Ethereum Completes its "Merge". What's Next for ETH2?
The much anticipated "merge" has happened on the Ethereum network as of last night - so far there doesn't seem to be any major shifts, although if you're an ETH holder you may have noticed a sharp drop-off in price as of this morning. (The market is down as a whole, but ETH took a bigger hit than most, as of today.) This pattern can be seen pretty often in the industry, where a technical upgrade or public hype often triggers a short-term rally as it gets close to the date, then a massive sell-off right after. (Dogecoin in particular tends to be very susceptible to this especially on Twitter, I've noticed.)
While some attribute this behavior as "whale activity", it's usually a sign that ETH still has downward pressure in terms of price - experienced investors often try to time their liquidations by riding short-term hype cycles of clearly-defined dates, as seen here.
While the merge was a momentous occasion for the chain for sure, now that it's over it's going to shift the attention of the project to a number of challenges that will likely determine the viability of ETH2 in the long-term. A few of them are:
- Yesterday probably marks the beginning of the proof-of-stake era for the crypto industry, especially as we head further into the recession and staking rewards (interest rates) start looking more appealing as a place for people to park their money, longer-term. ETH has made that transition, but there are also already many competitors out there (Tezos, Cardano, Cosmos, TRON, etc.) that outperforms ETH2's staking rewards by a very large margin right now. (Though to be fair, ETH2 is still beating the banks, which still is trying to stay at near-0, despite the Fed's rate hikes.)
- "The merge" is only 1 out of 5 steps (Merge, Surge, Verge, Purge, Splurge) until ETH2 is "fully done", which is estimated to take 6 years or longer. Gas fees won't be affected until their "sharding" upgrade is complete, which doesn't have a deadline as of yet. (Until then, most ETH apps will largely sit idle/abandoned since practical usage is just not possible right now.) 6 years is a very long time to sit idle, really.
- ETH2 is currently not liquid (you're not allowed to withdraw from ETH2 accounts until they're "ready"), which makes it much more inflexible and risky than traditional CDs and bonds that have fixed end dates. This is likely to make it very unappealing for most investors out there who will need more clarity and stability in their returns, especially during bear markets.
- Though in theory they are supposed to be independent, we don't actually know what sorts of after-effects ETH2 will have on Layer 2s and ERC tokens built on top of the original chain. Time will tell, but if the price continues to drop (which is likely at this point), we may start to see unintended effects start to pop up. (A lot of crypto projects "balance" their economy with the idea of the price always going up - but that strategy has already backfired in a number of projects already.)
- ETH doesn't support on-chain governance systems (like Tezos - Vitalik was on record being against the idea for a very long time) so there is no way for people to know whether or not the outcomes of DAO or multi-chain votes were done with due-diligence or not. Many businesses and organizations will not participate in these activities until this is fixed. Until then, ETH holders will have to just get used to big decisions behind done behind closed doors.
- What happens with the migration of miners in the ecosystem (ETH was the go-to in terms of mining profitability until now) will be interesting to see since this will be major shift in hash-power allocation in the industry as a whole. Bitcoin mining - due to its fixed supply - has a extremely high difficulty curve and very difficult to turn a profit on so most miners are unlikely to go there, either. It may be an opportunity for a lesser known proof-of-work chains to make its move. (Especially "useful" PoW projects like Gridcoin and Golem.)
--
All in all, the merge came and went, as with like most technical upgrades in the past, the market didn't seem too concerned -- at least, not yet. Ethereum has the bigger challenge now of addressing use-cases and business concerns in order to re-attract the talent and resources that had fled the scene since its gas-fee problem started becoming all too apparent. Can it stay competitive among the proof-of-stake league that have had more time to refine their process? Time will tell.
While some attribute this behavior as "whale activity", it's usually a sign that ETH still has downward pressure in terms of price - experienced investors often try to time their liquidations by riding short-term hype cycles of clearly-defined dates, as seen here.
While the merge was a momentous occasion for the chain for sure, now that it's over it's going to shift the attention of the project to a number of challenges that will likely determine the viability of ETH2 in the long-term. A few of them are:
- Yesterday probably marks the beginning of the proof-of-stake era for the crypto industry, especially as we head further into the recession and staking rewards (interest rates) start looking more appealing as a place for people to park their money, longer-term. ETH has made that transition, but there are also already many competitors out there (Tezos, Cardano, Cosmos, TRON, etc.) that outperforms ETH2's staking rewards by a very large margin right now. (Though to be fair, ETH2 is still beating the banks, which still is trying to stay at near-0, despite the Fed's rate hikes.)
- "The merge" is only 1 out of 5 steps (Merge, Surge, Verge, Purge, Splurge) until ETH2 is "fully done", which is estimated to take 6 years or longer. Gas fees won't be affected until their "sharding" upgrade is complete, which doesn't have a deadline as of yet. (Until then, most ETH apps will largely sit idle/abandoned since practical usage is just not possible right now.) 6 years is a very long time to sit idle, really.
- ETH2 is currently not liquid (you're not allowed to withdraw from ETH2 accounts until they're "ready"), which makes it much more inflexible and risky than traditional CDs and bonds that have fixed end dates. This is likely to make it very unappealing for most investors out there who will need more clarity and stability in their returns, especially during bear markets.
- Though in theory they are supposed to be independent, we don't actually know what sorts of after-effects ETH2 will have on Layer 2s and ERC tokens built on top of the original chain. Time will tell, but if the price continues to drop (which is likely at this point), we may start to see unintended effects start to pop up. (A lot of crypto projects "balance" their economy with the idea of the price always going up - but that strategy has already backfired in a number of projects already.)
- ETH doesn't support on-chain governance systems (like Tezos - Vitalik was on record being against the idea for a very long time) so there is no way for people to know whether or not the outcomes of DAO or multi-chain votes were done with due-diligence or not. Many businesses and organizations will not participate in these activities until this is fixed. Until then, ETH holders will have to just get used to big decisions behind done behind closed doors.
- What happens with the migration of miners in the ecosystem (ETH was the go-to in terms of mining profitability until now) will be interesting to see since this will be major shift in hash-power allocation in the industry as a whole. Bitcoin mining - due to its fixed supply - has a extremely high difficulty curve and very difficult to turn a profit on so most miners are unlikely to go there, either. It may be an opportunity for a lesser known proof-of-work chains to make its move. (Especially "useful" PoW projects like Gridcoin and Golem.)
--
All in all, the merge came and went, as with like most technical upgrades in the past, the market didn't seem too concerned -- at least, not yet. Ethereum has the bigger challenge now of addressing use-cases and business concerns in order to re-attract the talent and resources that had fled the scene since its gas-fee problem started becoming all too apparent. Can it stay competitive among the proof-of-stake league that have had more time to refine their process? Time will tell.
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