The Bull and Bear Case for the Merge

The Ethereum foundation made big news last week when they released a “soft” timeline for the much-anticipated merge (switch to PoS) to be completed by September (but still subject to change). A lot of people have been talking about making the “merge trade” (stacking ETH in the run up to the merge expecting the price to pump), so we thought it’d be a good time to discuss some of the reasons people are bullish about this event and also some of the risks involved.

As always this is not financial advice, nor are we even looking to draw any conclusions. This article is purely meant to help educate people. DYOR Templars!

🐂 Bullish - Issuance will drop significantly, along with selling pressure

ETH issuance (and price inflation) will be dramatically reduced. Currently~13,000 ETH per day is issued as mining rewards, and ~1,600 per day as rewards to ETH stakers. Post-merge the staking rewards will remain but the mining rewards will go to 0 as there will be no need for miners.

This would be a theoretical drop of almost 90% in ETH issuance and would be a substantial reduction in sell pressure. Staking will almost certainly increase as well in the run up to the merge so that could reduce the percentage of the issuance drop slightly.

Right now there needs to be at least $5m of new money entering the Ethereum network every day to maintain current prices. With a theoretical drop of 90% in issuance, that could lead a requirement of $30m to leave the network daily to maintain the same situation.

ETH issued to stakers probably won’t be sold as quickly as those given to miners, because miners have high operating expenses and frequently sell immediately to cover those costs. Stakers are much less likely to sell quickly. They are more likely to have large amounts of ETH, and in general be more future focused and bullish about ETH.

🐻 Bearish - Delays

The merge has already been delayed several times and there’s a chance it could be delayed further. On top of this, many of the features of the merge will not be implemented right away. This is good in some cases, like the fact that staked ETH will not be made available for users to sell until the “Shanghai Fork” goes live at a later date.

Many people are hoping the gas fees of using the Ethereum network will be reduced by the merge but this is actually a misconception. The main mechanism that is expected to address the high gas fee problem is sharding, which will be implemented at least a few months after the merge.

🐂 Bullish - Energy consumption will drop

Proof of Work networks require a lot of energy due to the CPU demands of validating them. The merge will see Ethereum move to a Proof of Stake system that is projected to require only around 0.05% of current energy usage. In fact, according to Digiconomist, Ethereum currently uses about 69.76 TWh/yr and post-merge that number could drop to as low as 0.01 TWh/yr. Compare this with Youtube as an example which consumes 244 TWh/yr (or about 1% of total worldwide energy consumption!).

This implies that, after the merge, more energy will be used watching videos about the Ethereum than the electricity which will be used to run the blockchain itself. An added benefit will be that users will no longer need expensive equipment to run a node in PoS, only a laptop should be sufficient.

🐻 Bearish - PoS uncertainty

A question some may have is, if there are so many reasons to be bullish, why isn’t everyone making the merge trade and buying ETH in the run up to the event? There are probably many reasons this hasn’t happened (and it may still happen), but one of the main reasons surely is risk.

PoS is less mature consensus mechanism compared to PoW. There has been other protocols attempting their own version of PoS like Cosmos, Avalanche, and Cardano, but these projects have not seen the volume of activity close to what Ethereum will. This will be the first large-scale test of PoS in the space.

The Merge is also about more than just switching to PoS. Many of the mechanics the Merge will use aren’t finalized yet and represent a risk to anyone looking to make this event-driven trade. It’s highly debatable how big of a risk that is, and investors will weigh the pros and cons when they are deciding whether or not to make this trade.

🐂 Bullish - MEV protection

Maximal extractable value is currently one of the biggest issues that the Ethereum team is looking to solve. MEV drives up the cost of doing transaction on the network because miners have first access to all transactions and can front run them, make the identical trade first thus forcing the user to pay a higher price.

The mechanism that is being discussed to reduce MEV is called Proposer-Builder Separation (PBS). This means that, once implemented sometime after the merge, block builders and block proposers will no longer be the same user.

Another layer of protection is added by keeping the data contained within blocks hidden until an advanced stage in the validation process. This way the transactions on a block can’t be copied and front run.

After the Merge

🐂 Bullish - Stakers will not be able to sell staked ETH until at least a few months after the merge goes live

From the Etherum Foundation:

“Staked ETH, staking rewards to date, and newly issued ETH immediately after The Merge will still be locked on the Beacon Chain without the ability to withdraw.

Withdrawals are planned for the Shanghai upgrade, the next major upgrade following The Merge. This means that newly issued ETH, though accumulating on the Beacon Chain, will remain locked and illiquid for at least 6-12 months following The Merge.”

🐂 Bullish - Network fee reduction from sharding

Sharding means to split the network up into more manageable pieces, so that the whole network doesn’t need to be validated when running a node, but only parts of it. The concept of sharding has evolved a lot from its origins, and we’ll cover it in more depth in a future article.

The TL:DR on where sharding stands today is it was originally a plan to split the Ethereum chain up into 64 different shard chains, with a beacon chain to oversee them all.

Now the current form of sharding has dropped the idea of splitting up the chain into different parts but instead creating a system where validators only need to download pieces of the data to validate the rest through advanced mathematical techniques and crowdsourcing. This method is called “Danksharding,” named after the developer who first proposed it, Dankrad Feist.

Sharding will not be implemented by the merge but is part of the roadmap and is planned to be implemented in some form later on.

Not Financial Advice

The article is only to provide Templars with more info. It’s definitely not meant to be financial advice so again, DYOR Templars!