Last week, ETH saw a significant increase in its price, after the launch of the grades from the latest developer meeting that hinted at the timeline for its next update, known as The Merge.

ETH price action, previous 30 days – source: Footprint Analytics

This update will change the way the network is protected, its energy consumption and the tokenomics. Stakeout will play an essential role in it. So how should the investor prepare for the upcoming events?

What is The Fusion?

A series of updates are being made to the Ethereum blockchain to change it from a Proof-of-Work (PoW) consensus mechanism to Proof-of-Stake (PoS). For this to be completed, the milestones are:

The creation and launch of the Beacon Chain occurred on December 1, 2020. The Beacon Chain is what introduces the PoS on Ethereum. Because of this, it is called a “consensus layer”. Replace the current chain consensus mechanism from PoW to PoS (current estimate: will happen in September). The existing chain, Mainnet, will act as the “execution layer”. as the current PoW running it will be replaced by Beacon Chain.

The consensus layer will take care of network security. The execution layer is where smart contracts are executed and transactions are created.

As the update will connect these two chains to act as one, the name of this event has been updated from ETH 2.0 to “The Merge”.

Why does fusion matter?

Main depositors by address

As Beacon Chain is already up and running since December 2020, a good part of the ETH supply is already being staked on it, receiving rewards for operating the network. Currently, there are more than 12 million ETH staked in the Beacon Chain smart contract:

That number is almost 10% of the current supply of ETH. Also, this ETH is locked up for the long term, as there is no date to implement the PoS ETH de-staking capability on-chain.

How it affects ETH emissions

After the PoS change, there will be no more mining rewards. Therefore, ETH issuances will be significantly reduced, on top of that 10% supply already locked in the staking contract.

Total ETH supply

According to Etherscan, a total of 13,347 ETH was added to the current supply on July 21. If we remove Block Rewards (mining) and leave only Staking Rewards, the daily net result would be negative. That means more ETH would be burned as fees than rewards, reducing the total supply of ETH.

How to capitalize on this change

None of the following is intended as financial advice, and investors should always proceed with extreme caution when trading cryptocurrencies. Analyzing the data presented, there are some investment strategies that an investor could take:

Buy ETH

With the release of a somewhat firm date for “The Merge”, there is a short period in which the supply of ETH will continue to grow. After that, it will become “deflationary”. If the investor believes that ETH will have a relevant place in the crypto markets and its demand will increase, the price of ETH will rise. We saw some price action already happening, but there is still room for more upside as the incentive to increase the amount of ETH staked (and out of circulation) will increase.

Buy liquid ETH on stake

As the ETH sent to the Beacon Chain staking contract is locked for an unknown period, and the minimum amount that needs to be sent is relatively high (at least 32 ETH), pools were created to help users stake their ETH. Some of these groups then created an ERC-721 token as a tradable receipt for that staked ETH.

Some examples are the Lido token stETH and the Rocket Pool rETH. When the user accesses their platform to stake ETH, their token is minted 1:1 to ETH.

Source: Lido Finance

However, since it is a receipt for future redemption, it trades at a discount compared to the ETH price. This discount is not fixed; the market determines its value, as we can see in the Footprint chart below:

ETH and stETH price evolution, last 30 days – source: Footprint Analytics

Buying the staking version would give the investor an additional 2-3% return and accrued interest if he is willing to wait for the staking feature to be released after the implementation of PoS on the Ethereum Blockchain. There is no due date for the implementation of this feature (the removal), but the approximate timeline is 6-12 months after “The Merger”.

key takeaways

In the long term, the price of ETH will rise with The Merge, if Ethereum retains its relevant and dominant place in the blockchain and the blockchain industry continues to grow, as the token will go from an inflationary to a deflationary issue. With supply shrinking and demand staying the same (and likely rising), this is the logical price action.

For additional opportunities to increase profits, buying a liquid staked version of ETH can result in additional profits if the investor can wait longer, as the staked version is often discounted to the spot ETH price.

The Footprint Analytics community contributes this piece at July 2022 by Thiago Freitas.

Data Source: Fusion

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This post How should investors prepare for The Merge?

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