Key Points:
The Merge is the upgrade event of the Ethereum network when moving from Proof-of-Work (POW) consensus mechanism to Proof-of-Stake (POS). When the upgrade is completed, the Ethereum 2.0 chain will be born with the fusion of the existing Ethereum chain and the Beacon chain.
This is expected to be a breakthrough in the development journey of the Ethereum ecosystem, improvements in Sharding technology will also help this chain to require less resources, faster, to scale easily but still have can partially maintain confidentiality. Accordingly, miners will no longer be able to mine ETH, but instead, if they want to receive ETH, they will have to stake ETH into validators.
Finally, after months of waiting, the most awaited event in the community in 2022, The Merge has officially taken place and the event was brilliant on September 15. It brought Ethereum officially from proof of work (POW) to proof of stake (PoS).
After The Merge, Ethereum will become a less energy-intensive blockchain because the consensus mechanism will no longer need miners as before. Because it uses less energy, the reward (reward) for validators on the PoS blockchain will also be lower than the reward for miners on the PoW blockchain, thereby helping to create deflationary pressure on ETH when combined with the mechanism. EIP-1559 coin burning process.
In the half-hour after The Merge took place, the supply of Ethereum decreased by more than 100 ETH, showing an apparent deflationary effect. This makes users expect a long-term price increase in the future. In addition, mining money no longer also helps the world’s second-largest blockchain cut power consumption by more than 99%.
According to CryptoQuant, right after The Merge took place, both the hashrate and the mining difficulty on the Ethereum network fell to zero, marking the end of the Proof-of-Work era that lasted for the past seven years.
However, gas fees on this network will not decrease after The Merge, and the transaction speed will not be faster. Gas fees and transaction speeds on Ethereum will only improve thanks to the sharding solution being implemented in The Surge – another major update underway in tandem with The Merge.
However, Ethereum founder Vitalik Buterin also shared that the successful The Merge is still only the first step in the journey for Ethereum to move towards Ethereum 2.0. The software engineers of the Ethereum Foundation said the upgrade process of The Merge went smoothly. Many notable upgrades will come soon, such as Surge, Verge, Purge and Splurge.
Other updates like The Verge, The Purge, and The Splurge are also being worked on by the Ethereum team to make the blockchain faster, more decentralized, and more accessible to the masses. However, completing The Merge also means completing 1/2 of the way to Ethereum 2.0.
Lido and Rocket Pool are [liquid staking] protocols that allow investors to earn future post-merge profits based on their ETH – by staking. These protocols issue derivative tokens that represent tokens staked on the protocol that can be traded. These are called stETH and rETH, respectively.
When The Merge takes place, the Ethereum blockchain will switch from using a proof-of-work consensus mechanism to a proof-of-stake. This means that a network of honest validators will secure the network. These people are rewarded with ETH. Currently, there are about 400,000 validators who are making around 5% percent annual return (APY).
To become a validator, you must stake 32 ETH (currently worth over $45,000), which is a high barrier to entry. Staking acts as escrow to ensure validators behave properly, so it needs to be significant.
Those who can’t afford 32 ETH can pool their resources using Lido and Rocket Pool. These two protocols collect all the funds and use them to fund their validating network nodes. After that, APY will be shared among stakers.
Let’s say you staked some ETH on Lido, and in return, you received STETH (representing the tokens you staked along with the rewards paid out by the Ethereum network). How do you trade? Well, the easy way is ETH/stETH on Curve Finance.
Curve Finance is a beloved decentralized finance platform that allows users to swap tokens with meager fees and slippage. The platform uses an automated market maker model, allowing anyone to deposit liquidity on the exchange and receive trading fees.
Curve pools generate fees based on transaction activity, so if The Merge increases the number of people wanting to trade with the ETH/stETH pool, these pools will increase costs for liquidity providers. Furthermore, Lido DAO offers to pay liquidity providers for their ETH/stETH pool an additional 4% APY in LDO tokens.
Optimism (OP) and Metis (METIS) are Layer 2 (L2), which are meant to be built on the Ethereum blockchain to ease congestion on the Ethereum mainnet. There are a number of L2s already in the works, Arbitrum being one of the most popular, but Optimism and Metis have some of the more mature token ecosystems and are, therefore, more likely to benefit from price increases based on Merge.
While Layer 2 doesn’t directly benefit from The Merge, it can get some impetus from its close association with Ethereum. This is due to the attention economy effect, which can be understood broadly in the crypto industry that whatever drives the most vigorous attention also causes the most capital flow.
Through the above reading, we hope you have a glimpse of the critical event of The Merge of Ethereum and can identify the protocols that receive the most significant benefit after the success of this event.
Please give your feedback in the comments section to improve our article.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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