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Ethereum Merge - So What?

Artwork by Steven Grundy
The long awaited Ethereum "Merge" is finally upon us.  I've heard people say "So what".   So what?  I think they don't understand the implications of the merge.  Either that or they really are betting against Ethereum.

I think this upgrade is probably the biggest thing for Ethereum since smart contracts first came out.  This change has the possibility of upsetting the apple cart in terms of Ethereum and BTC.  That's a big claim, but I really think it's possible.

The Ethereum Merge has been set for the week of September 19th, 2022.  The merge is when the Ethereum execution layer will be joined with the new proof of stake consensus layer.  What does that mean and why should I care?

What it means is that Ethereum will be changing from an energy intensive Crypto coin like all others to a 99% more efficient crypto coin like only a few have done.  Right now Ethereum is mined just like BTC and a host of other Crypto currencies.  That mining takes place by running very energy intensive operations on specialized computers.  

After the merge, Ethereum mining will change to what is called "Proof of Stake".  Proof of Stake means in order to mine more Ethereum, people will securely store, or "Stake," some or all of their Ethereum.  So now instead of running computer programs which gobble up energy, one will simply pledge to store their Ethereum for some time period in exchange for some payout, or "Yield".

The yield will vary, but it is expected to be somewhere from 4-6%, perhaps rising as high as 20% as it does for some other coins.  It functions in much the same way as a bond does.  You put out a certain amount of money, for a specified time period, in exchange for a defined interest rate to be paid at the end of that time period.

This change will most likely have very positive effect on the price of Ethereum.  First of all, institutional investors who have come into the Crypto space have done so halfheartedly.  They want to get in on the money being made in crypto, but they general much prefer to deal in pre-defined yields rather than in price growth.  Additionally the very wide price swings of crypto turns a lot of them off.  The same should not be true for a merged Ethereum.

In addition to the influx of institutional investors, the merge should also lead to an increase in price due to increase demand and decreased supply.  The increased demand is simply due to the added potential investors, but the decreased supply is not so obvious.  The switch to a Proof of Stake consensus layer, by nature will reduce the Ethereum supply.  There are estimates as high as 30% for how much of the Ethereum float will be staked after the merge. That is a LOT of Ethereum being taken out of the supply side of the equation.  There are several more changes, that will help encourage staking, thereby reducing the supply even further.

How much will that effect the price, nobody knows.  But by the look of things, with the price of Ethereum up over 50% in the past 3 weeks, the feeling by most, myself included, is that it will effect the price in a very positive way.  

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