Ethereum Merge and its possible effect on the DeFI space
Ethereum Merge or “ETH Merge” as the community calls it, quite possibly is one of the most awaited events in the DeFI Space for the second half of 2022. While regulators see this as Ethereum taking another step toward sustainability, Crypto Enthusiasts see this as a potential for a turnaround from the gloomy 2022 Bear Market. So What is the Ethereum 2.0 Merge really about? Does it have an impact on the crypto space as a whole?
What is Ethereum Merge?
Ethereum has been the most widely used cryptocurrency that has been showing consistent growth in terms of its application as the years have gone by. Although Bitcoin is still way ahead of Ethereum in terms of Market Cap and Price, Ethereum has been the main foundation upon which the new DeFI, GameFI, and NFT space was possible to be realized.
If you are new to the Crypto Space, Ethereum was founded by Vitalik Buterin who was still in his University when he published its Yellow paper in 2014 along with the other Co-Founders. Some of the Co-Founders include Dr. Gavin Wood and Charles Hoskinson who would go on to create their projects in Polkadot and Cardano respectively. The Ethereum Mainnet was then released in July 2015 and expanded the blockchain network with a concept called Smart Contracts.
Smart Contracts are codes that you can use to execute a specific transaction or task through the Ethereum Virtual Machine. This code is what then allows the blockchain to execute any kind of command instead of just carrying out transactions like in the original versions of the blockchain. This also presents a ton of opportunities for developers and crypto enthusiasts as they can utilize the smart contract to build different things on top of the Ethereum blockchain such as tokenization and Dapps.
Of course with all of this we can also attribute some of the success of DeFI towards its present stage to Ethereum for starting it all. It also is of no surprise that the DeFI Ecosystem is growing at a rapid rate with its valuation reaching $63.2 Billion in 2022 and Ethereum contributes to almost half of it with superior platforms such as AAVE, Uniswap, and MakerDAO offering different kinds of service to its users. The DeFI Ecosystem is expected to hit the $500 Billion Mark and you can count on Ethereum to be its key driver in the future.
Ethereum has also seen massive growth in terms of its user space, adding almost 18.1 Million Users in 2021 alone to reach 126 Million users and slowly catching up to Bitcoin’s 180 Million Users despite launching 6 years prior. Ethereum has also recorded $4 Billion worth of Transactions which will generate roughly $18 Billion in revenue throughout the year 2021 and with the whole network continuing to grow, fundamentally there is a fair reason why all market analysts are Bullish on ETH.
Unfortunately, the drawback of all of this growth, is that the network becomes so congested that transaction fees are also increasing. Transaction fees in the Ethereum Network come in the form of Gas Fees that are paid to the Miners who validate the transactions and are measured in GWEI (1/1,000,000,000 ETH). Normal Gas Fees are somewhere below 20 GWEI but throughout 2020 and 2021, it has stayed above their peak at 236 GWEI. So this presents a few problems that result from massive growth within the network mainly in terms of Scalability and Sustainability.
This is what Ethereum 2.0 is trying to solve with its current switch from the High Electricity Consumption Proof Of Work Mechanism to the Proof of Stake Mechanism. This Ethereum 2.0 project began in December 2020 with the launch of the beacon chain which is a separate chain from the current Ethereum Network used to run tests and simulations. This beacon chain, once fully functional, has been Merged to the current Blockchain earlier this year 2022 and this is what we referred to as “The Ethereum Merge”.
This is probably one of the major upgrades after a long time done on the Ethereum Network and when the crypto community refers to this event as “As One of the Biggest this Year”, the expectation is sky high for this upgrade to work. This Ethereum Merge should complete the phase of transition from the POW to the Proof of Stake Consensus mechanism which will help improve the speed, efficiency, and scalability of the network.
The Ethereum Merge will also mark the completion of Phase 1 in the Ethereum 2.0 upgrade with its Phase 2 Sharding scheduled to take place in 2023/2024. So what is all the hype about ETH 2.0? There are a lot of expectations riding on these upgrades mainly because there has not been an upside story after all the mess created in the crypto space. After the Celcius and Luna fiasco, people have continuously doubted the future and the commitment of the developers in the crypto space.
Ethereum 2.0 might be a glimpse to show that the project developers are focused on growing the ecosystem and commit to addressing the problems that occur within the network instead of fixating themselves on the token value. With the regulations on the crypto space improving, this ETH Merge should be good news for the crypto space but are there any side effects to it?
Potential Impacts on the Crypto Space
With the Ethereum Merge, the impact on the crypto space expects that the price of digital assets will come back to its Pre — Crypto Winter heights which unfortunately is not the case. The Ethereum Merge is really good news for the growth of the DeFI ecosystem and it surely leaves a positive impact on regulators as it should address the “Carbon Footprint” issue.
Is it all good news though? Not really as there are risks towards switching to a Proof of Stake and Staking also might be the reason behind all this hype. There has been a growing number of Crypto Institutions that offer liquid staking derivatives on staked ETH which should mean that we can have a huge number of Ethereum flowing to the market once the Staked ETHs are convertible to ETHs. This is the main drawback with Staking as although it is more energy–efficient, it does tend to oversupply the market resulting in tumbling prices if the Burning Mechanism is not sufficiently balanced.
Proof of Stake mechanisms is also prone to Censorship Risk as they can favor the highest Ethereum owner to become a validator which could be a bad thing if the major validator has other interests over the growth of the ecosystem. This would be a problem in a network that has a majority of its coin supply controlled by a few of its Holders.
Overall this is good news for the crypto space in general as it not only redefined what the blockchain network is capable of and should bring enough optimism back into the crypto space that is struggling through its “Crypto Winter” phase. A positive response from these Upgrades should be enough to drive interest back up of developers and crypto enthusiasts to create innovation that will carry it forward. Eventually, as the crypto ecosystem improves, people’s value of them will also slowly improve.
We in Nagaya Technologies Pte. Ltd is excited about the developments within the cryptocurrency space. We believe that innovations should be able to provide sustainable and scalable value to all its users. This is why we decided to create the world’s first hybrid cryptocurrency called Nagaya which has a gold backup and subsidiary projects to provide value sustainability over time. For more information regarding the latest updates on Nagaya and our whitepaper, you can visit us at nagaya.io