After completing a significant software overhaul with a promising potential approach, Ethereum has entered a new era. Ethereum, the world’s second-largest cryptocurrency’s remarkable feat, “The Merge”, successfully took effect, with increased network security and a reduction in its carbon footprint.
The upgrade has eliminated the need for energy-intensive mining, and instead, the network will be driven by staked ETH. After Ethereum Merge, there would be more scalability, security, and sustainability. However, the question is what made it all possible and what changes the protocol has undergone to transform into proof-of-stake (PoS) consensus from proof-of-work (PoW).
What happens after Ethereum Merge?
The dramatic transition that happened after Ethereum Merge is the joining of the original execution layer of Ethereum with its new proof-of-stake consensus layer, the Beacon chain.
Previously, the Ethereum mainnet with all its smart contracts, accounts, and blockchain state was secured by proof-of-work while the Beacon chain ran parallel using proof-of-stake. The Merge process happened by combining these two systems, leading to proof-of-work being permanently replaced by proof-of-stake. After Ethereum merge, both systems are now existing as one chain.
The Merge has slashed the supply of its native token ether(ETH) and reduced energy consumption by nearly 99.95%, making it more environmentally friendly.
Well, if we observe the merge more closely, the anticipated results are not what’s currently visible. With the upgrade, the blockchain no longer pays ETH miners for adding blocks of data to the blockchain. Also, after the Ethereum merge, there was a decrease in ETH supply to bring in inflation, but instead, the token became deflationary.
Theoretically, decreased ETH supply and increased demand for ETH in the market should have pumped the price of the token. In contrast to that, Ethereum’s price actually dropped following the Merge. As a trader, investor, or crypto enthusiast you must be wondering why is that so. Let’s move on to the next section to answer this.
Why is ETH Price dropping after Ethereum Merge?
While the protocol was awaiting new investors and the ETH price was expected to climb after Ethereum Merge, the market remained unaffected by the recent PoS transition.
When the merge upgrade was in talks, developers stated that there was no relation between the ETH price and the merge upgrade. Even the Ethereum foundation emphasized the fact that the upgrade will have no effect on the gas fee whatsoever in that aspect.
However, the crypto community and platforms have cheered this one-of-a-kind feat while simultaneously anticipating the tokens to dramatically rise in price. To their surprise, ETH prices dropped following the merge amid the situation that appears to be a deadly crypto winter with all cryptocurrencies bleeding red.
The reason for Ethereum’s price drop after the merge upgrade is no exception as the crypto market downturn took a toll on Ethereum as harshly as on other cryptocurrencies.
Now that we have established that the Merge is not even slightly linked to ETH prices, let’s shed some light on what pattern Ethereum has followed since the upgrade.
ETH Price after The Ethereum Merge
Ethereum merge has marked the biggest steps toward scaling the entire ecosystem around blockchain yet the ETH price, on the other hand, is seesawing between red and green.
The already falling price plummeted 10% instantly after the merge, and it has seen a drop of more than 20% since the upgrade took place. The network’s so-called merge was perceived as the biggest change to a blockchain since it was launched back in 2009. Yet it overall turned out to be uneventful in terms of a favorable price movement.
Due to a new mechanism, shifting the entire blockchain might have its own result. The Ethereum and Ethereum-based tokens will show higher volatility after Ethereum Merge, as the crypto market is still in a slump. In such conditions, even a calculated risk might prove fatal.
Though Ethereum’s price dropped dramatically following the Merge, note that the price rose about 20% over the past three months. It is fair to say that some investors are still locking in gains.
Nevertheless, a few big concerns have plagued Ethereum including energy use, lack of speed, and high fees before the transition. Issues related to security and environmental impact are taken care of in the recent upgrade. As a result, this greener profile makes Ethereum more attractive to a broader range of investors and users.
As for the problems of speed and fees, Ethereum is in the process of tackling them in the upcoming general update called “sharding”. Ethereum aims to launch the sharding next year. Let’s understand how the sharding upgrade will further change the protocol.
The Sharding Upgrade after Ethereum Merge
The impressive milestone “Merge” is the first of five key phases that the network is expected to undergo in the near future. These upgrades are called the “surge”, “verge”, “purge”, and “splurge”.
The very next phase described as the “surge” will make it possible for Ethereum to harness sharding which would divide the network into smaller pieces. Sharding would be done in an effort to improve its bandwidth for processing transactions. This upgrade is set to be executed in 2023.
Basically, sharding splits up the database horizontally to relieve congestion. As such, transactions will pick up speed and get cheaper. Originally the sharding upgrade was scheduled before the merge. However, with the rising popularity of layer 2 scaling solutions, the focus shifted to swapping proof-of-work to proof-of-stake.
The sharding plans are in development considering the rise and success of layer 2 technologies to scale transaction execution. Currently, sharding plans have shifted to finding the most optimal solution to distribute the burden of storing compressed call data from rollup contracts.
This will allow for rapid growth in network capacity and for this reason the network was first transitioned to proof-of-stake, without which the sharding upgrade is not possible.
Well, the merge upgrade does not cover a few important features such as the ability to withdraw staked ETH. For that to happen, the Shanghai upgrade is aligned to be implemented in 2023.
The Shanghai Upgrade after Ethereum Merge
After the Ethereum merge, the activity in the futures market is now closely tied to staking yields which are rewards earned by locking ETH in the network. In this way, the PoS consensus mechanism will verify the transaction based on staked ETH.
The bigger the reward for staking, the greater the number of stakers, and this will prompt stronger demand for shorting and selling futures. The reason is that staked Ether can not be withdrawn before the next upgrade called Shanghai fork, due in mid-2023. Thereafter, stakers will earn rewards in ETH which makes them vulnerable to potential price slides.
Under such situations, stakers will likely hedge their ETH exposure by selling futures contracts associated with Ether. Over 13.7 million ETH was locked in the so-called staking contract ahead of the Merge.
The figures will likely increase in the coming weeks as the decline in net ether issuance is brought on by the merge upgrade. With the fees paid to stakers and validators, staking yield would further increase.
After Ethererum merge, real yields will match nominal yields as inflation goes to zero. Moreover, miners will no longer exist, so the fees they get paid directly to prioritize transactions will now go to validators.
In layman’s terms, transaction blocks are instead proposed by validating nodes that have staked ETH in return for the right to participate in consensus. These upgrades will be used for future scalability upgrades including shardin
Also Read: Ethereum Merge Hard Forks Expose Rival Proof-of-Work Projects
What will happen to Eth 2 after Ethereum Merge?
The term Eth2 has been dropped. After the Ethereum merge, Eth1 and Eth2 are combined into a single chain which eliminates the need to differentiate between the two as now only one Ethereum network exists.
Eth1 is now the execution layer responsible for handling execution and transaction while Eth 2 is now the consensus layer that handles PoS consensus.
Conclusion
The much-awaited merge upgrade has changed the way blockchain verifies transactions and dramatically cut the energy consumption of the network. Not only that, but the merge has also increased network security.
With the next upgrades, such as sharding and Shanghai, the network will ramp up the speed and decrease the fees. The significant move would be ‘staking yield’ on the upcoming transitions.
Along with validating transactions, there are rewards earned by locking ETH in the network which wouldn’t be unlocked until Shanghai upgrade. Though the price fluctuations are severe after Ethereum Merge, it’s worth waiting for the next upgrades in the roadmap.