The combination of Ethereum will expand its use cases and strengthen its investment case

The most popular blockchain, Ethereum, is about to undergo a significant protocol change, switching from proof-of-work to proof-of-stake.

The upgrade will significantly alter the Ethereum network and could alter the popular blockchain's investment outlook.

Advisors should be ready to inform their clients about the transformation as a result. This entails first educating them about what Ethereum is, including some of the fundamental network architecture, and then about how the switchover would affect their present cryptocurrency holdings.

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What is the currency of Ethereum?

Ether (ETH), the second-largest cryptocurrency after bitcoin (BTC), has a market valuation of more than $180 billion at the moment.

Ethereum uses its own cryptocurrency, ether, to fuel its decentralized blockchain. The development of smart contracts on Ethereum is what underpins many of the most significant crypto efforts, including non-fungible coins, decentralized apps, and decentralized finance (Defi) (NFT).

A proof-of-work (PoW) consensus mechanism, which rewards network users for resolving arbitrary mathematical puzzles, powers and secures Ethereum at the moment. The present PoW system pays Ethereum miners 2 ETH for each block that is mined, which happens around every 10–19 seconds.

What will the merger achieve?

The Ethereum Merge will change Ethereum's proof-of-work security mechanism to proof-of-stake (PoS), having a significant influence on the blockchain.

Users stake their currencies in exchange for the right to approve new transactions on the network in a consensus process known as proof-of-stake (now utilized by many protocols including Cardano). A new block is established when validators have satisfied the network's requirements, and participants are rewarded native tokens for their support in safeguarding the network.

With the new PoS system, validators rather than miners will protect Ethereum. When selected by the blockchain and verified by others, these validators will produce blocks, aiding in network security. Reward tokens will be awarded in ETH according to each validator's stake whenever a new block is uploaded to the network.

Even while operating an Ethereum validator will need a high level of technical expertise, many investors will be able to do so by staking in a pool or with a third party's help. A validator must invest 32 ETH in order to take part in the validation procedure, according to the network.

By "staking" their ether, validators will protect Ethereum. Although it only takes 32 ETH to become a network validator, the likelihood of getting chosen by the network increases with the amount of ETH pledged. The stalker who is chosen by the network as a validator will get a reward made possible by transaction fees.

The "gas fees" users pay to conduct transactions on the blockchain are the transaction costs paid to validators. Sharding, a technical advancement that divides the Ethereum network into various sections in order to speed up transactions and lower network costs, will be introduced as part of the PoS transition. Sharding will be implemented, which should reduce costs and speed up transactions.

The impact of the merger on supply

In contrast to any existing fiat currency, investors have long held that bitcoin's supply cap of 21 million BTC is one of its best characteristics. Bitcoin has been described by investors as "digital gold" and has received funding due to its Tokenomics and supply transparency.

In this regard, Ethereum differs from bitcoin at the moment. Since the project's inception, the rate of ether inflation has been gradually rising, which many cryptocurrency aficionados have frequently cited as a drawback of Ethereum.

Historically, Ethereum has experienced far greater inflation than Bitcoin and has no theoretical supply limit. The foundations of Ethereum may alter with the anticipated upgrade.

The Ethereum upgrade will probably reduce the overall amount of ETH and provide token owners the chance to stake their tokens. The entire market interest in Ethereum is likely to rise as a result of the anticipated yield from staking since an investor can take part in income production by holding their ETH.

The second largest cryptocurrency will probably benefit from a reduction in the total supply of ETH.

According to Christine Kim, a research analyst at Galaxy Digital, "Supply should decrease over time rather than increase. I believe that gives Ethereum's case for investing as a store of value and an inflation hedge a major boost.

Increased involvement

An individual must commit a sizable amount of wealth to successfully mine on a PoW network. A PoW mining operation is expensive to run because it frequently needs to buy new hardware, power supply improvements, and logistical arrangements.

The switch from PoW to PoS will lower the capital need for network security, enabling many more new market participants to stake their ETH and support network security.

Retail investors can pool their ether and make money from staking thanks to the current cost of running an Ethereum node, which is roughly $36,000 USD (based on current prices).

Effects of the Merge on energy efficiency

The Ethereum network will operate more effectively as a result of the merger.

The PoS improvement will significantly reduce the energy requirements of the Ethereum blockchain and, as a result, the network's overall energy usage.

Instead of using expensive and inefficient mining equipment, those who want to safeguard the network will be able to run validator nodes.

Although from a network security standpoint PoW blockchains are very safe, the PoW consensus process necessitates heavy energy consumption from miners. According to ConsenSys, a blockchain software startup created by Joseph Lubin, co-founder of Ethereum, the amount of electricity needed to protect the Bitcoin blockchain has a carbon footprint similar to several small nation-states.

Many investors who care about the environment have spoken out against the energy use of PoW blockchains. Due to the rising popularity of ESG investing, many investors are now unable to fund initiatives that have a detrimental impact on the environment or the climate. PoS blockchains are substantially more energy-efficient than PoW blockchains and use a tiny fraction of the energy. The merger will make investments into ether more appealing to investors with stringent environmental standards.

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