Disclaimer: This article was brought to you in collaboration with Bybit. The following content does not howsoever constitute any endorsement, financial advice or any solicitation or offer of securities or other financial instruments.
The Merge is an Ethereum software upgrade from the energy-intensive Proof-of-Work to the energy-efficient Proof-of-Stake consensus mechanism.
As a crypto ark, Bybit is prepared for the probability of hard forks and will provide more stability and network efficiencies for the Ethereum community.
Bybit Savings provides users a customized savings experience, enabling them to earn interest on their favorite assets and take advantage of The Merge.
Users can also utilize Bybit's USDC-Margined ETH options to speculate or hedge and use it as a risk management tool during The Merge.
After multiple delays and revised timelines, a massive event in the crypto space is in the offing. Ethereum, the second-biggest cryptocurrency by market cap, is transforming how it operates and secures its network, becoming more energy-efficient and scalable. Currently slated around September 15, 2022, “The Merge,” as it has been dubbed, has profound impacts on the Ethereum ecosystem and the future of cryptocurrency in general.
The terminal total difficulty has been set to 58750000000000000000000.— vitalik.eth (@VitalikButerin) August 12, 2022
This means the ethereum PoW network now has a (roughly) fixed number of hashes left to mine.https://t.co/3um744WkxZ predicts the merge will happen around Sep 15, though the exact date depends on hashrate. pic.twitter.com/9YnloTWSi1
But what exactly is “The Merge”?
What is The Ethereum Merge?
Ethereum.org defines The Merge as “the joining of the existing execution layer of Ethereum (the Mainnet we use today) with its new proof-of-stake (PoS) consensus layer, the Beacon Chain.” For crypto beginners, that probably made little sense, so here is a more straightforward definition: The Merge is an Ethereum software upgrade from a Proof of Work (PoW) to a Proof of Stake (PoS) mechanism. It removes the prerequisite for energy-intensive mining and replaces it with energy-efficient staking.
Table below shows how both consensuses compare:
Here’s what Zhong, the head of research at CoinGecko, has to say regarding the important event:
“In our view, The Merge is a culmination of years of R&D work by the Ethereum Core Developers in order to migrate the chain from Proof-of-Work to Proof-of-Stake. This upgrade seeks to improve both the security and decentralization aspects of the network, as well as significantly reduce its environmental footprint. Once the Merge is implemented, later upgrades already in the works will seek to address the scalability of the network.”
To expound on The Merge further, let’s use an analogy of Ethereum as a spacecraft in mid-flight. The Ethereum community has created a new engine and a robust casing. After rigorous testing, it is almost time to hot-plug the new engine into the old mid-flight. The process will basically join the new, more effective engine with the existing craft.
So why change the old engine, yet Ethereum has achieved much as a smart chain network? Well, the Ethereum Mainnet leverages a PoW consensus mechanism to confirm transactions and add them to blocks. The mechanism involves using distributed computers (nodes) to solve (mine) increasingly complex mathematical puzzles to secure the network.
PoS uses validators instead of miners to secure the blockchain. Validators execute the same role as miners, only that instead of spending money to buy expensive and energy-intensive equipment, they stake Ether (ETH) as collateral to verify transactions on the blockchain. The staked assets can be confiscated if the validator acts dishonestly, with more severe consequences for wicked acts.
The process rewards active and honest validators for securing the blockchain without needing colossal power consumption. According to Staking Rewards, ETH ranks as the number one crypto asset by staking market value.
Source: Staking Rewards
Because all the power consumed securing a PoW blockchain originates from a mining algorithm, switching to PoS significantly minimizes energy use. Besides, there’s no need to use sophisticated mining equipment, eliminating the arms-race scenario and electronic waste.
How The Merge Works
The current Ethereum network is called Mainnet and differs from the various testnet networks used by developers. In December 2020, Ethereum developers came up with a new blockchain known as the Beacon Chain, basically the new Ethereum. It’s a PoS network that has been operating in isolation for almost two years now. The ETH2 deposit address allows users to stake their ETH tokens. The ETH2 deposit address allows users to stake their ETH tokens. It has been experiencing constant growth since its inception in January 2021.
Source: The Block
Validators have been integrating blocks into the network, but these blocks lack data. In other words, the chain has undergone rigorous tests ahead of the event. The Merge will see the data stored in the Ethereum Mainnet moved to the Beacon Chain, making it the primary Ethereum blockchain.
Evaluations drawn from the current Beacon Chain indicate that The Merge to PoS could result in a 99.95% reduction in total energy consumption. Ethereum’s power consumption will almost equal the cost of operating a laptop for every network node. Most studies use “per-transaction” power cost when comparing blockchains with other sectors. The advantage of this method is that it’s easy to comprehend, but the number of transactions in a block determines the energy needed to verify it.
