What to expect from the Merge this week and next?

What to expect from the Merge this week and next?

Ethereum fact of the day: Did you know that Ethereum’s market dominance has increased by over 57 percent since December 2018?

The long-anticipated upgrade, dubbed the Merge, will see Ethereum’s current Proof-of-Work (PoW) Mainnet merge with the Ethereum Beacon Chain’s Proof-of-Stake (PoS) system. Not only will the upgrade abolish Ether mining completely, but it will also be a substantial milestone in turning the blockchain into a “superhighway with more traffic but lower tolls.” The Merge is set to take place at a fixed block number, which is currently tracking to occur on 15 September. See the countdown here.

Media coverage is at a peak, leading to divided opinions on predictions, launch times and post-Merge expectations. Here are key points that investors can expect immediately after the Merge:

Mining: Ethereum will fully transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) after the last block is mined. This means that ETH mining will be abolished, and staking will replace mining in its function of securing the ETH network.

Energy consumption: Ethereum’s energy consumption will be reduced by more than 99 percent, dramatically reducing emissions resulting from the operations of the ETH blockchain. As a result, Ethereum and its second layers (e.g. Polygon) will become more environmentally friendly.

Supply: Issuance will be reduced by approximately 90 percent as mining will no longer be responsible for issuing new ETH. To date, the Beacon Chain only accounts for 10 percent of all current issuance, which is ~1600 ETH per day. In addition, Ethereum will continue to burn a portion of every transaction as per the London upgrade in August 2021, removing it from the circulating supply.

Staked ETH: Staked ETH, staking rewards and newly issued ETH will still be locked after the Merge. Withdrawals will only be available with the Shanghai upgrade, which is expected in early 2023. In addition, the Shanghai upgrade will allow a total of 40,000 ETH to be withdrawn from the ETH2 contract every day.

Temporary pauses: Many exchanges and service providers will temporarily halt ETH and ERC-20 token deposits and withdrawals. These services likely will resume shortly after the network stabilises.

Security: Under the new PoS system, validators will be responsible for securing the network and will be arbitrarily selected (based on the amount of ETH staked) to create new blocks. A minimum of 32 ETH needs to be staked to become a validator.

Fees: The Merge will not have a direct impact on transaction fees. This will only happen with further network upgrades, which are expected in 2023. However, the Merge is a major precursor to opening up Ethereum to scalability upgrades (sharding) and optimising Layer 2 scaling solutions that will reduce transaction fees.

Forks: It appears that an Ethereum Proof-of-Work (PoW) fork will occur 24 hours after the Merge, with a countdown to be announced publicly by ETHW Core. It is unclear whether a fork will gain the necessary support, given the already established, PoW-based Ethereum Classic blockchain. Several service providers have stated their support or have already listed the forked ETHW, whereas other providers, including our team at Sygnum, are monitoring the potential risks regarding the fork (e.g. replay attacks) on a continuous basis. Should a forked chain survive and stabilise, broader acceptance is expected.

Learn more about the Ethereum Merge here.

About Sygnum
Sygnum is the world’s first digital asset bank, and a digital asset specialist with global reach. With Sygnum Bank AG’s Swiss banking licence, as well as Sygnum Pte Ltd’s capital markets services (CMS) licence in Singapore, Sygnum empowers institutional and private qualified investors, corporates, banks, and other financial institutions to invest in the digital asset economy with complete trust. Sygnum operates an independently controlled, scalable, and future-proof regulated banking platform. Our interdisciplinary team of banking, investment, and Distributed Ledger Technology (DLT) experts is shaping the development of a trusted digital asset ecosystem. The company is founded on Swiss and Singapore heritage and operates globally. To learn more about Sygnum, please visit www.sygnum.com.

This document is purely for educational purposes and has been issued by Sygnum Group. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication. It does not constitute an offer or a recommendation to subscribe, purchase, sell or hold any security or financial instrument. It contains the opinions of Sygnum Group, as at the date of issue. These opinions and the information contained herein do not take into account an individual‘s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes personalized investment advice to any investor. Therefore, you must verify the above and all other information provided in the document or otherwise review it with your external advisors. Some investment products and services, including custody, may be subject to legal restrictions or may not be available worldwide on an unrestricted basis. The information and analysis contained herein are based on sources considered as reliable. Sygnum Group uses its best efforts to ensure the timeliness, accuracy, and comprehensiveness of the information contained in this document. Nevertheless, all information indicated herein may change without notice.

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