Bitget's Insights: How The Entire Ecosystem Will Benefit From The Merge (Part 2)

In the previous AMA session with Gracy Chen - our managing director, we already find out what the Merge is. For this session, let’s get straight to some of the concerns of Post-Merge.

One week after The Merge, as we all know, the price of ETH dropped significantly. But what does this mean for the ETH holders and the investors? Is reduced issuance as one reason to believe that: Less ETH in circulation means every individual token is theoretically more valuable? Before we dive in, it is important to note that there is no perfect behavior and no one can predict what will happen with this update.

Question 1: What are the real benefits of the Merge to Ethereum token holders?

First of all, it is important to mention that the entire ecosystem will benefit from the progress offered by Ethereum. Ethereum is fighting some big battles and is trying in a slightly different way compared to all other protocols. We can expect this may serve as a trigger, or help remove barriers for some potential players and see a wave of massive adoption of institutions because Ethereum is now much more environment-friendly.

Next, one of the significant consequences of The Merge impacts the ETH token. The number of ETH created should decrease by 90%. Staking rewards will be 1,600 ETH/day versus 13,000/day pre-Merge.

If certain specific conditions are met, ETH could even be a deflationary token. Almost everyone thinks this is a great thing. Indeed, few people like inflation, whereas deflation allows supply to decrease and potentially increase the asset’s prices. But, will the deflation is bad and the inflation is good? Well, we don't have a crystal ball and the answer is not yes or no. Inflation allows a currency to circulate, which is one of the most important things in economics because we do not want people just to save without using the money they have. It also encourages initiatives and creates new opportunities. Deflation, on the other hand, can slow down an economy and lead to difficult consequences.

So at the end of the day, for the token holders and investors, it is important to note that the ETH token is a token that will manage the ecosystem, secure the network and enable the growth of the protocol adoption. Because everything in the Ethereum protocol is designed to encourage the circulation of ETH, if the ETH issue is well managed, then the ETH price will come out ahead.

Question 2: Should we be expecting a significant price rally post the Merge?

There is one big change that concerns the issuance of new ETH. Indeed, the number of ETH that will be issued on the network will decrease by almost 90%. We can compare this to a Bitcoin super halving day, which is the time every four years when the Bitcoin protocol halves the number of bitcoins produced to reward each block producer. That said, ETH differs from BTC in that there have already been several updates that have increased or decreased the number of new ETH issued, such as the EIP-1559 update that burned some ETH. Whatever happens, this reduction is drastic and the model remains slightly inflationary overall.

As mentioned earlier, the number of new ETH issued is decreasing, so if demand remains on the rise, the price should logically rise. Many people are betting on that scenario while others believe that since this update was expected, the market anticipated it and in the minds of investors, this news has been built into the ETH price evaluation for quite some time.

Question 3: Can the Ethereum blockchain compete with other blockchains like Cardano and Solana which operate on the same consensus mechanism but have more TPS (transactions per second) strength?

We're going to break a common misconception right away, this merge won't make the network easier to scale immediately. Transactions will go only slightly faster and we estimate that this will be about +10% in terms of speed. As for scaling and the ability of the Ethereum network to handle many more transactions at once, we will have to wait for other developments.

One of the objectives of the Merge is to reduce the energy consumption of the network. There are other effects and this update is supposed to allow the Ethereum protocol to do a lot more things in the future but in the very short term, once this update takes place, it's mostly the energy consumption of the Ethereum network that will decrease. We find slightly different figures everywhere but the Proof-of-Stake would be between 100 and 2,000 times less energy-consuming than the Proof-of-Work.

So, what is the future of Ethereum? There's a lot of data to consider and no one can really tell you for sure what is going to happen. What is certain is that Ethereum will open a new door in the ecosystem. It is the biggest blockchain and the one with the most users. That being said, Vitalik and his team have taken one of the biggest risks in the history of blockchains to optimize their ecosystem and do everything they can to make sure that Ethereum will be adapted and used by the masses in the years to come. Other projects will therefore also have to raise their standards and take risks if they want to follow Ethereum's pace, which may be beneficial for the entire blockchain ecosystem.

Question 4: Do you think it was right for Ethereum to move from PoW (Proof-of-Work) to a PoS (Proof-of-Stake)?

The first thing to know about this is that we are moving from a system based on Proof-of-Work, i.e. miners who do a mathematical calculation and who provide proof of having done this work in order to be able to open a new block that will be added to the blockchain, to a Proof-of-Stake consensus, i.e. a consensus that requires, to take part in its validation consensus, the possession of a certain quantity of ETH tokens that are blocked.

If we call it The Merge it is because it is the fusion of these two chains that already exist, namely the Ethereum execution chain that we know from the beginning and the new chain in Proof-of-Stake which is called the Beacon Chain and which is also called the Consensus Layer.

Yes, we think this is the right decision because The Merge has been tested multiple times on test networks. However, there is no such thing as zero risk.

Question 5: Where do you see the price of Ether ending of 2022?

In short, we don't have a perfect answer. We also wonder about the consequences of this update on the price of Ethereum as well as the entire cryptocurrency market. It is hard to know for now. There are a lot of things that should be taken into consideration: Will The Merge be executed well? Will there be enough liquidity to drive up the price of the token? Will there be a lot of speculation? Has The Merge already been priced before? Will this pricing happen when the consequences of The Merge overtake the speculation? We don't know yet.

What is certain is that Ethereum will open a new door in the ecosystem. It is the biggest blockchain and the one with the most users. Other projects will therefore also have to raise their standards and take risks if they want to follow Ethereum's pace, which will be beneficial for the entire blockchain ecosystem.

The Merge and the other major updates that are coming will mark a change of era in the ecosystem. It will be very hard to get ahead of ETH. That said, it remains to run, and everything can happen. If all goes well, then Ethereum will reign and dominate even more, not only in 2022 but also in the upcoming years.

It will be interesting to follow the new updates and we will, of course, write more articles about these topics.

Further reading

Post-Merge: 5 Facts You Need to Know

Things you need to know about the Ethereum 'Merge'

What is the Proof-Of-Stake (PoS)? How is it different from Proof-of-Work (PoW)?

Different Token Standards on the Ethereum Blockchain

Bitget's Insights: How the Entire Ecosystem Will Benefit From the Merge (Part 1)

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