What Ethereum Proof of Stake Merge in September Means & How to Make Money Off Of It?

13 min read

If you’re remotely exposed to crypto, then you might have some idea of some big event coming up called The Merge. It’s been billed as the most significant event to happen in the crypto ecosystem in the last few years, and it’s definitely generating a lot of buzz.

The Merge is more exciting from a technological standpoint, and less has been said about that to the non-crypto-native folks. But much of the hype is around what it might do to Ethereum’s price. And, yes, it might push it up over time. I’ll explain why later.

Let’s start by explaining what the merge actually entails.

What is Ethereum Merge?

When Ethereum was launched in 2015, the team had high hopes for their new Proof of Stake consensus protocol. But because Proof of Stake was a new concept, they decided to launch with the tried-and-true Proof of Work style security used by Bitcoin and its derivatives. They promised to transition to Proof of Stake later, once they were confident they’d ironed out the kinks.

To ensure the smooth operation of the Proof of Stake chain before launching it to the public, they launched it as a separate Beacon chain. The Merge is when the Beacon chain is merged with the current Proof of Work chain, completing the shift to Proof of Stake.

Hopefully, as the testbed attests, the merge is to be done simultaneously and instantaneously for everyone. 

Reasons to switch to Proof of Stake

Why bother doing this at all when the Ethereum Proof of Work chain is working fine right now?

Proof of Work is a reliable and trusted method for securing a network, but it does have its downsides. One is energy consumption. Validators, also called “miners,” race to solve cryptographic equations to verify the next batch of transactions. If you win the race, you get paid a small amount of Ether or Bitcoin or whatever token the network uses.

If you don’t have the best hardware, you won’t be able to win the computational race, and your electric bill will be higher for nothing. Since hardware is so essential, some mining operations look like this:

No matter how you look at it, those operations use up a ton of power – which is ironic, considering that it takes even more power to defend the US dollar and gold as the world’s currencies.

If you want to help secure a Proof of Work network, you’ll need to invest in some hardware and electricity. However, if you can’t afford the hardware or you live somewhere where energy is expensive, you’ll be cut out. Using less power for the same level of security would be a good thing.

A big part of what The Merge is doing is reducing energy consumption. When Ethereum switches from Proof of Work to Proof of Stake, energy usage will drop by an estimated 99.98%. This will eliminate the need for massive mining operations. Anyone with a decently powerful laptop could run a staking validator if they wanted to. There is no need to consume an unusual amount of energy to solve computationally intensive problems. A computer running a validating node wouldn’t use much more energy than it would from normal use.

The reason numero uno is to decrease the cost of energy consumption significantly. Click To Tweet

If you don’t need powerful hardware or a lot of energy, what do you need? The main barrier to setting up a validating node on the Proof of Stake network is owning enough Ether. You need 32 ETH as the minimum staking amount on your own node.

If you want to be an honest transaction processor on the Ethereum network, you’ll need to stake a lot of money – over $50,000 at the time of writing. Proof of stake relies on the different members of the community running validator nodes to be honest and record transactions accurately. If you try to lie and process false transactions, your staked amount can be slashed or taken away entirely. So while it is expensive to have to stake that much Ether, it’s also how the network ensures no one is submitting false transactions.

The key difference between staking 32 ETH and investing in hardware and electricity is that the former does not result in a loss of ETH. Withdrawing ETH from a staking contract is possible with a short delay, meaning that stakers are not at risk of losing money in the same way as those who invest in mining setups. It is possible to stake with less ETH by setting up a Rocketpool Node, for example.

Hence, reason number two is: a decreased effort to participate in the validation process, thus ensuring more security and even more decentralization. Click To Tweet

The Proof of Stake network doesn’t need to pay nearly as much to the validators securing it since you don’t have a monthly hardware and electricity bill to stay on top of.

The Ethereum network currently pays miners approximately 13,500 ETH daily. However, after the merge, that will drop by around 90%. This significant reduction in the inflation rate of Ethereum could mean that more ETH is burned than is issued on particularly active days. Estimates suggest that if the gas fee on the network is at least 15 to 30 gwei, Ethereum is burning more ETH than it’s issuing.

The other reason the merge is so exciting for Ethereum from a financial perspective is that the inflation rate on the token supply is going to change from roughly 4.3% per year to somewhere between 0.4% and -2% depending on network activity. During periods of high transaction volume like last year, Ethereum can easily be burning one to two percent of its supply each year, creating deflationary pressure on the token price.

Making it reason number three: a nearly 90% decrease in ETH distribution per day. Click To Tweet

So, to sump it up: 

  • The Merge promises to be a major boon for Ethereum, reducing energy usage by 99.98% while increasing security and decentralization. With a potential inflation rate reduction of 90% or more
  • The Merge could make Ethereum a deflationary currency. On top of these quantitative benefits, The Merge would also be a massive technological achievement for a decentralized network

Therefore, further decentralization of the Application is the end goal for the translation. 

What Ethereum Merge is Not?

There are several items on the list that won’t be making it to the Proof of Stake future. 

First, gas fees for transactions will not decrease. They may even increase during periods of high activity. However, nothing about the switch from PoW to PoS will affect that.

