Ethereum Merge: Everything you need to know

Publish Date 12 Sep 2022
Blockchain / 4 Min Read
Milan Cutkovic / Last Update 12 Sep 2022

It's the most anticipated event within the cryptocurrency community right now – and arguably the most important since Bitcoin was invented.

But what’s the hype all about? And what impact will it have on Ethereum? 

Read on to learn everything you need to know about the Merge, or jump ahead to a specific section below:

 

What is the Merge? 

The Merge is an upgrade to the Ethereum network. It will merge the current Ethereum Mainnet – the Ethereum blockchain where currently all transactions are processed – with something called the ‘Beacon Chain’. 

To do this, Ethereum will shift away from proof-of-work (PoW) and adapt the proof-of-stake (PoS) mechanism. 



“Hang on… proof-of-what?”

Proof of work and proof of stake are the two major consensus mechanisms. Essentially, they’re ways of verifying new transactions, adding them to the blockchain, and creating new tokens. Just like in a traditional financial system where banks and payment providers need to work together, decentralized cryptocurrency networks need ways to verify transactions. 



So, what’s the difference between the two? 

Proof of work was used first and adopted by Bitcoin. A network of miners gets to work validating transactions and adding them as new blocks on the chain. As a reward, they receive new cryptocurrency. It requires a huge amount of processing power, and as a consequence, it is a very energy-intensive process.  

Proof of stake doesn’t involve any miners. Network participants are referred to as validators, who earn a reward for validating transactions. The network chooses validators based on the size of their stake and how long they’ve been holding it. It’s therefore rewarding the participants that have invested the most in the blockchain. 

Why does the Merge matter? 

Ethereum’s energy consumption will be reduced drastically – up to 99% – which is a big deal given how much focus there has been on the massive amounts of energy required to power cryptocurrencies. Aside from that, it also means participants with smaller computers would be able to use the network. It will also make Ethereum more secure, as it will become increasingly difficult and expensive to attack the blockchain. 

With the end of mining, the overall supply of Ethereum will start to decrease over time and make the cryptocurrency a deflationary one. 

When is the Merge happening? 

The merge is expected to happen between September 13 and September 15, 2022, although delays could occur. 

What could go wrong with the Merge? 

Given the scale of the operation and fragile investor sentiment, any potential issues could cause significant price volatility. 

What could go wrong? 

  • Delays: Although we’re getting close to the announced Merge date, delays cannot be ruled out if developers encounter issues 
  • Technical glitches: Significant technical issues could seriously damage investor confidence 
  • High expectations: Investors have high expectations about the Merge, and even if things go to plan, the hype might evaporate 

How should traders prepare? 

Investors holding ETH do not need to do anything. 

Active traders don’t need to do anything either but should be prepared for high volatility and the possibility of a temporary trading halt.  

Why could ETH rise? 

Improved security, faster processing of transactions, and reduced costs are all positive effects of the Merge that will boost investor confidence. ETH becoming a deflationary cryptocurrency will also increase its appeal as store of value – in other words, more investors could be holding onto their ETHs for longer. 

Why could ETH fall? 

Technical issues could cause trouble for ETH – especially if they are of a serious nature. Overall market sentiment also plays a big role. The Merge created a hype that hasn’t been seen in a long time in the crypto market. However, it remains to be seen if bulls will stay confident post-Merge or whether many will look to exit their long positions. 

 

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Milan Cutkovic

Milan Cutkovic has over eight years of experience in trading and market analysis across forex, indices, commodities, and stocks. He was one of the first traders accepted into the Axi Select program which identifies highly talented traders and assists them with professional development. Milan uses his extensive knowledge of financial markets to provide unique insights, commentary and market analysis.

 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

Cryptocurrencies (such as Bitcoin) are extremely volatile and can move or jump in price with no apparent reason due to lack of liquidity and ad hoc news. There is little or no fundamental reasoning behind its pricing and as such trading CFDs in cryptocurrencies poses a significant risk to clients. For any Cryptocurrency CFDs that we limit to Monday – Friday trading, it is important to note that the underlying market will continue to trade over the weekend, meaning there could be a significant price change between Close of Business on Friday and open for business on Monday. Therefore, these symbols should be traded by clients with sufficient experience to  understand that, subject to negative balance protection (where available), they risk losing all their investment, or more, in a  short period of  time, and only a very  small part of their portfolio should be allocated.


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