Dear Bitruers,
This year’s most anticipated crypto event is just around the corner!! “The Merge” is expected to happen on September 15th, just one month away!
This news has been making headlines everywhere lately, but do you know what it’s really all about and why it’s so important?
Today we are going to do a deep dive to discover the what, why and whens of the long awaited Ethereum merge!
Background:
Simply put, “The Merge” is an upgrade that will change the Ethereum main chain’s traditional proof-of-work consensus into a proof-of-stake consensus.
So what’s all the fuss about? What’s so special about this merge?
- Ethereum is the second biggest cryptocurrency by market capitalization after Bitcoin and the world’s first & most prominent altcoin. Ethereum is the largest ecosystem in the industry with the most number of decentralized applications (dApps) built on its chain. In fact, it was Ethereum that first introduced the concept of decentralized smart contracts, taking the utility of blockchain ledger to the next level. These decentralized smart contracts allow for the development of the dApps that we now see often. Having the first mover advantage, Ethereum’s ecosystem now hosts more than 1.45 million smart contracts as of early 2022! If you take a look at all the assets available on Bitrue you’ll find that most of the tokens are ERC-20 assets, or tokens built on Ethereum’s powerful mainnet.
- So if Ethereum is so great then why does it need to change its consensus mechanism?
In case you haven’t heard of it, there have been numerous new blockchain projects claiming to be “Ethereum killers”. These projects realize that despite all its grandiosity, the Ethereum blockchain still has several weaknesses that are detrimental to the fate of web3. The main issue with Ethereum arguably lies in its consensus mechanism, the proof-of-work. PoW has proven to be way too pricey, environmentally destructive, and has severe scalability issues. Many argue that despite PoW originally being designed to facilitate decentralization, the expensive equipment and huge amounts of energy needed to mine these tokens has actually led to network control being dominated by blockchain mining companies, or people with bigger resources, which gives those people the most power over the governance of the blockchain and ultimately defeats the whole purpose of cryptocurrencies being the currency of the people.
“Ethereum killers’ come in different forms, with the more popular layer 1 solutions including Solana and Avalanche, while others have pursued a layer-0 solution, such as Polkadot and Cosmos. Projects like Optimism and Arbitrum decided to not go head to head with the market leader, and instead propose a scaling solution to complement the Ethereum chain. All of the projects mentioned above aim to fix the problems that Ethereum has yet to solve, better known as the blockchain trilemma, which is a widespread belief that a blockchain project can only fulfill two out of three aspects of blockchain usability — scalability, security, and decentralization. Recently, the more popular choice of consensus mechanism for blockchains is the proof-of-stake (PoS) or delegated proof-of-stake (dPoS) mechanisms, as they are viewed as more optimal solutions for tackling this blockchain trilemma.
As expected, the Ethereum team would not stay quiet about this. As a matter of fact, the research for a PoS Ethereum chain had begun even before the launch of the original chain. Vitalik Buterin (one of Ethereum’s co-founders) managed to accurately predict the drawback of his own invention even at the early stage and foresaw that a better solution would eventually be needed. However, although the design has been around for quite some time, Ethereum keeps on delaying its move to PoS. As crypto awareness and usage has become more mainstream, an even greater threat has emerged in that the difficulty of mining Ethereum gets exponentially harder over time resulting in what is referred to as Ethereum’s difficulty time bomb, or the Ice Age, where miners can no longer mine these coins. This “Ice Age” phenomenon has happened precisely six times during Ethereum’s novel history, and was solved with a hard fork of the chain each time.
Although this transition into a PoS chain could not guarantee better throughput and scalability, experts believe that it will be a more decentralized chain and will be much more energy efficient.
How will it happen?
Both the team and the community supporting Ethereum have decided that it’s time for Ethereum to go down the PoS path just like its many other competitors. As Ethereum is an established chain with dozens of transactions every second, and has a host of apps and contracts built on it, the developers cannot afford to have a chain outage at any cost. This is why before the Merge happens, Ethereum has launched its Beacon Chain, which as the name suggests, runs separately from the Ethereum main chain. The Beacon Chain uses a PoS consensus mechanism, and has been in service for more than 1.5 years (since December of 2020), to ensure the smooth transition from PoW to PoS. In a sense, the Beacon Chain is a testing ground for implementing PoS on the chain without it actually affecting the already established original chain. As of May 2022, there are over 13 million staked ETH on the Beacon Chain. The Merge will combine the original ETH chain to this beacon chain. The original chain (Eth 1) and its beacon chain (Eth 2) will soon be called the execution layer and the consensus layer respectively. The Merge is called a merge because it is essentially a combination of both the two chains, and the original PoW chain would not be erased completely. The consensus layer of the PoW chain will be removed after the Merge, while its execution layer (Ethereum Virtual Machine) will be kept intact. The PoS will be the new consensus layer of the Eth chain after the
Merge. As the team describes it, the Merge is not the launch of a new Ethereum version, rather it’s a significant upgrade of the consensus layer.
