The value of Ethereum (quotation ETH) has risen by 30% in the last week thanks to the news that the "merger" is scheduled for 19 September. Investors speculate that there will be many improvements to the blockchain and related Tier 2 blockchains, which live on top of the Ethereum Tier 1 blockchain. But is it time to buy?
I think there are three main catalysts for Ethereum's growth in value after the "merger".
1. Developers will have more options
Ethereum is currently capable of handling around 12-14 transactions per second, which means it is not suitable for high traffic volumes. Unfortunately this situation will not improve after “The Merge”, but there are other reasons to be optimistic.
The developers have been working on a concept called sharding, which would increase the scale of the Ethereum Mainnet, but the expected benefits could relate to Layer 2 blockchains such as Polygon, which are currently at the heart of scaling solutions. In fact, sharding creates many blockchains from a basic blockchain.
2. Energy problems will vanish
One of Ethereum's biggest concerns is the energy used to run its proof-of-work consensus mechanism, in which large numbers of computers have to solve complex mathematical problems to verify transactions. The Ethereum network is estimated to consume about as much as the Netherlands.
The move to proof of stake, in which token holders validate transactions, will reduce energy consumption by around 99,95%, according to Ethereum estimates. This will take one of the concerns of Ethereum detractors out of the equation.
3. The stakers will take ETH off the market
Investors looking to generate passive income from Ethereum can do so by aiming for Ether, which generates a return from users of the blockchain. The good news is that stacking will steal Ether from the market, which could increase the value of the remaining Ether in the trade.
If the blockchain increases activity, it could also increase the value of Ether, because stakers see higher returns as a good alternative for their cryptocurrency.
The risks for Ethereum
There are good reasons to be optimistic about the Ethereum blockchain and Ether as a cryptocurrency, but there are also risks. The yield part of the staking it is only paid when blockchain usage is high and users are willing to pay high transaction fees on Ethereum. In other words, a headwind for Ethereum is its high transaction costs, but this cost is what pays for the return.
Ethereum also needs to scale more efficiently in order to compete with other blockchains. The "merger" is unable to do this scalability work, and investors are hoping that Layer 2 blockchains or future sharding will expand the network's capabilities. There is still a lot of work to be done, but I believe it is still time to be optimistic about Ethereum as “The Merge” approaches.