The Merge Is Near

Ethereum’s transition to Proof of Stake is nearly complete. The Merge is set to occur between September 14th - September 20, 2022. As of August 24th 2022, Ethereum has undergone 3 successful public testnet trials of The Merge and 10+ successful shadow forks which are less formal and far less public. To give a reference how big of an upgrade The Merge is for Ethereum, a good comparison could be upgrading an airplane while in flight, in other words a lot is at risk. It is important the transition is smooth so no applications or users are affected on the soon to be deprecated Proof of Work Ethereum. So now I know you’re thinking, thanks for the information, but what does this mean exactly? Well I’m glad you asked! So to break it down, The Merge brings 3 powerful narratives to the Ethereum blockchain and Ether as an asset. None of which are guaranteed to make the price of Ether go up in the short term, but they do set Ether up as an asset to be extremely competitive for years to come.

-ESG Compliant (Proof of Stake will reduce energy use by 99% compared to Proof of Work)

-Monetary Policy (The Merge reduces new issuance/inflation by 90%)

-Productive Asset (Staked Ether is a productive asset sometimes referred to as the Internet Bond)

So let’s break each of these topics down.

Most people by now are aware of the energy debate surrounding crypto, particularly when it comes to Proof of Work mining. Proof of Work is the method in which Bitcoin/Satoshi Nakamoto solved the Byzantine Generals Problem - how to send a message/value from one party to another without needing to trust anyone in the middle. Since 2008 a lot of research has gone into designing better consensus mechanisms with less energy use in mind. Proof of Stake, Proof of Authority, Proof of History are all examples while Proof of Stake appears to be the clear leader at this point in time. The Ethereum community decided years ago to pursue this path and has spent the last 5 years researching design structures and for the past 2 years implementing the design. Ethereum’s Proof of Stake mechanism will reduce the blockchain’s energy footprint by 99% with some estimates going as high as 99.9%. This is massive when it comes to institutional flows into the asset. This negates the need to purchase expensive, loud, and bulky mining hardware that only so many people know how to set up, run, and profit from. A validator is also much easier to move from one jurisdiction to another in the case of government/country censorship attempts.

Ethereum’s Proof of Stake design requires a validator (Proof of Stake version of a miner) to post collateral of 32 Ether into a smart contract (https://etherscan.io/address/0x00000000219ab540356cbb839cbe05303d7705fa) which will yield a variable rate depending on how many Ether are staked. As of right now there are about 13.5 million Ether staked which results in a yield of about 4-5% annually deriving from Ethereum’s inflation schedule (https://ethereum.org/en/staking/). As the number of Ether staked grows, the number of new Ether created per day increases and the annual yield per validator decreases creating interesting economics. Now The Merge is very special in its own regard but combined with a prior upgrade to Ethereum called EIP1559 which burns Ether every block, it is most likely there will be more Ether burned per day than what is created from inflation, creating a deflationary network. So to put this in perspective, Bitcoin has a hard cap on supply, there will never be more than 21 million Bitcoin and every 4 years the inflation gets cut in half until the year 2140. As of today Proof of Work Ethereum has no cap on supply, there is currently ~120 million Ether in existence and about 13,000 Ether are created every day with about 1,000 - 2,000 Ether burnt per day. The amount of Ether burnt is dependent on how much the blockchain is used. The most Ether burnt in one day was 18,070 Ether on January 11, 2022. So with Proof of Stake Ethereum, there isn’t a supply cap but rather a supply ceiling where today there is 120 million Ether and in 10 years it is probable there will be 100M-120M Ether. Anyone can mess with the supply/inflation schedule using this very cool website - https://ultrasound.money/?

Last but not least, Ether as a productive asset. If you’ve been following crypto at all the past couple years you have probably heard of some crazy interest rates marketed by crypto projects that are just flat out unsustainable or subsidized in some form or another. Staked Ether is simply put not one of those. The APR will range from 5-10% APR depending on number of Ether staked and amount of network usage. This yield is paid in Ether so it is different then earning an APR from a bank in dollars or a yield on a rental property in dollars. But then again, how much has the dollar lost in purchasing power over the last 20 years? Is that really what people should earn a long term yield in? In 10 years from now there will most likely be more dollars in circulation than there are today making each dollar’s purchasing power less than it is today. However, in 10 years there will most likely be less Ether in existence than today based on code programmed into the Ethereum blockchain. This can be changed but will be nearly impossible to do so in way that hurts Ether holders over the long term. Over the past 7 years Ethereum will have reduced new issuance (inflation) 3 times. Ethereum started with 5 Ether given to a miner per block, then reduced to 3 Ether per block, now it is at 2 Ether per block to be reduced one more time to ~0.2 Ether per block/slot. This trajectory clearly shows how important it is to the community to reduce inflation in the safest and most secure way possible.

So why did I take my time to educate those of you reading this? Because The Merge is arguably the biggest event in blockchain/crypto history since the creation of the Bitcoin blockchain. It creates a narrative-strong blockchain and asset with real utility beyond speculation/investing. My best analogy to those who don’t quite understand owning something they can’t see or touch is this: At the end of the day, Ether is the only triple point asset in the world - it is a commodity (gas to the network), it is money (DeFi collateral, NFT purchases, etc…), and working capital (staked Ether). What does nearly everyone in the world use today? Yes, the Internet and more importantly data/wifi. Ether the asset/commodity will be a form of data/wifi in the not so distant future along with an internet currency and a productive asset for those who need to generate a safe/predictable yield.

None of this is financial advice. Always consult with your financial professional before making investment decisions. If you are interested in learning more about this event or blockchain/cryptocurrency in general feel free to reach out to Advantage Blockchain - www.advantageblockchain.com or email [email protected]