Although the cryptocurrency sector itself has floundered, that hasn’t stopped its most ardent advocates from actively promoting the underlying blockchain industry. For weeks, both mainstream and alternative media outlets have been buzzing about the Merge, an event set to take place on Sept. 6 that not only could change the Ethereum (ETH-USD) network but also the entire virtual currency ecosystem.
Akin to almost every success tale in the business world, the once-universally loved Ethereum network received uncharacteristically sharp criticism in recent years. Transaction fees (called gas) became onerously expensive, leading to many blockchain programmers and developers pivoting over to more efficient ecosystems. Essentially, Ethereum got too big for its britches. However, the network’s core development team recognized this problem, setting off on a years-long journey to find a solution.
In short, the ETH blockchain is due for a software upgrade. Previously, the network ran on a consensus mechanism called proof of work (PoW). Over the years, however, the PoW approach itself garnered intense scrutiny for its escalating energy consumption. By moving to an exponentially more efficient protocol called proof of stake (PoS), Etherem can align itself with modern-day blockchain standards, with many competing platforms already incorporating PoS consensus mechanisms.
So, why don’t blockchain developers simply migrate en masse to next-generation blockchains that already incorporate PoS technologies? At least in part, an economic motivation exists. While new blockchain projects are sprouting all the time, Ethereum commands intense industry and social cachet, with ETH representing the number two cryptocurrency by market capitalization.
You don’t just give up on such power and influence. Rather, you take this impactful platform and upgrade it. However, that may be easier said than done.
Ethereum Faces Market Risks
Although the promise of an energy-efficient Ethereum network theoretically bodes well for ETH, market risks abound. Mainly, it’s important to understand the concept of buy the rumor, sell the news. Generally speaking, everyone betting on the same horse could be due for a disappointment.
If the wager turns out favorably, the resultant rewards would likely be limited overall. Moreover, no guarantee exists that following the masses or the implications of groupthink will lead to the correct “answer.” In many cases, the crowd can be right. But if following the crowd represented a proven high-probability pathway, everyone would unabashedly recommend it.
With the Ethereum Merge, however, the risk of groupthink appears more prominent than usual. Simply, the broader discourse of the Merge seems to overwhelmingly point to the bullish outcome. Hopefully, that will be the case for the countless ETH stakeholders out there – this author included. Nevertheless, a cautious approach may be the most prudent.
Recently, the Motley Fool published an article called “3 No-Brainer Reasons To Buy Ethereum Before The Merge.” In a nutshell, the author argued that because the shift to a PoS consensus mechanism will vastly improve Ethereum’s energy efficiency, the network will be able to leverage its vast influence to compete with smaller but newer blockchain competitors which already entered the arena as energy-efficient ecosystems.
Nevertheless, it’s respectfully a point of contention to label the Ethereum Merge as a “no-brainer” investment opportunity. Traders may have already bid up ETH as high as it can go in the near term. Following the Merge, buyers can simply cash out and look for new opportunities with their funds, considering the historical volatility of cryptos.
And that’s not including the possibility that the Merge itself can fail.
No Guarantees for the Pivot
Presently, the main focus of the Merge discourse seemingly centers on the energy-efficiency component. Per Yolowire, the “new proof-of-stake protocol will use 99.95% less energy than the current proof-of-work operating model and is viewed as a major milestone in the development of cryptocurrencies.”
Still, it might not be wise to count eggs before they hatch. Sure, the implications couldn’t be grander. If the Merge proves successful, then it can inspire other legacy blockchains to follow suit. Indeed, there might be an argument that they would have to follow suit to remain competitive and relevant.
However, few want to explore the other side of the risk spectrum. As The New York Times explained, the process of upgrading the ETH network “has taken so long partly because of the high stakes. A failed Merge could cripple thousands of crypto projects and cause a market crash.”
“Essentially, they’re changing the engines out in flight,” said Christopher Calicott, a crypto venture investor. “Nothing has ever been attempted at this scale.”
To be fair, the NYT notes that blockchain engineers and researchers “have conducted years of tests to prepare for the Merge. They have had to check for security bugs and build a new blockchain that uses proof of stake.”
Nevertheless, the issue remains that we won’t know until we know. That’s a major unknown to wager on.
Just Be Careful Out There
The above discussion isn’t to convince you one way or the other about how to approach the Ethereum Merge. It’s possible that the protocol can go off without any hiccups and send ETH to the moon. However, just because the apparent consensus of opinions forecasts that this narrative will play out doesn’t mean it will.
As frustrating as it may be for some investors, it’s critical to consider the other side. Again, no guarantees exist for the Ethereum Merge. With that being the only assurance in this matter, crypto market participants should respond accordingly.
Disclosure: The author held a long position in Ethereum (ETH).
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