What tomorrow’s ETH Merge means for investors – short and long term

What tomorrow’s ETH Merge means for investors – short and long term

The ETH Merge, blockchain’s biggest upgrade, is set for tomorrow morning, September 15. This article wraps up what trends investors can expect from the ETH merge from tomorrow, and also moving forward as the network moves through its ambitious roadmap.

Short-term:

Withdrawals: Withdrawals of staked ETH will not be possible until early 2023 with the Shanghai upgrade. There is a cap on the number of validators that can leave at the same time in order to maintain network security. This should also help maintain price stability.

Reduced selling pressure: There is likely to be an immediate reduction in selling pressure created by newly minted ETH. This is because staked ETH will remain locked until the Shanghai upgrade, and because miners previously needed to sell their tokens to cover operational costs. In a Proof-of-Stake blockchain, because validators’ operational costs are significantly lower than miners, the pressure to sell their tokens is likely to be less.

Long term:

Reduced issuance: The Merge will directly impact ETH’s supply by reducing the issuance of new ETH by almost 90 percent – primarily because mining will cease on the PoS network that historically minted as many as 13,000 ETH per day. Overall, “net issuance” (issued minus burned ETH) is likely to decrease or develop a deflationary trend due to increased network activity.

Reduced circulating supply: Since the London upgrade in August 2021, Ethereum has burned a portion of every transaction and removed ETH from the circulating supply. This will accelerate if ETH transactions rise as the network rolls out and becomes more scalable and efficient.

Since the London hard fork (Aug 2021), over 2.6 million ETH have been burned, currently worth USD 8.5 billion

In the event of a market upturn, the amount of ETH locked in DeFi may also rise, further reducing circulating supply. To date, 20 percent of ETH’s liquid supply has been locked in DeFi, with 11 percent locked in Ethereum’s ETH2 staking contracts.

Value redistribution: Transaction fees and newly minted ETH will no longer flow to miners but will remain within the ecosystem. This benefits token holders either directly (if they contribute to validator pools) or indirectly (by lowering the liquid supply due to validator’s staking in addition to burning some of the transaction fees).

Energy reduction: The PoS consensus mechanism is set to reduce energy usage by up to 99.5 percent over PoW. As the second largest blockchain by market capitalization, this is expected to significantly improve the industry’s sustainability and increase its appeal for ESG-focused investors.

Conclusion

The “stakes” are indeed high for the blockchain’s most ambitious upgrade, set for tomorrow.

Once completed, the network would have reached a major milestone in its journey to become more energy efficient, scalable and secure. This will enable it to further expand its range of use cases and leverage its new tokenomics to provide an even more compelling case for long-term value.

Learn more about the 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.

Disclaimer
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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