Later this year ethereum will deprecate PoW (Proof of Work) and upgrade to PoS (Proof of Stake), dubbed “the merge”.
This upgrade will be enormously bullish for ethereum for the following reasons:
- Ethereum staking yield will jump from 4.8% to 10-15%. This is because unburnt fee revenue will start going to stakers instead of miners. This will incentivize more people to stake ethereum, putting downward pressure on yields and they may ultimately settle around 3-5%.
- New ethereum issuance will be reduced by 90%
Currently, Proof of Work miners are earning 12,000 eth/day which they are incentivized to sell to cover operational costs. But under Proof of Stake, stakers (aka validators, the equivalent of PoW miners) will earn just 1,280 eth/day, and have no need to sell due to operational costs under PoS being negligible.
No eth can be unstaked until 6 months after the merge, and withdrawals will be capped at around 30,000 eth/day.
The merge will reduce ethereum supply growth from the current 3.4% to -0.7% assuming gas remains above 20 gwei (a pretty safe bet), making ethereum deflationary (simulate this here).
PoS also reduces energy consumption by 99.98% compared to PoW, eliminating one of the common criticisms of crypto of it being bad for the environment.
Of course short-term price movements are dependent on many factors such as the macro environment, so nothing is guaranteed. However it seems pretty clear that the merge will lead to upward pressure on prices due to the 90% reduction in new supply coupled with increasing staking yields.
Ethereum is currently well-positioned to becoming a major global currency. It is the largest and most decentralized programmable cryptocurrency (meaning it supports smart contracts), and the technology powering stablecoins like DAI, decentralized finance (defi), and NFTs. Bitcoin currently has twice the market cap of ethereum, but given the superiority of applications of ethereum and total lack of innovation in bitcoin, it’s hard to see bitcoin remaining the dominant cryptocurrency in the long run.
Moreover with inflation ravaging fiat currencies and the superior convenience and possibilities of cryptocurrencies like ethereum, the future only looks bright for cryptocurrencies (barring any bear markets in the short-run). I expect ethereum to reach $10-25,000 within the next 2-3 years, but of course I don’t have a crystal ball and this is not financial advice. Do your own due diligence.
Resources
J. Savage 