After years of preparation and several delays the Ethereum blockchain’s most ambitious software upgrade so far is anticipated to take place next week. The Ethereum protocol is moving away from the energy-intensive “Proof of Work” (PoW) approach switching to “Proof-of-Stake” (PoS). The upgrade is one of the biggest events in the crypto industry in recent years and could attract fresh interest and capital inflows. During “the Merge”, the Ethereum mainnet merges with a separate PoS blockchain that was created in 2020 for Ethereum 2.0, called the Beacon Chain. Looking at the main implications for the crypto industry and investors, some key considerations stand out: Firstly, the Merge makes Ethereum more energy efficient. Under the current PoW consensus mechanism, Ethereum miners get rewarded in ether (ETH) for producing blocks using energy-intensive GPUs. After “the Merge”, i.e. the move to PoS, validators supporting the network will need to stake to produce blocks, moving completely away from mining. There are estimates that PoS is more than 1500 times more energy efficient than PoW.
Another result of the Merge is a significant change in the new supply of ether. Broadly speaking, daily new ETH issuance will drop by roughly 90% from 13,000 ETH in mining rewards pre-merge to only 1,600 ETH post-merge. Validators have an incentive to hold ether to earn a yield from staking. In contrast, miners have sold the majority of their mined ether to pay for electricity and new mining equipment.
The main goals of the Merge are to make Ethereum more energy efficient and scalable which could attract further interest from investors, especially in the current macro-environment of ever rising energy costs. We think that the recent outperformance of ether compared to bitcoin is going to continue in the weeks to come.
Dr. Bernd Berg, Lead Portfolio Manager
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