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After five years, the Ethereum Merge has launched, and the dust has settled. The event has made history, being the first blockchain to transition from a Proof of Work to a Proof of Stake consensus mechanism.
Although the transition went ahead smoothly, Ethereum's price took a big hit, dropping 18% in the 5 days that followed the Merge. The drop in price could be a result of investors “selling the news”. The Merge took place during a time of uncertainty, as the economic climate grows weaker with higher-than-expected inflation rates and rising interest rates.
Additionally, a statement made by US Securities and Exchange Commission (SEC) Chair, Gary Gensler hints at a potential increase in regulation of Ethereum.
Ethereum carbon footprint reduced 99.99%
Prior to the Merge, the Ethereum blockchain was estimated to have a 99.95% reduction in energy consumption. A recent Crypto Carbon Ratings Institute (CCRI) report estimated that the Merge would reduce Ethereum's environmental impact more than previous expectations.
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The result from the report estimates that the Ethereum network will have a 99.99% annual electricity consumption reduction after the Merge. Additionally, the carbon footprint of the Ethereum blockchain will reduce by a factor of 99.99%.
Ethereum founder, Vitalik Buterin, stated that the Merge will reduce overall global electricity consumption by 0.2%.
The increase in Ethereum's energy efficiency spreads far and wide across its ecosystem. Polygon, a layer two scaling solution built on the Ethereum blockchain, stated that the Merge will have a “99% reduction in network footprint” now that the Merge is complete.
How was the price of ETH affected?
After the Merge was complete, Ethereum saw a short-lived surge in price that was quickly overshadowed by a 5% drop throughout the day. The drop in price despite positive news could suggest that the Ethereum Merge was a “sell the news” type of event.
A “buy the rumour, sell the news” type of event typically involves buying an asset before a significant event to capitalise on a price increase driven by hype and anticipation. Since the announcement of the Merge date, Ethereum has seen multiple price rallies despite being in a crypto bear market, which hints at a “buy the rumour” effect.
Looking at broader macroeconomic conditions, a recent report regarding the Consumer Price Index (CPI) in the US indicated that inflation rates were higher than expected. This news suggested that interest rates were likely to rise by 75 percentage points, which was confirmed by the Federal Reserve on the 22nd of September. The likelihood of another major interest rate hike was bearish news for many investors, which led to a downtrend in the crypto and stock market.
New consensus, new rules?
The Ethereum Merge sparked a debate on whether Ethereum would be viewed as a commodity or a security. A commodity is an economic good, typically a resource like gold or silver. A security is tradeable financial asset like stocks and bonds.
US Securities and Exchange Commission (SEC) Chair, Gary Gensler hinted that Ethereum could be considered a security given his recent statement about crypto staking. The classification of Ethereum as either a commodity or security is hugely important as it impacts how it is regulated. Commodities are less regulated than securities which investors may see as a positive. However, greater regulation could provide more consumer protection and improve confidence in the sector.
What’s next for Ethereum?
Now that the long-awaited Merge is over, the question begs: what's next for Ethereum? Although the Merge has tackled environmental concerns, the blockchain still faces scalability issues regarding network speed and high gas fees. Ethereum will aim to address these problems in the third step of the upgrade. This step is called “Sharding”, which is estimated to launch in 2023.
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Sharding splits the network horizontally, where multiple chains run in parallel, each handling its own transactions. It's as if a ticketing system opened numerous checkouts. Each booth will have access to the ticketing system's database whilst processing customer transactions.
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