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Ethereum Merge Impacts Beyond Blockchain

Events, like many things in life, are not siloed. Any type of event or action, planned or unplanned, causes changes and reactions in the surrounding components. Think of throwing a stone into a pond, creating ripples on the surface and changing the water environment beneath the surface. This idea can also be applied to Ethereum merges.

The Ethereum blockchain, with its native coin Ether (ETH), is a pillar of the cryptocurrency industry, which is becoming more and more mainstream each year. Ether is his second most popular altcoin, averaging 2.1 million monthly searches for “Ethereum” on Google. ETH has risen to over $100 billion in market capitalization, making the Ethereum blockchain a popular choice for developers building decentralized applications (DApps). Ether is the second most frequently asked alternative to Bitcoin (BTC), according to a Bybit survey, with 1 in 6 of her US adults saying he is familiar (15.4%). I’m here.

The Ethereum Merge, or simply Merge, is a radical change to the Ethereum blockchain, seeking to improve scalability and security while reducing the required energy usage. The move could have ripple effects in the broader cryptocurrency industry.

What is merging?

The merge is part of the multi-year transition of the Ethereum blockchain, sometimes referred to as Ethereum 2.0. This broader migration is primarily aimed at scaling the Ethereum blockchain. Ethereum’s main Proof of Work (PoW) blockchain also continued to function, but the official starting point for the network’s transition was the launch of Ethereum’s Proof of Stake (PoS) version, Beacon Chain, in late 2020. occurred in

The scheduled merge on September 15th essentially marks the end of the PoW chain, with all future efforts and attention focused on the PoS chain. PoW vs PoS has been a long-standing debate in the cryptocurrency and blockchain space. Various discussions include PoS blockchains, which require less energy than PoW networks.

What will Ethereum (and the broader cryptocurrency) look like after the merger?

After the merge, Ethereum will become the PoS blockchain and the PoW chain will be a thing of the past. Difficulty bombs reduce mining rewards and make mining on chains less attractive. Miners have resisted the change and debate has arisen about continuing with a forked PoW version (or versions) of Ethereum, but the main Ethereum blockchain will be that of PoS without miners.

After the merge, Ethereum will call validators instead of miners to run the blockchain. Validators need to lock 32 ETH to support blockchain functionality, but earn rewards for doing so. Other ways to contribute to the network through staking also exist, such as services offered by crypto exchanges.

The merge is not the end of Ethereum’s broader migration journey. According to Ethereum co-founder Vitalik Buterin, the event is slightly above the halfway point of Ethereum’s transition, marking 55% to completion to be exact. Sharding is Ethereum’s next major goal, aimed at improving scalability by segmenting the blockchain into parallel parts.

There are some misconceptions about merging

Some common misconceptions revolve around Merge. For one, some believed that Ethereum would magically become faster, with significantly lower transaction fees. However, this is not expected to happen anytime soon.

Similarly, some wonder if the merge will result in a large amount of unstaked ETH in the market. Not really. In practice, staked ETH will remain locked until the Shanghai upgrade scheduled for 2023.

Related: Buterin and Armstrong Reflect on Changes in Proof of Stake as Ethereum Merge Nears

Third, some observers have suggested that price movements will become more predictable, advising that ETH’s value will skyrocket with upgrades, or that it will be a “news-selling” event that leads to price declines. I am making a claim. This tactic is based on market psychology. If everyone is excited about the next event, the associated assets can rise in price until the event. Because we can’t, prices may drop.

As with many events in crypto, traders are looking to capitalize on competing predictions. One of the wild cards, however, is the price drop that the cryptocurrency market has already suffered, making it more difficult to predict with certainty.

Trading strategies that can be merged

If you want to take advantage of the bullish investor sentiment ahead of a merger, we recommend holding regular ETH, also known as holding a “spot”. If your investment capital is big enough, you can also consider holding the 32 ETH required to become a validator on the network and earning around 4% interest per annum. That number is expected to rise to about 7% after the merger.

Even if the price doesn’t rise sharply enough to generate a 1,000% return this year, the asset will at least continue to perform during market downturns. (Please note that 32 ETH will remain locked until the Shanghai upgrade in 2023.)

As a second strategy, if you are hedging a spot bag of ETH, you may want to consider using futures contracts to fill part of your portfolio into short positions. Depending on how well you “timing” the market, a small percentage of your portfolio may be enough to cover the short-term losses you experience with spot holdings. Conversely, if the market rises, you may lose the amount you bet on the futures contract. However, if you choose to sell, your spot portfolio may be sufficient to cover those losses.

A third option given market volatility is to “sit” on a stablecoin. This is a reasonable approach if you don’t have a lot of confidence in the direction the market might go next. When it finally breaks out, extreme moves can be taken advantage of.If the price of ETH drops to $880 (reached in June), you may be tempted to put in a buy. Alternatively, you can choose to shorten it if it explodes to obscene heights.

Keep in mind that the majority of active traders lose most of their money, whichever they choose. Your best chance of success is to pick a price range, buy, and forget about it until favorable market conditions return.

Check if centralized exchanges have access to airdropped ETH

Centralized exchanges differ in how they handle merging. A decision most users will probably want to focus on is whether or not their exchange of choice chooses to offer “airdropped” Ethereum.

Specifically, if some blockchain participants continue to operate the Proof of Work chain, Ethereum holders will suddenly have two versions of the ETH token. Some exchanges, such as Bybit, have said they will support both chains so that users can sell or withdraw their tokens. Other companies, including Coinbase and Binance, have refused to make the same promise. (And of course, users can also give ETH access by storing it in their own self-custody wallet.)

Holding tokens in complex financial protocols can also make the blockchain unaware of ETH holdings. This includes lending protocols and liquidity pools. A user may want to withdraw her ETH from such a protocol a few days before the merger if she wants to be sure she holds it.

Another issue to be aware of is downtime during merges. Most exchanges plan to disable deposits and withdrawals of ETH and tokens on the blockchain known as ERC-20 tokens after September 14th. Most exchanges plan to resume these activities by September 16th, but due to unforeseen technical issues.

DApp users also benefit

The crypto and blockchain industries are highly interconnected spaces. According to the State of the DApps, Ethereum itself hosts around 3,000 of his DApps on the blockchain at the time of publication. Looking back at the high Ethereum fees present in 2021, we see one example of Ethereum’s significant impact on the overarching crypto sector, which may have deterred some DApp users.

DApp users, ETH traders, etc. may be affected by the merger, but may be even more affected as part of the grander plans for the Ethereum 2.0 movement. The merge itself is part of a broader Ethereum migration, ultimately aimed at reducing energy usage and improving security and scalability. Merge should have a significant impact on the energy required to run the Ethereum blockchain, making it slightly faster to operate, but as part of a broader transition, other benefits appear to take longer.

ETH does not have a maximum coin supply, but there is a cap on new ETH created in a year. Ethereum Improvement Proposal 1559 introduced a transaction-based ETH burning mechanism, but the Ethereum blockchain also generates new ETH. Mergers reduce the amount of new ETH created each year, which can affect the asset’s price activity in the market.

Bill Shin Head of Financial Products at Bybit, leading research and design efforts for innovative products in both the CeFi and DeFi worlds.

Opinions expressed are those of the author and do not necessarily reflect the views of Cointelegraph. This article is for general information purposes and is not intended, and should not be construed as legal or investment advice.

Ethereum Merge Impacts Beyond Blockchain

Source link Ethereum Merge Impacts Beyond Blockchain

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