Despite falling 58% in 2022, Ethereum (ETH 1.42%) has produced a stellar return of over 600% over the past five years (as of this writing), easily crushing the broader S&P 500 index during this time frame. But as many cryptocurrency followers know all too well, a huge roadblock on Ethereum’s path to greater adoption has centered on a lack of scalability. That is, until now.
Three Motley Fool contributors discuss the benefits that “The Merge” — which, according to Google, which is not complete — will bring about. It has the potential to catapult the price of ether, or ETH, to new heights. Let’s take a closer look.
1. Ethereum allows more users to participate in the network
Michael Byrne: The Merge is a net positive for many of the Ethereum network’s participants, as more of them will now be able to earn rewards for participating in and securing the network. By transitioning from proof of work to proof of stake (PoS), transactions on the network will no longer be validated by miners. After The Merge, transactions will be processed via staking, in which Ethereum holders can commit or “stake” a portion of their Ethereum holdings toward validating transactions and securing the network to earn a share of transaction fees.
While mining takes a considerable deal of upfront investment and effort to engage in, staking is more accessible to everyday users of Ethereum. There are still some barriers to entry. Holders need to commit a minimum of 32 Ethereum (over $50,000 worth of Ethereum at current prices) to run their own node for validating transactions, which is cost-prohibitive for many investors. There are also other steps involved.
However, the good news is that a number of widely used services, including Coinbase and Lido Finance, now enable customers who hold less than 32 Ethereum to enjoy these benefits by facilitating staking in a relatively simple and automated process. Right now, staking Ethereum on Coinbase pays a 3.25% APY, and staking on Lido Finance pays a 3.8% APY.
Users should be aware that once they commit their Ethereum to staking on Coinbase, they won’t be able to trade the staked portion for a considerable amount of time, but this shouldn’t be an issue for long-term holders. These interest rates are superior to those of many dividend stocks and far above the market average for the S&P 500, and the ability to earn passive income in a fairly seamless manner is another compelling reason to own Ethereum.
2. The Merge paves the way for sharding
RJ Fulton: It might come as a surprise that Ethereum is still a blockchain under development, even with The Merge going live. Vitalik Buterin, an Ethereum co-founder, said that after The Merge, he only views Ethereum as being 55% complete.
Before Ethereum can reach its full potential, two other things need to take place — an increase in transaction speeds and a lowering of fees. The Merge won’t solve these directly, but it’s a necessary step to solve these problems.
The importance of The Merge boils down to one thing — it will lay the foundation for Ethereum to eventually grow its capacity so that it becomes faster and less costly. To do this, a process known as sharding will be introduced.
Sharding will divide Ethereum’s blockchain into smaller, more manageable, blockchains. Instead of having to validate all transactions on the main blockchain, validators will become more efficient because they will be able to focus their attention on only those that occur within their shard. You could think of it like adding additional checkout lanes and cashiers at the grocery store.
Furthermore, sharding will lower barriers that come with being a validator. When sharding is introduced, it will lighten the data storage requirements, since validators would be responsible for storing a fraction of the blockchain’s data. This means that in the future, you could run the Ethereum network from your laptop or phone.
This is highly sought after by blockchain developers because security and decentralization increase with greater distribution of the network.
Ethereum’s website says that sharding is planned to be unveiled some time in 2023, depending on how much progress is made post-Merge. Once launched, sharding will help Ethereum get one step closer to reaching its ultimate goal of becoming “powerful enough to help all of humanity.”
3. Ethereum is now more environmentally friendly
Neil Patel: One of the most widely publicized benefits of The Merge focuses on Ethereum’s energy usage. Like Bitcoin (CRYPTO: BTC), up to this point, Ethereum has operated a proof-of-work (PoW) consensus mechanism. This means that massive amounts of computational power are needed to solve complex math problems in order to validate new transactions on the blockchain. It is cited as being slow, expensive, and energy-intensive. In fact, estimates point to Bitcoin’s network requiring as much energy to run as a small country.
After The Merge, Ethereum’s proof-of-stake system will lead to a whopping 99.95% reduction in energy consumption, according to Ethereum’s official website. High-powered and expensive computers will no longer be necessary for Ethereum’s network to run, eliminating the need for specialized hardware and thus cutting out electrical waste. This is an incredibly noteworthy development, especially in today’s age when a focus on combating climate change has never been greater.
Investors who value companies that care about environmental, social, and governance (ESG) practices might now consider Ethereum as a worthwhile financial instrument to own. Bitcoin, and Ethereum prior to The Merge, have become political punching bags because of their energy use. If one knows nothing else about cryptocurrencies other than the fact that some may use up a lot of electricity, it’s easy to end the discussion there and continue to paint these digital assets in a negative light. For Ethereum, this will no longer be the case. And this new potential demand from ESG-focused investors could drive up the price of ETH simply because the network is no longer as energy-intensive as it was previously.
Looking ahead, the biggest knock on Bitcoin, its energy usage, isn’t a valid argument that can be used against Ethereum as well. And this is a bullish sign for the latter cryptocurrency.