You probably heard that the Merge went successfully last week. What's next for Ethereum (ETH +0.35%), and how should investors approach the world's second-most-valuable cryptocurrency?
First, we should make one thing clear: The Merge is just one step in Ethereum's development. The blockchain is still a work in progress. It's barely halfway complete, according to one of its co-founders, Vitalik Buterin.
At the Ethereum Community Conference in Paris this July, Buterin was asked about his thoughts on the future of the blockchain. He said that Ethereum would still be at only 55% completion once the Merge was finalized and launched. Additionally, he discussed future improvements and implementations that will eventually make Ethereum able to handle 100,000 transactions per second (tps), orders of magnitude more than the 12 to 20 tps it can handle in its current state.
But to get to that level of speed and capacity, Ethereum needs many more upgrades.
What the Merge isn't
With any event as significant as the Merge, rumors and speculation are bound to circulate. Some of the most common misconceptions have to do with speeds and fees. As Ethereum has become one of the most popular blockchains over the last few years, its network has grown substantially more congested. This increased traffic caused speed to slow to a near standstill and transaction fees to increase significantly.
Ethereum's goal is to get rid of these drawbacks one day, but that won't be happening with the Merge. The Merge only transitioned Ethereum from a proof-of-work consensus mechanism to a proof-of-stake one. The only way to streamline speeds and reduce fees is by increasing the network's capacity.
But the importance of the Merge shouldn't be undersold. Now that Ethereum is on proof of stake, the foundation has been laid for the blockchain to evolve more easily.
What the Merge is
Without moving to proof of stake, Ethereum would have a difficult time scaling, a term used to describe a blockchain's ability to handle more transactions at higher speeds. As previously mentioned, the move to proof of stake won't directly make Ethereum faster or increase throughput, but it will eventually enable the network to increase its scalability.
One of the primary ways Ethereum will scale is through a method called sharding. This process essentially splits Ethereum's main blockchain into multiple shards. Sharding on a proof-of-work blockchain isn't impossible, but it's much more difficult to implement.
Once sharding is launched, validators approving transactions will now have to process only those transactions within their shard instead of the entire blockchain. Think of it as Ethereum going from a two-lane road to a six-lane freeway. With sharding, Ethereum's network will finally increase its capacity, and subsequently, fees should come down, and speeds should improve.
The plan is for sharding to go live sometime in 2023. Ethereum's website states that priority was given to the Merge first; now that's complete, attention will shift to implementing sharding.
CRYPTO: ETH
Key Data Points
The bigger picture
Investors should understand that Ethereum isn't a finished project. If the blockchain reached a high of nearly $4,700 last year while still on proof of work, one could imagine the heights it could reach as developers continue to carry out upgrades.
Fortunately for investors, these upgrades won't happen overnight, reducing the risk of something massively going wrong in a short time following the merge. Either way, Ethereum has been notoriously sluggish when it comes to deadlines. The Merge was under development for over a few years and had a handful of missed completion dates.
Assuming that sharding will also proceed along a delayed timeline, investors should take advantage of this opportunity to add more Ethereum to their portfolios until the market realizes the increase in value and bids up the cryptocurrency. Ethereum is building for the future by ensuring that it's capable of supporting more users at faster speeds and cheaper fees, a great combination for price appreciation. Now that it's hovering around just $1,500 in a bearish crypto market, Ethereum potentially has a long runway ahead.
