Last week, ETH experienced a significant increase in its price, following the release of the Remarks from the latest developer meeting that hinted at the timeline for its upcoming update, known as The Merge.
This upgrade will change how the network is secured, its power consumption, and its tokenomics. Staking will play an essential role in this. So how should the investor prepare for the events to come?
What is Fusion?
A series of upgrades are underway on the Ethereum blockchain to move it from a Proof of Work (PoW) consensus mechanism to a Proof of Stake (PoS). To do this, the steps are as follows:
- The creation and launch of the Beacon Chain took place on December 1, 2020. The Beacon Chain is what introduces PoS to Ethereum. For this reason, it is called the “consensus layer”.
- Replace the consensus mechanism of the current PoW to PoS chain (current estimate: to occur in September.) The existing chain, Mainnet, will then act as the “execution layer”, as the current PoW running it will be replaced by the Beacon chain.
The consensus layer will take care of network security. The execution layer is where smart contracts run and where transactions are created.
As the upgrade will connect these two chains to act as one, the name of this event has been updated from ETH 2.0 to “The Merge”.
Why the merger is important
As the Beacon Chain has already been running since December 2020, a good portion of ETH supply is already staked there, receiving rewards for operating the network. Currently, there are over 12 million ETH staked on the Beacon Chain smart contract:
This number represents nearly 10% of the current ETH procurement. Additionally, this ETH is locked for the long term, as there is no date for detachment capacity deployment under the ETH PoS chain.
How This Affects ETH Emissions
After the PoS change, there will be no more mining rewards. As a result, ETH issuance will drop significantly, on top of that 10% supply already locked to the staking contract.
As by Etherscan, a total of 13,347 ETH was added to the current supply on July 21. If we remove Block Rewards (mining) and leave only Staking Rewards (staking), the daily net result would be negative. This means that more ETH would be burned as fees than rewarded, which would reduce the total supply of ETH.
How to capitalize on this change
None of the following is intended to be financial advice, and investors should always proceed with extreme caution when trading cryptocurrencies. Analyzing the data presented, there are some investment strategies an investor could adopt:
With the release of a somewhat firm date for “The Merge”, there is a short period where the supply of ETH will continue to grow. After that, it will become “deflationary”. If the investor believes that ETH will have a relevant place in the crypto markets and its demand will increase, the price of ETH will increase. We have already seen some price action occurring, but there is still room for more upside as the incentive to increase the amount of ETH staked (and out of circulation) will increase.
Buy staked liquid ETH
As the ETH sent to the Beacon Chain staking contract is locked for an unknown period, and the minimum amount to send is relatively high (at least 32 ETH), swimming pools were created to help users stake their ETH. Some of these pools then created an ERC-721 token as a negotiable receipt of this staked ETH.
Examples are the Lido stETH token and the rETH Rocket Pool. When the user accesses their platform to stake ETH, their token is minted 1:1 to ETH.
However, since it is a receipt for future redemption, it is traded at a discount to the price of ETH. This discount is not fixed; the market determines its value, as can be seen in the footprint table below:
Buying the staked version would give the investor an additional 2-3% return and the accompanying accrued interest if he is willing to wait for the release of the disengagement feature after the implementation of PoS on the Ethereum blockchain. There is no deadline for the rollout of this feature (the rollback), but the approximate timeline is 6-12 months after “The Merge”.
Key points to remember
In the long term, the price of ETH will rise with The Merge – if Ethereum retains its relevant and dominant place in the blockchain and the blockchain industry continues to grow as the token transitions from inflationary to deflationary issuance. With supply decreasing and demand staying the same (and most likely increasing), this is logical price action.
For additional opportunities to increase earnings, buying a liquid version of ETH can bring additional profits if the investor can wait longer, as the staked version often has a discount to the spot price of ETH.
The Footprint Analytics community contributes to this article in July 2022 by Thiago Freitas.
The data source: Fusion
The Footprint Community is a place where data and crypto enthusiasts around the world help each other understand and acquire information about Web3, the Metaverse, DeFi, GameFi, or any other area of the nascent blockchain world. Here you will find active and diverse voices that support each other and move the community forward.