For almost the entire summer, Ethereum (ETH -6.08%) investors have bought into the idea that the September Ethereum Merge will be one of the greatest events ever, not just for Ethereum but also for crypto. And the price of Ethereum has increased accordingly, up more than 100% over the past two months. If you got in early on the Merge trade, you've likely made money.
But now comes the difficult question facing Ethereum: Will it actually be better after the Merge? From different corners of the crypto world, we've already started to hear concerns about what will happen to Ethereum once it transitions from a proof-of-work blockchain to a proof-of-stake blockchain. Not everyone is convinced that the new-and-improved Ethereum will actually be better. If you're thinking about adding to your Ethereum position now, it's worth doing a little homework before you click "buy."
First, let's start with the performance of the Ethereum blockchain, which is the major focus of the Merge. Yes, throughput capacity will increase, transaction speeds will go up, and transaction fees will decrease. But by how much? Ethereum co-founder Vitalik Buterin has already suggested that there will still be a need for Layer 2 scaling solutions even after the Merge. This would seem to imply that Ethereum will still be dealing with scalability issues.
Moreover, not everybody is convinced that Ethereum gas fees will actually decline by much after the Merge. This is important because gas fees are arguably one of the biggest problems facing Ethereum today. If you've performed any transactions on the Ethereum blockchain recently, you're aware of how much money you are leaving on the table every time you choose Ethereum over a rival blockchain. So it would be a huge disappointment if gas fees decline only negligibly after the Merge.
And then there's the issue of decentralization, which is one of the most important ideas in the blockchain and crypto world. This concept simply means that power and control should move from the center to the edges: Power should never be centralized, it should always be distributed. This is the case now with Ethereum, with huge numbers of Ethereum miners scattered around the globe, all of them helping to verify new transactions and add blocks to the blockchain.
And yet, with the Merge, Ethereum seems to be moving toward a new era of more centralization as it transitions to proof of stake. That's because the most important validators on the Ethereum blockchain network will need to stake at least 32 ETH. Given that Ethereum traded near $2,000 this summer, that works out to about $64,000. At that price point, it becomes prohibitively expensive for many Ethereum miners to become validators. Yes, they can still stake Ethereum, but they can't be a validator. So that's led to some discussion in the blockchain world about what happens to Ethereum if only deep-pocketed individuals or wealthy institutions control the fate of Ethereum going forward.
Not that there's anything wrong with that, of course. It simply speaks to Vitalik Buterin's famous Blockchain Trilemma, which postulates that any blockchain can only optimize two of the following three elements: security, scalability, and decentralization. In the "old" Ethereum, the blockchain was able to optimize security and decentralization, but scalability was problematic. In the "new" Ethereum, the blockchain will be able to optimize security and scalability, but not decentralization. If you're an investor, is that a fair trade-off?
At this summer's Ethereum developer conference, Buterin noted that Ethereum's upgrade might only be 55% complete after the Merge takes place. There will still be a need for the "Surge, Verge, Purge and Splurge," and this process could take many more months. That's why Vitalik Buterin has discouraged anyone from referring to the new Ethereum as "Ethereum 2.0." There's still more work to be done after the Merge takes place. As an investor, that's important to know so that you're not disappointed later.
Thus far, Ethereum has done a very good job of calibrating investor expectations, even going so far as to publish a list of "Misconceptions" about the Merge. It seems like we're so close to the finish line and everything seems to be going according to plan right now. Everybody wants this to work out. Ethereum investors have placed their full faith and trust in Vitalik Buterin -- let's just hope he doesn't let us down in September.