As an investor, you may be wondering what you need to know about the Ethereum (ETH) merge. Ethereum is the second most prominent cryptocurrency on the market after Bitcoin, and is a popular holding for Bitcoin IRA customers. As part of a network upgrade, Ethereum is merging its base Mainnet proof-of-work (PoW) Chain with the Beacon proof-of-stake (PoS) Chain. The move will turn all ETH transactions into PoS transactions.
The primary reason for the Ethereum merge is that it may reduce transactional and ETH creation energy consumption around 99% — of course, there will be other benefits. Let’s break down the reasons for the ETH merge, how it works, and what it could mean for both the cryptocurrency landscape and your retirement investments.
Background of the ETH Merge
ETH network developers have been creating test networks and chains since the inception of Mainnet, the production blockchain for ETH transactions. There are also public testnets for developers to try out new upgrades.
Some chains were created as a means of testing improvements to the system. For example, the Beacon Chain was first created in December 2020 to introduce the PoS method of validation.
The PoS model turns miners into stakeholders who help validate blockchain transactions. So, instead of miners competing to solve blocks and transactions on Mainnet, Beacon distributes validation protocols across its stakeholders, paying them a fee in return for processing the work.
The PoS model is well-known for its energy conservation, speed, and security, including these benefits:
- Less energy is used in computing power because computers are not tasked with solving complex math problems.
- These networks are faster because transactions only need to go through the validation step, reducing the time they take.
- Security is enhanced because hackers need to have a significant investment, 32 ETH per stake, in the cryptocurrency to be a validator. The rewards for participating are also much lower than in a straight mining situation.
In sum, benefits of the PoS model include less energy, more speed, and the potential for fewer bad actors. But what does this look like for ETH holders and traders?
How the ETH Merge Works
The merge will occur in two steps called hard forks. The first hard fork started in mid-August 2022; the finalization fork runs behind it, making the full switch. The first fork is called the Bellatrix Upgrade; this will prepare the Beacon Chain for its merge with Mainnet via the consensus layer, making it “merge aware.”
About a week and a half later, the Paris update will be released on the execution layer, swapping the consensus protocol from PoW to PoS. The entire process is projected to finish by mid to late September.
What the ETH Beacon Chain Merge Will Do
The Beacon Chain merge will not only cut ETH power consumption. It will also make transactions minutely faster by a single second. However, a significant decrease in transaction time will not come until well after the merge, with sharding updates projected to come in 2023, as discussed below.
In the new PoS framework, people that have staked or bought a staking position on the Beacon Chain will not be able to withdraw their stake until the Shanghai update, which is projected to run after the merge is deemed stable. Everyone else will be able to buy and sell ETH as usual.
The new framework creates new ETH as transactions occur rather than being created as new blocks are solved. This significantly slows the creation of ETH by limiting it to the consensus layer — resulting in an inflation rate of 0.49% rather than the 4.62% rate currently seen.
In financial terms, the merge is deflationary to the monetary base because less ETH will be created each year. The reduction in annually distributed ETH can increase demand and raise the value of the cryptocurrency, making sharding more relevant — because the more expensive ETH becomes, the less affordable staking becomes, resulting in centralization.
Understanding ETH Sharding
In computer programming, sharding distributes a single dataset across multiple databases. The ETH sharding updates will serve two purposes. First, transactions will be processed faster; some experts have estimated this at up to 10,000 transactions per second under the current projected framework.
The second benefit is that it will bring the barrier to entry for staking down and split it into a hierarchy. The overall idea is that anyone with ETH can participate and gain benefits while keeping the decentralized aspect of the cryptocurrency. While this may seem to take away from the security aspect of using PoS, the new protocols do integrate additional security measures by using fraud proofs and random sampling.
Ethereum Merge, What Does it Mean for My Retirement Account
For those that are trading and investing ETH in their retirement accounts, sentiment-driven price moves may occur. Investors can strategize their position size based on their investment goals and risk tolerance.
Overall, these exciting new developments may level up ETH to transaction rates comparable with the digital fiat landscape — and incentivize adoption by spreading the benefit of money creation among the people rather than the limited few at the top.
ETH is one of the 60+ cryptocurrencies available for trading within Bitcoin IRA, the first and leading cryptocurrency IRA platform. With partners like BitGo and Digital Trust as part of its security-first model,1 Americans can safely trade cryptocurrencies in an IRA with potential tax benefits.2
1Security may vary based on asset chosen and custody solution available.
2Some taxes may apply. We recommend you consult your tax, legal, and investment advisor.
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