In the crypto world, there has understandably been much excitement about Ethereum (ETH 5.90%) and its long-anticipated technological upgrade known as the Merge. The investment thesis for Ethereum seems simple enough, right? You buy the upgrade and you count your profits later.
However, focusing only on the technological aspect of the Merge is ignoring a very important group of people who helped make Ethereum possible. These people are the Ethereum miners. As JPMorgan recently pointed out in a research note, as soon as Ethereum flips the switch in mid-September, all Ethereum miners will be out of work and will need to find new ways to make money. What happens to them next could have important consequences for the future of Ethereum and Ethereum Classic (ETC 9.85%).
Whither the Ethereum miners?
The current version of Ethereum uses a proof-of-work consensus mechanism that requires mining, and this involves mining rigs, which are essentially just connected graphics processing units (GPUs). Ethereum miners use these mining rigs to create new blocks of Ethereum for the blockchain. In exchange, they are rewarded with Ethereum. As you might imagine, this has been a profitable (albeit energy-intensive) endeavor, and many Ethereum miners would probably like to continue with this way of life.
Image source: Getty Images.
However, as soon as the Merge takes place, Ethereum will become a proof-of-stake blockchain, and that means mining (and miners) will no longer be required. Miners will have a few options. They can give up mining entirely. They can sell their mining rigs and become validators on the new proof-of-stake Ethereum blockchain. They can move all their mining operations over to Ethereum Classic, which will remain a proof-of-work blockchain. Or, finally, they can choose to adapt their mining rigs to mine relatively obscure cryptocurrencies that are entirely proof of work.
Possible scenarios
What happens to the Ethereum miners could have some profound implications for the future price of Ethereum. If the Merge happens as planned, many Ethereum miners might reluctantly embrace the new reality and become proof-of-stake validators on the new blockchain. If everybody gets along and there's no drama, that would help to stabilize investor expectations around Ethereum and its future trajectory.
But what if the Merge doesn't happen or gets botched? Then there could be a lot of fear, uncertainty and doubt (FUD) about what happens to Ethereum and all the smart contracts and decentralized apps running on the Ethereum blockchain. Who knows what might be lurking in all the code used to create the new and improved Ethereum? What if the miners clash with the validators? Smart investors might decide to get out of their Ethereum positions and guarantee their profits rather than wait around to find out the answers.
Ethereum 2.0
Let's hope that updating Ethereum in September is as simple and ho-hum as updating your mobile phone to the latest version of its operating system. Sure, it's annoying when you get all those upgrade messages, but the process itself is pretty painless, and all your apps still work once the upgrade is complete. But just keep in mind that plenty of people are skeptical about the Ethereum upgrade, and plenty of miners might not be so annoyed if the process takes longer than planned.
If you are an Ethereum or Ethereum Classic investor, it's worth keeping a careful eye on the drama behind the scenes of the Merge, such as by checking out the latest news about Ethereum on Reddit or Twitter. What happens to the Ethereum miners next could affect how investors perceive Ethereum as a crypto investment in the future. And it could definitely affect your ability to profit from the Merge over the next few months.
