The blockchain behind the second-largest cryptocurrency, Ether, will soon undergo a highly-anticipated upgrade that may lead to more institutional investors putting money in the network and help lift Ether’s price.
The goal is to make Ethereum, the blockchain being upgraded, more scalable, secure, and sustainable. Among other things, it would make its crypto mining obsolete, thereby reducing the huge amount of energy required to create new tokens—a source of intense criticism.
As of now, Bitcoin is the largest cryptocurrency by market value at over $804 billion. But Ether—with a current market cap of more than $360 billion—could become the leader after the infrastructure upgrade called the “merge.”
Though a timeline isn’t definite yet, industry watchers have speculated that the “merge” could happen this summer. Investors are already betting on that, and there’s a lot of money at stake.
In addition to powering Ether, Ethereum has been adopted by decentralized finance (DeFi) applications and non-fungible token projects (NFTs), so an upgrade could dramatically enhance its valuation.
Move to proof-of-stake will result in ‘99%’ less energy used
Ethereum currently relies on what’s known as proof-of-work in which miners must complete complex puzzles to validate transactions and create new coins. This process requires a huge amount of computer power and is often criticized due to its environmental impact.
With the planned upgrade, Ethereum is moving to proof-of-stake, which would let users validate transactions according to how many coins they contribute, or stake. In return for staking more coins, users have a higher likelihood of being chosen to validate transactions on the network and earn a reward.
Currently, Ethereum has both a proof-of-work and proof-of-stake chain running in parallel. While both chains have validators, only the proof-of-work chain currently processes users’ transactions. Once the merge is complete, Ethereum’s blockchain will shift fully to the proof-of-stake chain, called the Beacon Chain, making mining obsolete.
As a result, it’s predicted that Ethereum’s energy consumption will be cut by 99%. Due to the reduced environmental impact, it’s thought that more institutional investors will want to buy Ether, use its blockchain, invest in its network, and create greater adoption.
Ethereum developers successfully tested the shift last week as part of final preparations for the merge, which added to bullish sentiment surrounding the upgrade’s potential.
Though the merge was expected to happen months ago and has been delayed, Ethereum developer Tim Beiko told Bloomberg that “it would take a catastrophic event for it not to happen this year.”
Ether issued is estimated to drop by ‘90%,’ which may boost its price
The supply of Ether is also expected to decline post-“merge,” because fewer coins are expected to be issued.
“Following the merge, the amount of ETH issued is projected to drop by 90%, which would lead similar levels of fees to reduce ether’s supply by as much as 5% a year,” blockchain analytics firm IntoTheBlock wrote in its newsletter.
If demand increases as the supply declines, the price of Ether may rise. But it’s impossible to predict the future price of any asset.
Since the implementation of another important upgrade in August, Ethereum has already burned, or destroyed, $5.9 billion worth of Ether, according to data dashboard Watch the Burn. Though that August upgrade was unrelated to the merge, it does show that the issuance of new Ether has already slowed. Post-merge, some think Ether may become a deflationary asset, or one with declining supply that can be used as a store of value. Bitcoin is already considered such a safe haven.
Staking yields estimated to cause for high returns
Under proof-of-stake, validators will “stake,” or contribute their Ether to crypto wallets. Fees that were typically paid to miners for their efforts in the proof-of-work model will turn into somewhat of passive income for validators under the new proof-of-stake, since mining will become obsolete.
“Through the merge with the proof-of-stake chain, fees previously earned by miners will pass on to being earned by those staking. This is expected to result in staking rewards between 7% and 12%,” IntoTheBlock reported.
But critics are skeptical of the ‘merge’
Though most of the Ethereum community is excited about the “merge,” some have expressed concern.
Alyse Killeen, founder of Bitcoin-focused venture firm Stillmark, said on Twitter: “Ethereum is in so. much. trouble…ensuring security is becoming harder [and] harder.” She argues that proof-of-stake is less secure and that it makes Ethereum more vulnerable to attacks.
But this critique “just seems very anti-Ethereum without much extra substance,” Beiko told Fortune. He said that the move to proof-of-stake would actually improve security against potential hacking.
“Under proof-of-stake, if an attack happens, we can simply upgrade the network to remove the attackers’ coins,” he said.
