The launch of Ethereum 2.0, or Eth2, includes the transition from proof-of-work to proof-of-stake, which is said to turn ether (ETH) into a deflationary asset and revolutionize the entire network. The event has been a hot topic for years, and while anticipation for “The Merge” has grown over the past few months, this week ethereum core developer Tim Beiko told the world “it won’t be June, but it may be. In a few months. No firm date yet.”
Delays in ethereum network upgrades are nothing new, and so far the news has had minimal direct impact on ethereum prices.
Here’s what several analysts have to say about what the merger will mean for Ethereum and how the recent delay could affect ETH prices moving forward.
Staking Rewards expects merger to be a short-term boon
According to Beaconscan data, more than 10.9 million ETHs are currently pledged on the Beacon chain, with a total pledge return of 4.8%. According to a recent report by cryptocurrency data provider Staking Rewards, this level of staking offers validators the opportunity to earn a 10.8% net staking yield.
The amount currently staked is equivalent to 9% of the circulating supply of ETH, but some barriers, including the inability to withdraw staked ETH or any rewards from the beacon chain, limit wider participation.
In a merged world, Staking Rewards expects the amount of ETH staked will increase to 200 to 30 million ETH, which will “generate a net validator return (staking return) of 4.2% to 6%.”
While the merger has several benefits for the Ethereum network, including reducing the circulating supply of ETH through burning and staking, some of the major issues facing the network remain a problem.
Chief among these are high transaction costs, difficulty in use, and network congestion, which opens the door to competing networks that offer comparable staking rewards and cheaper transactions to increase their market share.
Hayes defends ethereum bonds
Big events like Merge often turn into “buy the rumor, sell the news” type events in the cryptocurrency space, but some analysts say it’s wrong to assume Ethereum.
According to decentralized finance (DeFi) educator and pseudonymous Twitter user “Korpi”, there are multiple factors that will change the supply and demand dynamics of ETH post-merger.
The triple halving refers to a combined 90% reduction in ETH issuance, a feat that “requires three Bitcoin halvings to produce an equal supply reduction.”
Other bullish factors include a potential increase in staking rewards, as stakers will also receive unburned fee income currently flowing to miners, and increased institutional demand due to the ability to apply a discounted cash flow model to Ethereum, “which institutional investors need. Approve multi-million dollar investments.”
Essentially, after the transition to proof-of-stake, institutional investors can begin to view Ethereum as an internet bond, offering a viable alternative to U.S. Treasuries.
Ex-BitMEX CEO Arthur Hayes explained the concept in detail in a recent post titled “The Five Dodge Numbers”, saying: “The native rewards to validators in the form of ETH-based issuances and The network fees for staking ether in the staker nodes make ether a bond.”
Hayes provided the following chart that illustrates how much value ether could lose if investors still break even compared to the U.S. bond market.
According to this chart, if the collateralization ratio is 8%, the price of ether could fall by 32.6%, but still be equivalent to 2.5% of the 10-year bond.
With many analysts’ long-term price forecasts for Ether at $10,000 or more, assuming the institutional infrastructure needed to support such investments exists, it’s possible that many U.S. bond investors will start seeking yield from Ether collateral rather than the U.S. bond market and approved.
Related: Ethereum Price ‘Bullish Triangle’ Puts Bitcoin at 4-Year High Within Reach
Several methods of transaction consolidation
In terms of transactions, the pseudonymous Twitter user “ABTestingAlpha” discussed several ways in which transactions could be consolidated, noting that there would be less selling pressure after the merger, as the regular sales of proof-of-work miners would cease.
According to ABTestingAlpha, this could be a crowded long trade, meaning “there will be a significant portion of momentum traders going long Ether in the consolidation.”
This will help increase price gains, but it’s important to remember that these traders are unlikely to hold ether for long, so it’s important to try and determine when they’re selling.
Based on the latest news of the delay, ABTestingAlpha will consider Merge’s launch to be late, which leaves several possible scenarios. With the current delay pushing the launch to the second half of 2022, it is possible that momentum traders will sell their tokens, which could lead to a loss of 75% to 80% of Ethereum’s gains since mid-March.
If the delay is extended to 2023, sentiment could take a hit, causing momentum traders to sell some short positions. This is a worst-case scenario that could result in ether liquidity flowing into cash and other layer-1 and layer-2 protocols.
“Result: Ether sold off, returning all proceeds to the merger, plus 30-50%.”
At this point, the situation has turned into a waiting game and a test of patience, as the official launch of Merge is unknown and the crypto market is notorious for its short attention spans.
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