Ethereum 2.0 - A Whole New World
The stakes for the second largest crypto network upgrade could hardly be higher
Dear Pioneers,
Buckle up and get ready - the Ethereum Merge is now fast approaching and there are only approximately 24 hours left before the biggest cryptocurrency network upgrade EVER is performed. For that matter, it could even be the biggest network upgrade to occur - crypto or otherwise - OF ALL TIME, with close to $200 Billion dollars on the proverbial table.
Angel City explains what the upgrade will mean and its implications.
“The Merge” Rundown
The Ethereum network upgrade aims to create Ethereum 2.0, and is referred to as “The Merge” because in effect it is merging one network type to another.
A second planned upgrade, called “The Surge” because it is expected to increase scalability, will likely follow at a later date.
Ethereum is transitioning from an energy-intensive model, called Proof-of-Work (or PoW) to an energy-efficient model, called Proof-of-Stake (or PoS).
Energy use for Ethereum may decrease by 99%+ after the upgrade
This could bring in a wave of more conservative or institutional investors
Ethereum will resemble a more conventional financial asset
Rates for locking your Ethereum (called staking) will vary but could be as high as 8% APR
This makes Ethereum more like a stock or bond that generates a dividend or yield (although generally is still a riskier asset)
Staking is already available on Ethereum but users will not be able to unstake until a second network upgrade is performed enabling that functionality
This makes it more likely that supply will continue to decrease over time, until staked Eth can be unstaked, having positive price implications all else being equal
When the second upgrade is performed a supply shock could hit the market. This is not expected for some months after the current upgrade is performed tomorrow
Certain products make it possible to “cash out” staked Ether (ETH2.0) via synthetics, such as cbETH (Coinbase) or stETH (Lido).
Network congestion and fees will decrease while TPS goes up
Ethereum *should* be cheaper to send onchain transactions and will not experience the congestion and associated fee spikes during heavy usage. The number of transactions per second (TPS) will go up significantly to support this.
This could lead to renewed demand from smaller investors who were pushed out of transacting on Ethereum due to high fees.
The supply of ETH being generated into the market could decrease, up to 80% from current levels per one Head of Digital Assets.
Ethereum miners will lose (most of) their hardware mining revenue.
I suspect the miners that plan to stay involved have been saving their Eth in order to stake it on Ethereum 2.0 and participant in securing the network through staking, rather than hardware
Some players may divest to Bitcoin mining or leave the space altogether
The upgrade has been planned for a long time (6+ years, 2+ years of testing on a testnet, and a myriad of delays along the way), and crypto has never seen a network transition from PoW to PoS in production at massive scale (Ethereum is second largest currency at $190 billion.)
The stakes could hardly be any higher
If the upgrade goes poorly, all Hell could break lose in markets and be exacerbated by the current Federal Reserve tight-money policies that have been wrecking the stock market all year
If the upgrade goes as expected, money could flood into ETH tokens and from there spread out to other altcoins, renewing “Alt season”
We expect volatility to ensue in every case, although the risk could be higher on the downside as upgrade issues could have a sharp negative effect whereas a hassle-free upgrade could lead to a more gradual influx of demand, or little change at all initially
The exact time of the upgrade is not known, but is estimated around Wednesday September 14th at 10pm PT / 1am ET (on the 15th)
The upgrade will be triggered when certain criteria are met
When this happens, Ethereum's execution layer will “merge” with and into the PoS chain (Beacon), and Ethereum's PoW chain will shut down, completing “The Merge.”
Most exchanges have enabled a pause on all ERC-20 (Ethereum) token withdrawals and deposits in order to safeguard assets, refer to your individual exchange’s announcements
The Takeaway
At Angel City Stakes, we prefer Proof-of-Stake because it allows the “mom-and-pop” investor to reap the rewards of securing the network, rather than just the big miners that can afford to invest tens or hundreds of thousands in mining equipment and run massive data centers in warehouses.
Our current focus in the Cosmos has shown that the proof-of-stake model works not only for security and low transaction cost, but also as a way to support markets through AMMs and earn passive income liquidity mining. A skilled liquidity provider and miner can earn money even in a bear market with the proof-of-stake model. With Bitcoin mining, revenue can decrease so much that it may not cover the cost of electricity, and requires large upfront and illiquid investment.
Regardless of how smooth the upgrade goes, as long as the upgrade completes without blowing up the network (I know it is unlikely but has to be said in light of Terra/UST), it demonstrates Ethereum’s ability to adapt to change and evolve with current trends. This is important because crypto is an infinite game as I wrote previously, and those that continue to stay relevant win by default.
It will be a boon for all Proof-of-Stake networks, especially those integrated with bridges already in place to Ethereum (E.g. Cosmos’ ATOM). Ethereum’s success will lead to injections of liquidity for these networks. The merge will also open up a whole new world of staking on Ethereum, with new ways to mine liquidity and earn passive income that were not previously accessible to small-scale investors.
We are pumped up for this future and hope things go smoothly. Reminder to never invest more than you can afford to lose, and stay diversified by asset type and time.
If you’re reading this shortly after publishing, click this link or type “Ethereum merge” in Google search to see the countdown timer live.
Stay nimble,
Mike Broudy, ACS and StakeSchool.com founder