Second, Proof of Stake won’t make transactions go through any faster, despite what some people think. This is in line with Ethereum’s goals to be a security and settlement layer, rather than a high-speed transaction chain.

It’s also worth noting that Ethereum may not necessarily be deflationary. A lot depends on gas fees and network activity. If activity remains low, there may not be any deflationary pressure. However, if activity picks up on L2s and gas fees rise, Ethereum could become deflationary over time.

Finally, there’s a misconception that with Proof of Stake, the amount of ETH you have gives you the power to vote on the future of the network. This is not the case. Chain upgrades will still be decided by consensus of validators and the implementation of Ethereum Improvement Proposals.

Now, let’s discuss some concerns. 

Possible issues about The Merge and Proof of Stake

Centralization and 51% majority ambush. 

The primary concern with staking is the potential for centralization of power. With staking services from companies like Lido and Coinbase, a large portion of ETH is being locked up by fewer and fewer validators. There are 240,000 validators on the Beacon Chain, but the great majority of staked ETH is held by only a small number of stakers. Lido alone has around 30% of the staked supply.

If someone managed to accumulate 51% of all the staked ETH, or if a few stakers colluded, they could conduct a hostile takeover of the rest of the chain. This could be a problem for Proof of Stake chains that are vulnerable to 51% of attacks.

As of the time of writing this article, there is no clear way of preventing it in theory, however, as more stacking platforms emerge, and with the majority of participants choosing to divide their staking across new platforms, we should be able to avoid the issue. 

Make no mistake, this is one of the biggest concerns, and the whole community will need to find a sustainable solution (quickly) to foster the adoption rates and further strengthen the Proof of Stake path forward for the network. 

Less resilience to Censorship

One of the main concerns that has arisen in the past few weeks is the possibility that, with fewer large centralized staking providers like Coinbase and Lido, they could be forced by a government to validate only a censored version of the Ethereum blockchain – such as one that blocks certain applications or addresses from using the network.

It’s not surprising that this could happen. There’s already a way for the community to combat it through a “User Activated Soft Fork.”

In short, a community might choose to switch from Coinbase to a slightly modified version of the ETH to counterbalance the malicious behavior. 

If Coinbase were to comply with sanctions, it would mean the end of their business. Given the stakes, it’s more likely that companies would simply stop offering staking services, rather than face the consequences.

Enriching the Rich further

With Proof of Stake, you can earn a passive income by staking your ETH. The more ETH you have to stake, the more ETH you’ll get paid in return (though with the same APR for everyone). So the richer you are now, the richer you’ll be in the future.

This argument may seem a little silly at first, but it actually makes a lot of sense. After all, under Proof of Work, the more money you have to invest in mining equipment, the more money you can make. So, it’s not really that different after all.

Chain Reliability

This argument may seem a little silly at first, but it actually makes a lot of sense. After all, under Proof of Work, the more money you have to invest in mining equipment, the more money you can make. So, it’s not really that different after all.

Does that mean that Proof of Stake is less reliable than Proof of Work? Some people have raised this question about the network’s reliability post-transition, but the Beacon Chain has never had any downtime since its launch in 2020.

Ultimately, there’s no indication that network reliability might decrease after a merge. So I’m not sure how seriously to take this concern. It might just be FUD.

Ethereum Will become the first of its kind Decentralised Proof of Stake Network

Ethereum’s shift to proof-of-stake is both scary and exciting – it’ll be the first fully decentralized network of its kind.

If they are successful, it will be a great achievement for a decentralized team of contributors. Arguably, this is more momentous than the original Bitcoin launch, due to the added complexity of a Proof of Stake system.

But it’s also something that’s never been done before. So, pulling it off without a hitch is far from a sure thing. Even though they’ve been test-running it for a while, something could still go wrong. But, it wouldn’t be terribly surprising if they managed to pull it off. They seem to have done a good job covering all their bases.

How to Invest in Success or Demise of Ethereum Merge & Bet on Proof of Stake?

Although we don’t hold a crystal ball in our arsenal, and despite the “crypto winter” being as real as one can get over the past seven months ( near 120% drop since All-Time Highs in November 2021), there is a fair chance that Ethereum and all crypto sphere will really after the event. 

Even though the event is quite anticipated and some might say priced in, the success of the switch will inevitably lead to more funds pulled into Ethereum Network. 

Therefore, if you are comfortable with speculation, it is a fair bet to go Long on Ethereum (Exness, VT Markets, and XM offers seamless access via familiar  MT4/5). 

Another way could be to buy and hold Ethereum long/mind term while also placing a bunch of smaller short positions to benefit from lower-time frame volatility that may engulf Ethereum during the time of the merge (effectively hedging your longer-term non-leverage holding approach). 

Overall, new funds come into the Crypto sphere day in and out, with blockchain technology being among the hottest technologies – that’s argued to speed up a transfer to a more decentralized economy and even stepping-stop in metaverse development. 

Stay tuned to our newsletters and asset management solutions for an extra exposure to this exciting market and, as always, trade safe.

Team of Elite CurrenSea

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