Ethereum started its transition in December 2020 when the beacon chain was brought to life. Since that day many things have changed. Not only has Ethereum seen a drastic increase in price. It is also the world’s second valuable blockchain and still the most valuable in terms of TVL and DeFi usage.
What is “The Merge” and how will it affect Ethereum?
The merge introduces proof of stake
The transition from Ethereum 1.0 to Ethereum 2.0 will lead to one of the biggest changes in Ethereum’s history. Proof of work and mining will be abandoned and proof of stake is going to secure the Ethereum blockchain in the future.
The change is so drastic that Ethereum 2.0 is a different blockchain that has been started with the ignition of the beacon chain. The idea behind the merge is to literally merge the current with the new Ethereum blockchain. Once that is done Ethereum will no longer depend on mining. It was last week when developers successfully merged ETH1 and ETH2 on the Kiln testnet.
Of course, there were hiccups but that was to be expected and it seems that things are going quite well. Which leads to the most important question: When is the real deal going down?
This summer could be big
There is no official due date available, but the merge is expected to happen somewhere in Q2 2022. With achieving satisfying results on Kiln it is believed that Ethereum could possibly finish the first step of its transition in June.
The event could spice up the market since Ethereum could become a deflationary cryptocurrency. It is true that Ether the native token of the Ethereum blockchain has no supply cap. Instead, there is yearly inflation, and the price is driven by the emission of new ETH and the demand that is mostly created from using the many protocols that call Ethereum home.
Last year EIP-1559 introduced a block fee that effectively started to burn Ether with each transaction instead of passing it on to the miners. With the transition to proof of stake, this burn mechanism could push the available supply below the demand. Many analysts believe that this could cause a second bull run since the merge would drive down the issuance of freshly minted ETH by 90 %. In effect, Ether wouldn’t be ultimately scarce as Bitcoin but the event could create a relative scarcity between supply and demand.
Not the end of the journey
Once the merge has happened the transition is not completed. Ethereum is still looking to implement so-called shard chains. Each shard is a blockchain that can serve a specific purpose which offers great advantages in terms of speed and scalability.
Since Ethereum has already several layer-2 protocols running the priority has changed and developers are working on the transition to proof of stake. Once that is chapter is closed the work on shard chains is going to continue and they are going to be released in 2023. Even if the merge should turn out to be the biggest event this year for Ethereum, there is still a long road ahead.