for that. Therefore, staking reduces the quantity of ETH in the crypto exchanges. As we know, the lower the supply of an asset on the market, the higher its price will be.

A research analyst at Galaxy Digital, Christine Kim, said, “Supply should contract rather than expand over time. And so I think that’s a huge boost to Ethereum’s investment narrative as a store of value and as a hedge against inflation.”

Demand of ETH is likely to increase

Our assumption is that an increase in supply of ETH will be accompanied by either constant or increasing demand to realize a price rise. Now, it is time to look at the demand side of ETH. The Merge will create conditions that will induce a rise in demand.

For example, the Merge will lead to better security standards of the ethereum network as well as less energy consumption which are likely to lure many decentralized applications (dApps) and blockchains to migrate to Ethereum from rival networks such as Solana, Avalanche and Cardano, the so-called ethereum-killers. This increases the demand of ETH.

Increase in energy efficiency affects the demand of ETH

Energy efficiency on the Ethereum network will likely increase the demand for ETH both in the short-run and long run. A shift to the proof-of-stake consensus mechanism will reduce energy consumption of the Ethereum blockchain by about 90%. This is because the transaction validation process will take place through staking rather than mining. Notably, mining is responsible for high electricity consumption.


This means that many environmentally conscious investors who used to shun the Ethereum blockchain due to its carbon footprints will invest in it. Therefore, we expect a large influx of investors on the blockchain in areas such as DeFi and dApps. Already, the Ethereum blockchain has a good track record in terms of security. This is different from some of its rivals, such as Solana, that have been experiencing security breaches.

Transaction fees

Most people are interested to know if the Merge results in a decrease in transaction cost. Unfortunately, it does not lead to lower gas fees in the short run. The gas fees will decrease later on when Ethereum introduces shards, which are partitions in the blockchain that reduce congestion and increase computational power.

Transaction Speed

The Merge will result in a slight improvement in transaction speed. Ethereum says that the Merge only leads to a 10% increase in speed. However, this is unlikely to have a direct impact on the price of ETH.

Conclusion

---

The Merge affects several functionalities of the Ethereum blockchain. It will also result in lower supply creating deflationary pressure on the cryptocurrency. Staking and token burning help to reduce the circulating supply of ETH. Aside from this, energy consumption efficiency is likely to attract more investors since it leads to less environmental degradation. Overall, the Merge is likely to cause an Ethereum rally.



Author: Mashell C., Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.