What is the Future for ETH in Light of the Merge?

【TR;DR】

After years of promising the much-awaited Ethereum network ‘Merge’, the 15th of September marked the historic day on which the deployment was successfully executed, finally migrating the blockchain’s consensus mechanism from PoW (proof-of-work) to PoS (proof-of-stake). Yet, now that this has been accomplished, what is next for the network?





What is the Merge?

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In simple terms, the Ethereum blockchain Merge was the network’s transition from the PoW consensus mechanism to PoS – essentially moving the blockchain into a more efficient, powerful, and environmentally conscious future. On a more complex level, the Merge represents the joining of Ethereum’s original execution layer, the mainnet that has existed since the birth of the network, and a new proof-of-stake consensus layer otherwise referred to as the Beacon Chain.

Working in tandem with the original mainnet, the Beacon Chain is designed to eliminate the need for energy-intensive mining, as well as enable the network to be strengthened and secured using staked Ethereum tokens. However, the Beacon Chain existed before the Merge and was operating parallel to the original mainnet, which at the time was still secured by the PoW mechanism, as a means of trialling the technology and ascertaining its suitability for the entire network. Now that the two have become a singular chain, the former, arguably archaic, PoW consensus mechanism has been entirely abandoned, paving the way for a PoS future for the Ethereum network. In doing so, the Merge seeks to also decrease the overall supply of the Ethereum token by enforcing deflationary tokenomics mechanisms that seek to shrink the supply and increase the value of the asset.

As well as unlocking superior mining and security capabilities, the Merge also enhances the overall functionality of the Ethereum network by significantly increasing its scalability. As a network that has been historically plagued by scalability issues such as network congestion and extortionate gas fees in volatile market conditions, the superior scalability offered by the new PoS consensus will provide network users with superior efficiency and more affordable gas fees that are not as easily influenced by market conditions and network congestion. Similarly, the Merge also offers the ability for Ethereum developers to later introduce scalability-improving mechanisms such as sharding, which will further enhance the efficiency and usability of the Ethereum network at large.


The Role of Bifurcation Forces

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Historically, Ethereum has been renowned for the volume of network forks that have occurred as a means of bettering the network by delegating different functions and mechanisms across the entire Ethereum ecosystem. This forking process is typically referred to as ‘bifurcation’, which is the process by which something splits into separate branches or channels as a means of creating a division between different functions. Think of bifurcation as a road that forks into two separate exits – whilst they are both parts of the same road, either fork leads you to a different destination.

Throughout its entire history, Ethereum has endured a multitude of forks, with several of these occurring as a means of preparing the Beacon Chain for the Merge. On September 6th 2022 Ethereum unveiled the Bellatrix upgrade designed to finalise the Beacon Chain for the Merge. In order to do so, the Bellatrix upgrade introduced validator penalties to their full values for inactivity and slashable offences; additionally, the Bellatrix upgrade provided an update to the fork choice rules to assist in the transition from the final PoW block to the first PoS block.


What do Analysts Think?

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Following the successful execution of the Ethereum network merge on the 15th of September, the Ethereum token witnessed an unprecedented 7% valuation decline, which extended later into the week, resulting in a total loss of 24.03% across the entire week. This notable valuation decline has resulted in various mixed bullish and bearish sentiments as some investors sought to ‘sell the news’ and attempt to rake in profits as the Merge occurred, whilst others chose to hold onto their Ether. Unsurprisingly, this has divided analysts and led to a range of different hypotheses as to what the future holds for Ethereum.

As a result of the various structural changes the Merge has introduced to the network, some analysts have noted that a consequence of this is that the Ethereum futures market will now be closely tied to staking yields (rewards earned by locking ETH away for specific periods of time in order to verify transactions under the PoS consensus mechanism). This in turn will mean that the higher the staking reward, the greater the number of stakers, and the stronger the demand for selling and shorting futures. This is due to the fact that those staking ETH are unable to withdraw their staked assets until the Shanghai fork, anticipated in mid-2023, leaving stakers susceptible to potential price dips. As a means of protecting themselves from this, analysts have predicted that stakers will likely hedge their ETH exposure by selling futures contracts tied to Ethereum, hence why the volume of open interest positions remains perpetually high.

However, from a more bearish perspective, various analysts have hypothesised that the Merge’s introduction of even more deflationary tokenomic structures to the Ethereum network will spur significant long-term price growth. Bloomberg intelligence analyst, Mike McGlone, has projected that Ethereum will close Q4 between $4,000-$4,500. Similarly, a report by Kaiko, published on August 1st of 2022, proposed that Ethereum’s market share of trading volume will reach 50% parity with Bitcoin for the first time in history as a result of Ethereum outpacing Bitcoin throughout July due to significant inflows into both the spot and derivatives markets respectively.

While the former could signal a potentially uncertain future for stakers, the overall future sentiment for Ethereum remains perpetually optimistic as the network continues to upgrade and ready itself for the future.



Author：Matthew Webster-Dowsing, Gate.io Researcher
*This article represents only the views of the researcher and does not constitute any investment suggestions.
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