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How should investors prepare for The Merge?

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Last week, Ethereum saw a significant increase in its price after the release notes since the last developer meeting, which hinted at the timetable for the upcoming update known as The Merge.

ETH Price Movement, Previous 30 Days - Source: Footprint Analytics
ETH Price Movement, Previous 30 Days – Source: Footprint Analytics
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This update will change the way the network is protected, its power consumption and tokenomics. Staking will play an important role in this. So how can an investor prepare for upcoming events?

What is a merger?

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The Ethereum blockchain is undergoing a series of updates to change it from a Proof of Work (PoW) consensus mechanism to a Proof of Stake (PoS) consensus mechanism. For this to be completed, the milestones are as follows:

  1. The creation and launch of Beacon Chain took place on December 1, 2020. Beacon Chain is what represents PoS on Ethereum. Because of this, it is called the “consensus layer”.
  2. Change the current chain consensus mechanism from PoW to PoS (current estimate: to happen in September). The existing chain, Mainnet, will act as a “run layer” as the current running PoW will be replaced by the Beacon chain. .
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The consensus layer will take care of the security of the network. At the execution level, smart contracts are launched and transactions are created.

Since the update will merge these two chains into one, the name of this event has been changed from ETH 2.0 to Merger.

Why Merger Matters

Top contributors by address
Top contributors by address

Since Beacon Chain has been up and running since December 2020, a significant portion of the ETH supply has already been staked on it, rewarding the operation of the network. There are currently over 12 million ETH staked on the Beacon Chain smart contract:

This number is almost 10% of the current ETH offer. In addition, this ETH is locked up for the long term as there is no rollout date for the unstake capability on the PoS ETH chain.

How it affects ETH emissions

After the transition to PoS, there will be no more rewards for mining. Thus, ETH emissions will be significantly reduced, on top of the 10% supply already locked in the staking contract.

Total supply of ETH
Total supply of ETH

As by EtherscanOn July 21, a total of 13,347 ETH was added to the current offer. If we remove the block reward (mining) and leave only the staking reward (staking), the daily net result will be negative. This means that more ETH will be burned in fees than rewarded, which will lower the overall supply of ETH.

How to capitalize on this shift

None of the following is financial advice and investors should always proceed with extreme caution when trading cryptocurrencies. Analyzing the presented data, we can identify several investment strategies that an investor can choose:

Buy Ethereum

Following the publication of a more precise date for the Merger, there will be a short period when the ETH supply will continue to rise. After that, it will become “deflationary”. If an investor believes that ETH will take its rightful place in the crypto markets and the demand for it will increase, the price of ETH will rise. We have seen some price action already underway, but there is still room for more growth as the incentive to increase the amount of ETH in staking (and out of circulation) will grow.

Buy ETH with liquid staking

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

Examples are Lido’s stETH token and Rocket Pool’s rETH token. When a user accesses their ETH staking platform, their token is minted at a ratio of 1:1 to ETH.

Source: Lido Finance
Source: Lido Finance

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

Price movement of ETH and stETH over the last 30 days - Source: Footprint Analytics
Price movement of ETH and stETH, previous 30 days – Source: Footprint Analytics

Buying the staking version will give the investor an additional 2-3% return and accruing interest if they are willing to wait for the release of the non-staking feature after PoS is implemented on the Ethereum blockchain. There is no timeline for this feature (unstaking), but the estimated timeline is 6-12 months after the Merger.

Key Findings

In the long term, the price of ETH will rise along with the merger – if Ethereum retains its significant and dominant place on the blockchain and the blockchain industry continues to grow – as the token moves from inflationary to deflationary issuance. With a reduction in supply and unchanged demand (and, most likely, growth), this is a logical price behavior.

In order to gain additional opportunities to increase profits, buying a liquid rate version of ETH can generate additional profits if the investor can wait longer, since the staked version often has a discount compared to the spot price of ETH.

The Footprint Analytics community contributes to July 2022, Thiago Freitas.

Data source: merger

The Footprint community is a place where data and crypto enthusiasts from all over the world help each other understand and gain insight into Web3, the Metaverse, DeFi, GameFi, or any other area of ​​the nascent blockchain world. Here you will find active, diverse voices supporting each other and moving the community forward.

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