Ethereum “The Merge”: What you should know about the crypto event of the year
Even in advance, the Ethereum Merge was hailed as “the” crypto event of 2022. What sounds like an event for developer nerds at first glance, however, has a big impact on the entire crypto sector and investors. After all, within a few years, Ethereum has developed into a successful alternative to Bitcoin, which, although it only has half as much market capitalization, has many more uses. Find out the potential of blockchain and how the merge could impact the future development of Ethereum and ETH.
What is Ethereum?
Strictly speaking, Ethereum is not a cryptocurrency, but an entire system based on blockchain. The digital currency used in it is called Ether (ETH). In contrast to Bitcoin, however, the Ethereum blockchain itself has a so-called smart contract functionality, which allows contracts of all types to be managed, stored and automated as soon as the conditions contained therein are met. This saves time and costs for intermediaries, such as banks or notaries, and is considered very secure.
Current areas of application of the Ethereum blockchain include NFTs (Non-Fungible Token), which caused real hype due to astronomical sales prices for digital works of art. Even smart contracts in the area of DeFi (Decentralized Finance), the shared economy, or the Digitalization of tangible assets are becoming increasingly important and can liberalize or democratize many industries. This is because blockchain makes assets such as art, real estate shares, private equity and certain forms of financing, which many private investors have previously withheld from, accessible to everyone. Industry and administration are also likely to benefit from smart contracts, as contracts, processes and payment flows can be processed quickly, globally, securely and cost-effectively via the blockchain.
Why is the Ethereum blockchain getting an update?
The extensive possibilities of the Ethereum blockchain are driving interest in its further development. The planned merge is primarily intended to solve two fundamental blockchain problems: the high energy consumption for mining and the scaling problem due to low transaction numbers. The update is intended to make the Ethereum blockchain faster, more secure and, above all, more sustainable. In addition, the merge is also reducing the Ether inflation rate: The distribution of new Ether is reduced by around 90 percent, which could spur the exchange rate of ETH as a result of the resulting “shortage.”
What is the Ethereum Merge?
As an Ethereum Merge, the Ethereum blockchain's transition from a proof of work consensus process to a consensus process Proof of Stake referred to. For this purpose, the Ethereum Foundation has developed a new blockchain in recent years, which is now being “merged” with the old blockchain. With the switch to Proof of Stake, mining ends, as the Ether blockchain is then secured by validators.
But what is the difference between Poof of Stake and Proof of Work? In the “old” Proof of Work method, users compete with each other in the network using computing power (“Work”): They check transactions for authenticity and enter them into the blockchain in encrypted form. Only the miner who completes the calculations first receives, for example, Ether as a reward.
In contrast to proof of work, proof of stake validators don't have to use tremendous computing power because they are determined randomly and don't compete with each other. You don't have to mine blocks all the time, only when they're selected and validate suggested blocks when they're not selected. In this way, the According to all expectations, the Ether blockchain's energy consumption of over 99 percent. Through the hoped-for energy reduction, Ethereum could shed its image of the climate sinner and serve as a role model for the industry.
What opportunities does Ethereum 2.0 hold for the crypto industry and investors?
Market observers basically expect two effects of the merge: On the one hand, the Ethereum reform could attract new investors or speculators who hope that the cryptocurrency ETH will gain. On the other hand, the decentralized financial world (DeFi) is likely to benefit from the merge and the associated blockchain improvements.
Many investors are currently hoping that ETH will rise in price thanks to its “green” image and disguised supply - and could even knock the previous top dog Bitcoin off the throne. In technical jargon, this point in time is called “flippening.”
It remains to be seen whether the hoped-for price increase of the cryptocurrency Ether will actually occur. ETH has not been a profitable investment in recent months. Since investors have generally avoided volatile forms of investment due to the tense market situation, Ethereum lost around 50 percent in value since the beginning of the year (as of September 15, 2022). Cryptocurrencies are likely to be subject to high fluctuations in the future and are therefore only conditionally suitable as an alternative investment.
On the other hand, the market potential of the Ethereum blockchain is much more exciting, which, as mentioned, could transform many areas such as industry, administration, art and culture as well as the important decentralized finance sector. The biggest opportunity in the DeFi sector is for users to transact, lend, trade or Investments in alternative tangible assets No longer need banks and intermediaries, but can carry out financial transactions with other users in a decentralized manner. This autonomous processing can be accompanied, among other things, by low fees and increased return potential.
In this regard, it is hoped that the Ethereum Blockchain Merge will provide an improved basis for further optimizing the speed, efficiency and scalability of the network in the future and to be able to fully exploit the potential of the Ethereum blockchain.
