Upgrade The Merge and Impact on Ethereum

Information that ETH 2.0 will deploy The Merge phase in August 2022 is one of the events that many investors are interested in recently. There are many opinions that the move to The Merge will negatively affect the price of ETH because there are many ETH staking unlocked, specifically more than 12 million ETH.

In this article, I will give you some views to discuss with you!

1. What is The Merge?

The ETH 2.0 upgrade process has a very large amount of work, so it is divided into 3 small stages: Beacon Chain, The Merge and Shard Chain.

Beacon Chain (deployed in December 2020) is the first stage to convert Ethereum from Proof-of-Work (PoW) consensus mechanism to Proof-of-Stake (PoS) mechanism. During this period, the Ethereum network will have 2 parallel chains, ETH1 (using PoW) and Beacon Chain (using PoS). During this phase, in order to participate in staking, users need to use a min of 32 ETH and cannot withdraw until the next stages are completed.

  • On-chain Analysis: Does Beacon Chain Show the Potential of Ethereum 2.0?

The Merge is the phase of merging Beacon and ETH 1.0 into one chain, using PoS. Ethereum 1.0 will bring the ability to run smart contracts into the PoS system, plus the full history and current state of Ethereum, to ensure that the transition is smooth for all users and owners. own ETH. 

  • The event “The Merge” will start in August “if everything goes according to plan”

Shard Chain is the stage of applying Sharding solution on the Ethereum network. Sharding is the process of dividing data into small pieces and processing them at the same time to help the Ethereum network achieve higher performance, improve scalability and capacity.

2. Correct understanding of unlocking ETH after The Merge

2.1. The Merge is not synonymous with unlocking ETH

First, you need to understand that The Merge phase does not mean that there will be a large amount of ETH being withdrawn and discharged into the market. The Merge does not unlock ETH withdrawals from the network at all. Unlocking will be done after this period for a period of 6 – 12 months. So the amount of ETH staking and rewards will remain locked for a long time.

2.2. ETH will be unlocked slowly according to the

roadmap This means that even if withdrawals are made, ETH will not be unlocked massively but in turn.

According to the mechanism, in order to unstake ETH, validators must exit the active validator set first. However, in each cycle (epoch), there will be a limit on the number of validators that are exited, this is to ensure that there are always active validators, maintaining the network.

According to statistics, currently on ETH 2.0, there are 395,000 validators (including active or pending validators), each epoch can allow to exit 4 validators, each epoch cycle is 6.4 seconds long, so it takes more than 420 days to complete. get rid of this validator completely. This is a very unlikely thing to happen in practice.

2.3. Participants in staking ETH

Most investors, funds or groups will participate in staking ETH in two forms:

  1. Direct Stake (retail investors)
  2. Stake through Liquid Staking solutions like Lido Finance
  3. Stake through Staking Pools or Centralized Exchanges (CEX)

In the case of staking via Lido, investors can more easily withdraw ETH. So, if a bearcase happens, early selling will mainly come from liquid staking solutions like Lido. According to statistics at Nansen, there are currently 3 Liquid Staking solutions accounting for the largest proportion, respectively, Lido Finance (32.6%), Rocket Pool (1.4%) and Ankr (0.4%). The total amount of ETH locked through liquid staking solutions ranges from 34% to 35%. It is certainly unlikely that all investors participating in staked through this solution will withdraw and dump on the market.

According to the chart of the ETH deposit source, you can see that 44% of the ETH staked comes mainly from unlabeled wallets (ie retail investors). If these investors are ready to lock a large amount of ETH (min is 32 ETH) for a long time, these are definitely ETH maxis and they are willing to hold ETH for a long time. Therefore, the selling pressure from this source is quite small.

3. Impact of The Merge on ETH

When successful, The Merge will help the entire Ethereum network operate under the PoS mechanism. It is estimated that this will help reduce the inflation of ETH from 4%/year to only 1%/year. This will be one of the big bull cases for ETH.

In addition, the success of The Merge will make the fomo community more into the future of Ethereum, thereby creating a buy demand, which combined with the need for staking will create more push for ETH to increase in price.

Besides, one of the main beneficiaries of The Merge's success will be projects on Ethereum. When transaction costs are cheap and transaction speeds are faster, users will return to DeFi, GameFi and NFT on Ethereum, thereby creating new money flow in the ecosystem, bringing both projects and Ethereum itself to rise. chief.

From the above analysis, I personally believe that the successful implementation of The Merge will have a more positive impact on Ethereum instead of a negative one. What's your opinion guys?

Aug 20, 2022

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