What the Delay in Ethereum Merge Means for Investors

The widely anticipated move won't happen in June.

Ethereum (ETH) is in the process of a huge upgrade to make it more scalable, sustainable, and secure. The second-biggest cryptocurrency was the first to introduce all important smart contract functionality that allows developers to build other applications and cryptos on its network. However, it struggles with high gas fees and network congestion.

The next big step in its upgrade has been dubbed the "Ethereum merge," and it's generated a lot of excitement. Indeed, searches for Ethereum merge hit an all-time high toward the end of March. Unfortunately, in April developers announced it would not happen in June as expected. Let's dive in and find out what the merge is and what the delay means for crypto investors.

What is the Ethereum merge?

Ethereum currently works on a proof-of-work mining model, similar to Bitcoin (BTC). It's a way to validate transactions and add new blocks to the blockchain. Proof-of-work has a proven track record and is recognized as a robust way to work. However it also consumes a huge amount of energy and is not very scalable. This is why many newer blockchains, such as Cardano (ADA), use a proof-of-stake model. 

The Ethereum merge is a switch from proof-of-work to proof-of-stake and involves moving to a whole new blockchain. It's a huge undertaking -- a bit like trying to fix a car engine while speeding down the freeway. But it's necessary if Ethereum is to remain competitive. 

The merge will cut Ethereum's energy costs by over 99%. However, it's worth bearing in mind that it won't solve all of Ethereum's problems. For example, it will not address the network's high gas fees. That will come in the final part of the upgrade -- called Shard Chains or Sharding -- that's due in 2023.

What the delay means for investors

Ethereum is by far the biggest cryptocurrency in terms of the number of applications built on its network and the amount of money on the platform. However, it has lost a lot of market share in the past year, as both investors and developers look to its cheaper and less congested competitors.

One concern is that Ethereum will delay the merge even further. Lead developer Tim Beiko didn't give a fixed date when he informed the community about the delay. "It won't be June, but likely in the few months after," he tweeted. "No firm date yet, but we're definitely in the final chapter of PoW on Ethereum." If Ethereum can't complete the merge by the end of the summer, it would further erode confidence and could cause more developers to seek alternative platforms. 

Gas fees on Ethereum are no joke -- they recently spiked to thousands of dollars during what was an extremely busy weekend. That was an anomaly, but everyday transactions still cost around $50 to $100. Similar transactions on competitor networks cost less than $1. 

Delays to merge could kick the sharding solution, which will fix high fees, even further down the road. Here's why that matters. Even if Ethereum can meet its 2023 sharding deadline, it still may not be able to maintain its dominant position. A report early this year from JPMorgan said that by the time it completes the sharding stage of its upgrade, "Competitors' ecosystems would have grown by so much that activity won't return en masse to the ethereum network." 

Essentially, every delay erodes Ethereum's first mover advantage. While developers trust the network and know how to use it, the longer it takes to make these crucial upgrades, the more market share it will lose. 

Bottom line

The Ethereum upgrade is an enormous project. There are around a million transactions on its blockchain every single day. It needs to keep existing activity running while also migrating years worth of records to a new system. Given DeFi Llama shows there's almost $100 billion invested in apps on its system, it's important to get it right. In that context, a delay of a few months may make sense if it means avoiding technical errors. 

Nonetheless, there are consequences. Competition between Ethereum alternatives is fierce, and each one is making a strong push for increased adoption. For ETH investors, the issue isn't so much that the merge will be a few months later than planned, it's that we're a year away -- maybe more -- from the upgrade that will really make Ethereum competitive again.