The Ethereum (ETH 2.51%) blockchain network is about to get a huge facelift. The platform has been called slow, bloated, and inefficient, and its transaction fees have an annoying tendency to skyrocket when the network gets busy. All of these issues should go away in the Merge, an upcoming event that will create the long-awaited Ethereum 2.0 system.
Test runs are firing off without any issues, and the Merge could take place as soon as August. Could the Ether token skyrocket after its Merge? Should you rush to pick up a few tokens beforehand?
Let's take a look.
What is the Merge?
Ethereum currently uses a proof-of-Work (PoW) architecture, similar to the blockchain system supporting Bitcoin (BTC 0.77%). This is a highly secure blockchain design, but it's also very inefficient in several ways. PoW networks consume a lot of electricity in their mining operations, and these systems take a lot of time to validate new data blocks.
This design has become an albatross for Ethereum. This is still the largest platform for smart contracts, and app developers flock to this solution due to its proven stability and massive scale.
But a number of hungry challengers are nipping at Ethereum's heels, offering similar smart-contract functionality with faster transactions, lower network fees, and a smaller carbon footprint. The largest so-called "Ethereum killers" to date include Cardano (ADA 1.99%), Binance Coin (BNB 1.54%), and Solana (SOL 1.77%).
CRYPTO: ETH
Key Data Points
The Ethereum community will erase many of these flaws with the Merge, which will replace the PoW platform with a faster and less resource-hungry proof-of-stake (PoS) system. Furthermore, Ethereum mining will not be a thing anymore, but investors can stake their Ether tokens in order to support the new validation system and earn some dividend-like rewards. This switch has been in the cards for years, and the developer community has checked off every box on the testing checklist leading up to the final redesign.
The exact date for the final Merge between Ethereum's historical transaction ledger and the revamped PoS validation network is coming up soon. The date is not yet set, but developers are targeting the second half of 2022. When they flip the switch, Ethereum will be just as fast, inexpensive, and power-sipping as Cardano or Solana, and that massive developer community isn't going away. This is a game-changing event, and a necessary step in Ethereum's long-term evolution.
Do significant network upgrades always drive crypto prices higher?
The thing is, Ether investors have seen this change coming from a mile away. The Merge won't surprise anyone, as it simply follows through on promises that were first made years ago.
Therefore, the benefits of the Merge are already accounted for in Ether's current market price. Its Merge is just one of many components that add up to a final price tag, and market makers have been distracted by macroeconomic risks in 2022. The long-term promise of crypto-based decentralized finance systems and ultra-smooth payment networks has been buried under inflation fears and unclear cryptocurrency regulations. Ether prices are down by more than 70% year to date, and smart-contract platforms are serving up far fewer transactions per day this year:
Ethereum transactions per day. Data by YCharts.
For example, take the Berlin upgrade in April 2021. This event optimized network fees for Ethereum's smart contracts and added several new transaction types, which add up to a pretty significant technology upgrade. But the Ether token traded almost exactly in line with Binance Coin and Cardano that week, so the arrival of the Berlin update didn't exactly trigger fireworks. Ether's returns were just as much in line with its closest challengers around the introduction of staking contracts, the crucial Istanbul update in December 2019, and many other platform upgrades.
So you shouldn't expect Ether prices to skyrocket on the day of the Merge. If anything, you might see a bump when the announcement of that event is made, but even then, the market-moving effect should be small. The Merge is a good thing for the Ethereum ecosystem, and investors will benefit from it in the long run; it just won't send token prices to the moon right away.
If you're investing in Ethereum, I hope you're doing it with a long-term mindset and a high threshold for short-term volatility risks. This is a bumpy ride, and the Merge isn't a magic wand that can address every challenge facing the Ethereum platform. It's a good start and a powerful boost, though, and a small Ether investment today could serve your portfolio well over the long haul.
