The Ethereum Merge draws closer with each passing day, and the anticipation in the market is palpable. There are a number of advantages that come with the Merge, with all of those being factors behind the recent recovery in the price of ETH. However, the advantages, and the subsequent recovery, do not look to end here, as the argument for the value of ETH is even stronger once the Merge upgrade is completed.
The Ethereum Triple Halvening
A Twitter thread from Sprise co-founder Montana Wong has outlined how the upcoming Merge would greatly benefit Ethereum and its holders. The triple halvening, as he put it, is a series of things that happens with the network after the thread that will drastically reduce supply.
Culled from the term “bitcoin halvening,” it basically refers to an event that reduces the amount of supply in the market. For Bitcoin, this happens every four years with the slashing of block rewards in half. For Ethereum, this can only happen with important upgrades such as the Merge.
The first halvening event that Wong highlights in the thread is moving from proof of work to proof of stake. POW is known to require large computational power as well as electrical energy to mine transactions. Miners are incentivized to do this by being provided high block rewards. However, with the move to proof of stake, the network no longer needs miners but validators, who require more than 99.9% less power to validate transactions. Since it requires less energy, fewer rewards are paid to validators. This will reduce the yearly ETH issuance from 4.3% to 0.4%.
ETH price falls below $1,700 | Source: ETHUSD on TradingView.com
The second part of the halvening mentioned is something that is currently running but ties directly to the reduced fees being paid to validators. EIP-1559 was the Ethereum upgrade that removed a third of all transaction fees from circulation. So basically, it piles on the already reduced fees. With fees already 10x lower post-merge, another 33% is being taken out of circulation, further reducing the supply of ETH.
The last one is where the lock-up period comes into play. Currently, ETH is being staked ahead of the Merge, which cannot be withdrawn. These stakers get rewarded with about 4% APY for doing so. Now, it is expected that these staked ETH would be available for withdrawal post-merge, flooding the market with ETH, but this is not the case.
A little-known fact is that withdrawals are not implemented into the ‘Merge’ upgrade. The developers had actually declined to do so, so they could focus on the Merge and then build out withdrawal functionality later. This means that even after the upgrade, stakers would not be able to remove their tokens.
Withdrawal functionality is expected to be added about a year after the upgrade, and it will be a queue, meaning that only a particular amount of ETH can be withdrawn from the staked amount per day. What this does is ensure that there is not an influx of ETH into the market in a short amount of time.
In conclusion, the triple halvening will see the supply of ETH cut down significantly, imposing scarcity on the market. This scarcity is expected to drive up the price of ETH post-Merge due to decreased supply and increased demand. If this analysis is correct, then the Ethereum Merge may be the trigger for the next bull rally.
Featured image from The Coin Republic, chart from TradingView.com
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