As with most things in life, events don’t just appear. Any event or action, planned or unplanned, causes changes and reactions in the environment. Imagine a rock thrown into a pond creating ripples in the water and changing the water environment below. This school of thought can also be applied to Ethereum integration.
The Ethereum blockchain, along with its parent coin Ether (ETH), is a pillar of the crypto asset industry – an industry that is growing every year. Ether is the second most popular altcoin, with people searching for “Ethereum” on Google 2.1 million times per month on average. ETH has increased in value by more than 100 billion dollars in market capitalization, the Ethereum blockchain serves as a common choice for developers who build decentralized applications (DApps). According to a survey conducted by the crypto exchange Baybit, Ether is the second most heard of alternative to Bitcoin (BTC), with one in six US adults aware of it (15.4%).
Ethereum integration, or simply integration, fundamentally changes the Ethereum blockchain in pursuit of greater scalability and security while requiring less power consumption. This move could have dire consequences for the broader crypto industry.
What is integration?
The merger is part of a multi-year transition to the Ethereum blockchain, sometimes referred to as Ethereum 2.0. This massive transition basically aims to scale the Ethereum blockchain. The official starting point of the network transition is Late 2020 saw the launch of Beacon Chain, a proof-of-stake (PoS) version of Ethereum, although Ethereum’s main proof-of-work (PoW) blockchain also continues to operate.
Expected to happen on September 15th, the merger essentially represents the end of the PoW chain, with all future efforts and attention focused on the PoS chain. PoW vs. PoS has been a long-standing debate in the crypto and blockchain sector. In the mix of arguments, PoS includes blockchains that require less power than PoW networks.
What will Ethereum (and crypto more broadly) look like post-merger?
After the merger, Ethereum will become the PoS blockchain, the PoW chain will be a thing of the past. A difficult bomb reduces the mining rewards, making mining on the chain attractive. Miners resisted the change and discussions began about continuing with the PoW version (or versions) of Ethereum, but the main Ethereum blockchain would be PoW without miners.
Post-merger, Ethereum calls validators instead of miners to run the block. Validators must lock up 32 ETH to support the blockchain functionality, earning rewards for doing so. There are other ways to contribute to the network through staking services, such as crypto exchanges.
Integration is not the end of Ethereum’s extensive transition journey. The event marks more than the halfway point in Ethereum’s transition — it’s 55% of the way to completion, according to Ethereum co-founder Vitalik Buterin. Sharding is the next major goal that aims to improve performance by dividing the blockchain into parallel parts.
There are some misconceptions about integration.
Some common misconceptions have cropped up around the merger. For one, some people believed that Ethereum would magically be faster and that transaction fees would drop dramatically. But this is not expected to happen immediately.
Similarly, some wondered if the merger would flood the market with unfiltered ETH. That is not the case either. In fact, the stock ETH will remain locked until the proposed Shanghai reform in 2023.
Related: Buterin and Armstrong reflect on the change in stock confirmation as the Ethereum merger approaches
Thirdly, some observers have pointed out that it is easier to predict the price action, suggesting that the price of ETH will increase due to corrections or argue that it will be “news selling” that will cause the price to decrease. This method plays on market psychology. If everyone is excited for an upcoming event, the related property may increase in value leading up to the event. Then, when the event occurs, the price may drop because the event is anti-climactic and fails to live up to expectations and expectations.
As with many events in crypto, traders are looking to gain an advantage over competing predictions. One wild card, however, is the low price action that the crypto market is already suffering from, which makes any prediction more difficult to say with certainty.
Possible marketing strategies for integration
If you want to take advantage of the pre-merger bullish investor sentiment, there is a case to be made for holding regular ETH, which holds “spot”. If your investment fund is large enough, you can consider holding the 32 ETH needed to become a network validator, which will earn you 4% interest every year. This number is expected to increase to approximately 7% after the merger.
If prices don’t rise fast enough to earn you a 1,000% return this year, your assets will at least continue to work for you during market depressions. (Just remember that your 32 ETH will remain locked up until the Shanghai upgrade in 2023.)
As a second strategy — if you want to hedge your wallet with ETH — you might want to short-term a small portion of your portfolio using futures contracts. Depending on how long you’ve been in the market, that small percentage of your portfolio may be enough to offset any short-term losses on your position. If the market goes up, on the other hand, you may lose the amount you invested in the futures contracts. But your portfolio may be big enough to cover those losses — if you choose to sell.
A third option is to “sit” in Stablecoins to account for market volatility. This is a reasonable approach if you don’t feel very confident in the direction the market will take next. When it finally comes out – which it will – you can try using very high speed. If the price of ETH drops to $880 – which it reached in June – you may want to go long. Or if it explodes to obscene heights, you can choose to keep it short.
Whatever you choose, remember that most active traders lose most of their money. The best chance of success is to pick a price point, make a purchase, and forget about it until favorable market conditions return.
Make sure that your centralized exchange can access the ETH dropped in the air
Centralized exchanges differ in how they handle integration. The decision that most users will want to follow is whether the exchanges of their choice choose to issue their “airdropped” Ethereum.
In particular, if some blockchain participants continue to operate the proof chain, Ethereum owners will suddenly have two versions of their ETH tokens – one on the proof chain and one on the proof of work. Some exchanges, such as Bybit, have said they support both chains, allowing users to sell or withdraw their tokens. Others — including Coinbase and Binance — have declined to make a similar commitment. (And of course, users can ensure they can access their ETH by keeping it in their own wallet.)
Keeping tokens in complex financial protocols can also prevent the blockchain from recognizing ETH holdings. That includes credit protocols and liquidity pools. Users may want to withdraw ETH from such protocols a few days before the merge to ensure their holdings are recognized.
Another issue to be aware of is downtime during integration. Exchanges mostly plan to disable ETH deposits and funds and tokens on the blockchain — known as ERC-20 tokens — starting September 14. Unexpected technical problems.
DApp users will also benefit
The crypto and blockchain industry is a very interconnected space. Ethereum itself hosts 3,000 DApps on its blockchain as of press time, according to State of DApps. Looking back at the top Ethereum payouts in 2021, we can see an example of Ethereum’s significant impact on the mainstream crypto sector, which has alienated some DApp users.
DApp users, ETH transporters and others may be affected by the merger, but only as part of the larger Ethereum 2.0 movement plan. Its integration is part of the wider Ethereum transition, which will ultimately increase security and scalability through reduced power consumption. The integration should have a significant impact on the energy required to run the Ethereum blockchain while it works slightly faster, but other benefits may take more time as part of the wider transition.
ETH does not have a large coin supply, although it has capital on new ETH created annually. Ethereum reform proposal 1559 laid out a mechanism for burning ETH based on transactions, although the Ethereum blockchain also generates new ETH. The merger will reduce the amount of new ETH generated each year, which may affect the price movement of the asset in the market.
Bill Xing He is Head of Financial Products at Baybit, leading the research and design efforts of innovative tools in both the CeFi and DeFi worlds.
The opinions expressed are solely those of the author and do not necessarily reflect the views of Cointelegraph. This article is not intended for general information purposes and should not be construed as legal or investment advice.