ETH Merge and its Aftermath
What is the Ethereum Merge and why?
The Ethereum Merge is the most significant upgrade for the Ethereum Network migrating its consensus algorithm from Proof-of-Work (PoW) to Proof-of-Stake (PoS). It is achieved by running a parallel chain called the Beacon Chain on 1st December 2020, underwent more than 1.5years of extensive testing and bug bounties before merging the Beacon Chain to the Ethereum Mainnet (the ETH we hold and use now). The Beacon Chain is the consensus layer which replaces the existing layer of PoW and the execution layer of Ethereum (Mainnet), along with all its previous transaction records remain unchanged.
Under the PoS consensus algorithm, Ethereum will be:
1) More accessible – Anyone can access the network and become a validator node as compared to owning expensive hardware for mining operations under PoW.
2) More scalable – Faster transaction speed, reduced gas fees and upgrades that are not possible under PoW to encourage more adoptions on Decentralised Applications (Dapps) and Decentralised Finance (DEFI).
3) More secure – Increased accessibility and participation makes the network more secure and more decentralized which mitigate the issue of 51% attack on the network that PoW is susceptible to.
4) More sustainable – PoW consumes a great amount of energy and is not sustainable for our environment. PoS is a more energy efficient way to validate transactions and produce blocks on the Ethereum blockchain.
Observations after the Merge
The Merge upgrade is successfully completed and 2 week after it, I found some interesting observations:
1) ETHW, which is the forked version of the pre-Merge ETH starts to trade actively on major exchanges such as Binance, FTX
2) ETH, ETC and ETHW lost value sharply right after the Merge for 3-4 days straight
3) ETHW moved move violently than the other 2 ETH counterparts
4) At the time of writing, ETH has dropped about 14%, ETC 27% and ETHW 44%
You might ask, shouldn't an upgrade makes ETH better, and hence the price should increase? I have some hypothesis myself to explain the price action. ETH is the first blockchain protocol after Bitcoin that enables Smart Contracts. Being the first mover, it gained significant market share and has a large pool of developers / communities working on ETH's ecosystem before other PoS layer 1 projects such as and not limiting to TRX, ADA, NEO, ALGO, XTZ and BNB came into the market to offer comparable blockchain solutions that are faster, cheaper and more scalable.
ETH's dominance was affected but not threatened because fundamentally, the consensus layer of ETH is different from the others as ETH relied on miners to validate transactions, which many argued is more secure and decentralized. The closest thing to ETH is ETC, which is a previous version of ETH after a forked that took place in 2016 and ETC made little changes since. However, after the Merge, PoW changed to PoS which in turn changed the very fundamental basis of valuation for ETH - Real world resources such as electricity, mining rigs, manpower, rental and operation cost.
ETHW, which was given to ETH holders at a rate of 1:1 also saw large selling pressure after the Merge. Think about it, you have 10 ETH and now you are given 10 free ETHW, coupled with an vibrate marketplace created by existing Exchanges, most people will choose to sell their ETHW because it comes at zero cost for them. This Godsend freebies and also the lack of buyers in the market could explain why price of ETHW dropped notably steeper than ETH and ETC.
Moving Forward
It is evident to say that ETH miners did not stop their operations and wind down their businesses because of the Merge, it is just not economically sound because the infrastructures are already in place, switching to mine either ETC or ETHW will make more business sense as long as mining remains profitable.
As for ETH, their long term roadmap seemed unchanged and carried out as planned. Next upgrade will be the introduction of Sharding and this will greatly increase the Transaction Per Second (TPS), making ETH more scalable. For further reading about this ETH roadmap, you can go to their Ethereum official page.
Closing Thoughts..
Overall, I think the switch from PoW to PoS is a sound move as it is in line with ETH's vision of becoming the world's super computer and requires higher scalability. On the short term, I am bearish on the price of ETH until the world is ready to transit and embrace blockchain technology on a wider scale. There are many projects that are direct competitors of ETH and they started off on the PoS route at the very beginning and had went through many improvements and upgrades. Their community validator node bases are also stable and mature, they can seriously contend with ETH.
ETHW has dropped much more than ETH and ETC, it could be a leading indication that ETH and ETC still has room of price correction, or ETHW is lagging behind the two after a serious selloff of the free airdrops and looking at a sharp price rebound, which I think the former is a more likely scenario.