Before the Merge can happen successfully, given the scale of the software upgrade, the team at Ethereum has done several rehearsals to make sure nothing could go wrong on the D-day, to avoid things such as bugs or security loopholes.These rehearsals are done by first merging Ethereum’s testnets before merging the mainnet to the beacon chain. Just recently, Ethereum’s third and final testnet merge, the Goerli merge, was completed successfully. The two testnets that came before it, Ropsten and Sepolia also went smoothly. With all three testnets merges completed, this gives the Ethereum team a huge boost of confidence that the real merge can be executed this year.
If the Merge were to happen successfully, this will pave the way for another upgrade in the Ethereum network which has been included in their development plan, the sharding phase. This sharding is expected to further improve the main chain’s scalability, thus possibly allowing for faster transaction speeds and lower gas fees on the chain.
In theory, if Ethereum is able to achieve all three development phases, eliminating almost all of its weaknesses, it could become the most solid chain in the crypto space in this era, further solidifying its standing as the world’s biggest blockchain ecosystem.
Disputes
Although a large portion of the community supports the Merge, as with every new technological leap, there are always contrarians. Famous miner/PoW influencer Chandler Guo has been one of the most outspoken stakeholders displaying their animosity towards PoS Ethereum. Guo is a strong proponent of keeping the Ethereum main chain’s consensus layer proof-of-work. He has repeatedly voiced his opinion against the Merge in the past, even going as far as to plan his own hard fork of the chain to keep it PoW. Guo’s controversial idea is backed by an active community of miners on his social networks, which he has screenshotted and shared on Twitter.
A hard fork results not only in an offshoot chain but also a new native token on that chain. Seeing this possibility of a hard fork conducted by Guo and his allies, many crypto enthusiasts are referring to the soon-to-be hard forked ETH as ETHPOW or ETHW. When asked for an opinion, the ETC Cooperative stated that the hard fork will be very hard to do, additionally it will be hard to convince developers to continue building on the PoW layer. However, Guo’s crude determination manages to convince the exchanges that a hard fork is indeed viable, leading to mass announcements by CEX Twitter accounts stating their support for the ETHPOW currency if it does emerge.
Bitrue has decided to remain neutral in the PoW and PoS feud, and will support both the ETHPOW and ETHPOS. Details regarding Bitrue’s standing in this situation and the details of execution can be found here -https://bitrue.zendesk.com/hc/en-001/articles/9286197879193
What should you do?
Despite the fact that the emergence of a secondary ETHPOW is less likely, there is nothing wrong with being prepared for both scenarios. As an investor, there is not much that you should be worried about during and after the Merge, as the execution layer will still retain all of your transaction history. In short your funds will remain recorded on the blockchain ledger and you would not lose any of them. Stay alert for potential scams claiming that they require you to take any actions to support the Merge, because we all know that this is not true — the Ethereum developers have stated clearly that no action is needed to be done from our side in anticipation of the Merge.
However, if you are an opportunistic trader, there are some fun tactics that you could do to earn some extra bucks. If you are bullish on the Merge being successful, a no-brainer strategy is to simply stack up your ETH supply and sell right after the Merge. To spice things up, you could utilize an options contract or leverage your ETH holdings with derivatives. If you are bearish, you could do the opposite. This of course comes along with a bigger risk and traders should be prepared for the consequences if things go the other way.
Another proposed trading idea is to trade Lido Finance’s LDO tokens instead, as Lido Finance is known to have more than 30% of all staked ETHs, and has been known to outperform ETH by a substantial margin in the past.
The CEX support of ETHPOW will give you a window of opportunity to do arbitrage trading as well, as the centralized exchanges require several days to be able to support the ETHPOW chain while decentralized exchanges will have ETHPOW almost immediately, you could get some ETHPOWs on DEXs first before selling them for fiat once trading opens in CEXs.
The real question is, what if you are neither bullish or bearish about this Merge and expect that there will be some sort of volatility due to the tug-of-war between buyers and sellers? Well you can always opt to stay silent and do nothing as trading in a highly uncertain market is not recommended to those just starting in the space, and investing is a waiting game. If you choose to use the volatility in your favor, then you could deploy a popular options strategy known as the long-straddle. The long straddle is when you buy both put and call options on the same token, with the same strike price and expiration, so if the price goes either way you can always ramp up some profits by exercising the winning position and only paying the premium for the losing position. With that being said, derivatives trading is easier said than done, as it requires a degree of experience and good emotional management to execute perfectly.
Conclusion
The world of crypto, as nascent as it is, is full of exciting news and opportunities for developers and investors alike. As an exchange, it is our obligation to educate and provide our Bitruers with sufficient knowledge and access to gain some standing in this dynamic space. Crypto investing can be a rewarding experience when done right, both materially and spiritually, but it can be a double-edged sword if the risk and rewards are not managed properly. Therefore, Bitrue encourages our Bitruers to always DYOR (do your own research) and not let your decisions be affected solely by any single entity or other person’s ideas. Risk appetites vary for different people, make sure to know what you want and what you can tolerate before placing your bets.
Regards,
The Bitrue Team
