Ethereum (CRYPTO:ETH), the world’s second-largest cryptocurrency, is one that’s been on the move of late. This top token has gone from around $2,500 per token a month ago to as high as $3,500 in recent weeks. That said, this cryptocurrency has given up roughly half of these gains; it’s now trading around the $3,000 level.
One of the key drivers of this (mostly upside) volatility is a series of major upgrades on the Ethereum network. Sometime later this year (it could be this quarter), Ethereum will undertake the biggest of all upgrades. This upgrade, popularly called “the merge,” will bring about some serious changes to how the Ethereum network operates.
Let’s dive into what this Ethereum merge is and what it means for crypto investors.
About the Ethereum merge The Ethereum merge is probably best described as a large-scale shift in this network’s consensus mechanism. Ethereum is moving from a proof-of-work structure to a proof-of-stake one. This means that the days of solving complex puzzles to verify blocks and secure the Ethereum blockchain will be over soon. Instead, investors will be able to stake their tokens to achieve similar results.
This shift also means that significantly less computing power and therefore less electricity will be needed to power the Ethereum network. Like other proof-of-work blockchains, Ethereum has come under fire for its environmental footprint.
Ethereum has both the proof-of-stake and proof-of-work model operational right now. However, only the proof-of-work mechanism processes transactions. After the merge, Ethereum will shift entirely to the proof-of-stake mechanism.
What does this mean for crypto investors? Experts claim that while this merge aims to reduce the environmental impact of crypto mining, it will also potentially improve blockchain security and protect it against attacks from malicious agents. That’s because crypto mining, or the activities performed by validators in a proof-of-work blockchain, have become increasingly centralized. Proof-of-stake mechanisms have the potential to be more decentralized, and therefore reduce the probability of a 51% attack.
This merge also suggests that fewer Ethereum tokens will be issued. A reduction in ETH, via burning and other means, could result in improved supply/demand fundamentals for this token. And while transaction fees may not necessarily change, the improved dynamics of this network are enough to entice many investors to get in now.
Final word Ethereum developers are hopeful that this plan of merge will go as per schedule. Indeed, the expectation of many investors is that we’ll see the official merge take place by mid-year. Crypto investors are showing significant interest in this merger, with Google (NASDAQ:GOOGL) searches about the merge skyrocketing in early March this year.
Like any other major event, this merge isn’t without risk. A myriad of things could go wrong. Accordingly, investors bullish on the upside should also be pricing in downside risks. That’s just the smart thing to do.
The post What Does the Ethereum Merge Mean for Crypto Investors? appeared first on The Motley Fool Canada.
Fool contributor Chris MacDonald owns Ethereum. The Motley Fool owns and recommends Ethereum.