The Ethereum Merge is the most significant upgrade for the Ethereum Network migrating its consensus algorithm from Proof-of-Work (PoW) to Proof-of-Stake (PoS). It is achieved by running a parallel chain called the Beacon Chain on 1st December 2020, underwent more than 1.5years of extensive testing and bug bounties before merging the Beacon Chain to the Ethereum Mainnet (the ETH we hold and use now). The Beacon Chain is the consensus layer which replaces the existing layer of PoW and the execution layer of Ethereum (Mainnet), along with all its previous transaction records remain unchanged.
Under the PoS consensus algorithm, Ethereum will be:
1) More accessible – Anyone can access the network and become a validator node as compared to owning expensive hardware for mining operations under PoW.
2) More scalable – Faster transaction speed, reduced gas fees and upgrades that are not possible under PoW to encourage more adoptions on Decentralised Applications (Dapps) and Decentralised Finance (DEFI).
3) More secure – Increased accessibility and participation makes the network more secure and more decentralized which mitigate the issue of 51% attack on the network that PoW is susceptible to.
4) More sustainable – PoW consumes a great amount of energy and is not sustainable for our environment. PoS is a more energy efficient way to validate transactions and produce blocks on the Ethereum blockchain.
Observations after the Merge
The Merge upgrade is successfully completed and 2 week after it, I found some interesting observations:
1) ETHW, which is the forked version of the pre-Merge ETH starts to trade actively on major exchanges such as Binance, FTX
2) ETH, ETC and ETHW lost value sharply right after the Merge for 3-4 days straight
3) ETHW moved move violently than the other 2 ETH counterparts
4) At the time of writing, ETH has dropped about 14%, ETC 27% and ETHW 44%
You might ask, shouldn't an upgrade makes ETH better, and hence the price should increase? I have some hypothesis myself to explain the price action. ETH is the first blockchain protocol after Bitcoin that enables Smart Contracts. Being the first mover, it gained significant market share and has a large pool of developers / communities working on ETH's ecosystem before other PoS layer 1 projects such as and not limiting to TRX, ADA, NEO, ALGO, XTZ and BNB came into the market to offer comparable blockchain solutions that are faster, cheaper and more scalable.
ETH's dominance was affected but not threatened because fundamentally, the consensus layer of ETH is different from the others as ETH relied on miners to validate transactions, which many argued is more secure and decentralized. The closest thing to ETH is ETC, which is a previous version of ETH after a forked that took place in 2016 and ETC made little changes since. However, after the Merge, PoW changed to PoS which in turn changed the very fundamental basis of valuation for ETH - Real world resources such as electricity, mining rigs, manpower, rental and operation cost.
ETHW, which was given to ETH holders at a rate of 1:1 also saw large selling pressure after the Merge. Think about it, you have 10 ETH and now you are given 10 free ETHW, coupled with an vibrate marketplace created by existing Exchanges, most people will choose to sell their ETHW because it comes at zero cost for them. This Godsend freebies and also the lack of buyers in the market could explain why price of ETHW dropped notably steeper than ETH and ETC.
Moving Forward
It is evident to say that ETH miners did not stop their operations and wind down their businesses because of the Merge, it is just not economically sound because the infrastructures are already in place, switching to mine either ETC or ETHW will make more business sense as long as mining remains profitable.
As for ETH, their long term roadmap seemed unchanged and carried out as planned. Next upgrade will be the introduction of Sharding and this will greatly increase the Transaction Per Second (TPS), making ETH more scalable. For further reading about this ETH roadmap, you can go to their Ethereum official page.
Closing Thoughts..
Overall, I think the switch from PoW to PoS is a sound move as it is in line with ETH's vision of becoming the world's super computer and requires higher scalability. On the short term, I am bearish on the price of ETH until the world is ready to transit and embrace blockchain technology on a wider scale. There are many projects that are direct competitors of ETH and they started off on the PoS route at the very beginning and had went through many improvements and upgrades. Their community validator node bases are also stable and mature, they can seriously contend with ETH.
ETHW has dropped much more than ETH and ETC, it could be a leading indication that ETH and ETC still has room of price correction, or ETHW is lagging behind the two after a serious selloff of the free airdrops and looking at a sharp price rebound, which I think the former is a more likely scenario.
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