3 Ethereum Merge Risks to Watch Out For

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  • The Ethereum merge is one step in a series of staged upgrades to make the blockchain more scalable and sustainable.
  • There's a risk the much-anticipated upgrade has been over-hyped and may not fulfill people's expectations.
  • Technical glitches and further delays could also impact Ethereum's position in the longer term.

The Ethereum merge may happen in August, but any technical upgrade carries risk.

The Ethereum (ETH) merge is one of the most anticipated events of the year in the crypto world. The merge has been in the pipeline for some time and is just one step on the road to an even bigger upgrade, which won't be finished until at least 2023. The goal is to make Ethereum more scalable, secure, and sustainable. 

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The merge will move the pioneer of smart contracts to a whole new blockchain, one that consumes 99% less energy. Right now Ethereum runs on the same gas-guzzling proof-of-work mining model as Bitcoin (BTC). It's switching to proof-of-stake, the same system many newer cryptos use. But the move is not without risk -- here are three to watch out for.

1. People may be expecting too much

Back in March, Google searches for "Ethereum merge" hit an all-time high as excitement grew about the upcoming switch. This is understandable given Ethereum is the second biggest crypto in the world and the switch to proof-of-stake is unprecedented. However, speculation often drives prices to unsustainable levels in the crypto industry, especially in the run up to a big event. 

Importantly, the merge will not address some of the biggest issues faced by Ethereum users. It won't reduce gas fees -- which can come to $50 to $100 per transaction. And it won't do a lot to reduce network congestion. Those improvements will come with the so-called "shard chains," which the team say should happen at some point next year.  There's a risk that Ethereum's price will suffer when people realize the much-hyped merge won't fix all its problems.

2. It could get delayed even further

The merge has already been delayed several times. Most recently, developers announced it wouldn't happen in June as planned, and wouldn't be drawn on a specific date. However, last week, Ethereum co-founder Vitalik Buterin announced the merge should happen in August. He then added a caveat that it might get pushed to September or October. 

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The crypto community often expects development to happen extremely quickly, and that can be unrealistic. It is certainly better to delay than rush and make costly mistakes. Ethereum has $50 billion locked on its platform and still hosts the lion's share of applications. At the same time, further delays push the bigger upgrade even further down the road. And this could be problematic.

According to DeFi Llama, at the start of 2021 about 96% of all the value locked on blockchain networks was on the Ethereum blockchain. This refers to the amount of money that's on applications on each network. That figure is now around 60% -- showing the degree to which Ethereum competitors are taking market share. Delays give other faster, lower-cost networks more time to eat into Ethereum's dominant position. Analysts at J.P. Morgan warn that even if it completes the upgrade in 2023, it might be too late as many projects may not return.

3. There may be technical challenges

It isn't easy to tinker with an engine while it's running, and that's essentially what Ethereum needs to do. It is a complex operation and even with heavy testing that's taken place, there may still be technical glitches on D-Day. Plus, for all the environmental concerns about proof-of-work, it is simply more battle-tested than proof-of-stake. Proof-of-stake is newer and we can't discount the possibility that there may be unexpected problems.

When you invest in cryptocurrency, you're investing in a new and relatively experimental technology. The hope is that as it develops it could transform whole industries. But there's also a risk of technical issues -- even with a major crypto like Ethereum. This is one reason it's important to only invest money you can afford to lose, and ensure your crypto investments are part of a diversified portfolio.

In the short term, Ethereum's price could see significant volatility in the weeks surrounding the merge. Taking a longer-term view, it's important to consider the danger that Ethereum could slip from its position as smart contract crypto king. The most likely scenario is that a handful of programmable cryptocurrencies dominate rather than one player. Ethereum will probably continue to be one of the leaders. But significant technical issues or massive delays with its upgrade could put that in jeopardy.

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