Last week, Ethereum pointed to the timeline of its upgrade known as “Merge”. It has seen a significant increase in price following the release of notes from the last developer meeting. This upgrade will change the security, energy consumption and tokenomics of the network. Staking will play an important role in this. So how should the investor prepare for upcoming events?
What is Merge?
The Ethereum Blockchain is undergoing a series of upgrades to move from a Proof of Work (PoW) to a Proof of Stake (PoS) consensus mechanism. Milestones for completion of this are:
- The creation and launch of Beacon Chain took place on December 1, 2020. Beacon Chain is what introduced PoS on Ethereum. This is why it is called the “consensus layer”.
- Migration of the current chain’s consensus mechanism from PoW to PoS (current forecast: September). The existing chain, Mainnet will then act as the “execution layer”.
The consensus layer will take care of the security of the network. The execution layer is where smart contracts run and transactions are created. The upgrade will connect these two chains to act as one chain. Hence, the name of the event changed from ETH 2.0 to “The Merge”.
Why is “merge” important?
As we have also reported as Kriptokoin.com, Beacon Chain has been operating since December 2020. Therefore, a large part of the ETH supply is already staked here. He receives awards for the work of the network. Over 12 million ETH is currently staked in the Beacon Chain smart contract. This number is almost 10 percent of the current ETH supply. In addition, these ETHs are locked on a long-term basis as there is no date for the deployment of unstake capability under the PoS ETH chain.
How does it affect Ethereum emissions?
After the PoS change, there will be no more mining rewards. Therefore, above the 10% supply already locked to the staking contract, ETH emissions will drop significantly. A total of 13,347 ETH was added to the current supply on July 21, according to Etherscan. If we remove the block rewards (mining) and leave only the stake rewards, the daily net result will be negative. This means that more ETH than rewarded will be burned, lowering the overall ETH supply.
How can you benefit from this change?
None of the following does not constitute financial advice. Traders should always exercise extreme caution when trading cryptocurrencies. Footprint analysts pointed to the following as some investment strategies for the ETH merge:
buy Ethereum
With a somewhat firm date announced for “The Merge”, there is a brief period in which the ETH supply will continue to increase. After that, he will be a “deflationist”. If the investor believes that ETH will take its place in the crypto markets and its demand will increase, the price of ETH will rise. We have already seen some price action taking place. However, the incentive to increase the amount of ETH staked (and withdrawn) will increase. Therefore, there is still room for further upside, according to some experts.
Buy liquid, staked ETH
Since the ETH sent to the Beacon Chain staking contract is locked for an unknown period and the minimum amount to be sent is relatively high (at least 32 ETH), pools have been created to help users stake their ETH. Some of these pools later created an ERC-721 token as a tradable token of this staked ETH.
Examples include Lido’s stETH token and Rocket Pool rETH. When the user accesses their platform to stake ETH, the tokens are minted as ETH at a ratio of 1:1. However, it is traded at a discount to the ETH price as it is a future redemption receipt. This discount is not fixed. As we can see in the table below, it determines the market value:
Purchasing the staked version can provide the investor with the ability to freely transact with their coin after PoS is implemented on the Ethereum Blockchain. In this case, it gives the investor an extra 2-3 percent return and with it the interest. There is no deadline for this feature to be deployed. But roughly, that timeline is 6-12 months after “Merge”.
What are the important implications?
In the long run, ETH price will rise with The Merge. The token will switch from an inflationary issue to a deflationary issue. This is the logical price action to be expected with supply contracting and demand remaining the same (and likely increasing). For extra opportunities to increase earnings, the staked version often provides a discount on the spot ETH price. Therefore, according to experts, buying a liquid staked ETH can bring additional profit if the investor can wait longer.
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