What to Anticipate in the Ethereum Merge
Bybit strives to create a space where savvy traders, thought leaders, and other crypto enthusiasts can share and enrich each other. With offerings for users of all proficiencies, Bybit learn, the intuitive trading platform, offers the best, first-hand information on what investors should take note of the market conditions.
Since the crypto space is constantly evolving, Bybit will continue to monitor The Merge and its market consequences. The platform will be established at a future date and offer updates on whether it will support product lines of potential ETH-forked coins. Let’s take a look at the common misconceptions about The Merge and the three trading strategies from Bybit that investors can leverage to take advantage of.
Common Misconceptions on the Merge
1. Ethereum getting less decentralized after the Merge
Not necessarily correct. Lido and centralized players' dominance in ETH staking will create centralized risk. Censor Validators can create trouble, while miners are less likely to get attacked as the attacking costs are high.
2. Ethereum gets faster and cheaper after the Merge and dwarfs other ‘Ethereum Killers’
No. Nothing changes right after the Merge in terms of its performance. The Merge's critical change is shifting from energy-intensive PoW to energy-efficient PoS. However, enhancing throughput is a part of ETH 2.0 where the Merge only marks 55% completion of ETH 2.0. Ethereum Killers are not impacted in the short term, but once ETH 2.0 boosts ETH's throughput to 100k, Ethereum killers will probably feel the heat.
3. Huge selling pressure from unleashing of staked ETH after The Merge
False. Only after the Shanghai hard fork, expected to take place after The Merge, can staked ETH start to exit gradually.
4. The recent ETH rally shows full faith from investors, and retail investors shall invest more into ETH
That is not necessarily true. Some analysts believe that The Merge has not been fully priced in from a long-term point of view. Spot volume does not add up, and this rally is derivative-driven. Therefore, the "buy the rumor, sell the news" plot may come to play if The Merge happens in September.
Read more on the misconceptions regarding The Merge through Bybit’s article.
Expanding Your Transition with Bybit
Bybit, established in 2018, is a cryptocurrency exchange that serves over 10 million users and institutions, offering access to over 100 assets and contracts across spot, futures and options, launchpad projects, earn products, an NFT Marketplace, and more. It also offers a professional platform featuring an ultra-fast matching engine, excellent customer service, and multilingual community support for crypto traders of all levels.
As a crypto ark, Bybit is open to the likelihood of hard forks and will ensure more stability and network efficiencies for the Ethereum community. ETH prices in different Bybit product lines will track the PoS ETH prices after The Merge. Unlike other exchanges offering limited support to The Merge, Bybit is focused on ensuring a seamless shift across its entire product suite.
In the August Nansen report, Bybit provides expert opinions on whether smart money, which consists of big institutions, has actively speculated on the hypothesized speculations about ETH PoW. For more insights, check out Bybit X Nansen's Crypto State-of-the-Industry Report.
Here are three ways to take advantage of The Merge:
HODL and Earn with ETH Staking
According to CryptoQuant, the total value of staked ETH has been growing steadily since the beginning of 2021, showing users increasing interest in ETH staking. Bybit Savings offers users a customized savings experience, enabling them to stake and earn interest on their favorite assets, including ETH. Users can select flexible and fixed-term products that guarantee competitive Annual Percentage Yields (APYs).
For example, you qualify for a 1.75% APY when you stake ETH for a flexible/fixed period, 0.39% for a flexible period, 1.50% for 30 days, and 1.75% for 60 days.
Likewise, Coinbase has introduced cbETH options to enable crypto users to sell, transfer, or spend their staked ETH while it remains locked. Unlike Coinbase’s cbETH which requires users to wrap ETH (incurring other costs in the process), Bybit Savings offers users a customized savings experience, enabling them to earn interest on their favorite assets.
Hedge and Protect Gains with ETH Options
An option is a financial contract that gives the holder power (without commitment) to buy and sell an asset on a stipulated date at a specific price. Bybit has two primary ETH options: call and put options. The call option (bullish) gives holders the right to purchase a certain amount of ETH on a specified date at a predetermined price. On the other hand, a put option (bearish) gives holders the power to sell a given amount of ETH on a specified date at a fixed price.
The major factors that affect the price of an option are the price of the underlying asset, the time premium, the buying or selling price, and implied volatility. The price of a call option appreciates with an increase in the value of the underlying asset. Equally, the price of a put option depreciates with a decline in the value of the underlying asset. Options offer investors risk-reduction strategies, cost-effective ways to long or short the market with less downside risk, and more flexible and complex methods, like spread and combinations that are potentially lucrative in various market conditions.
Bybit is the first crypto exchange to list and trade USDC options and launch USDC-margined ETH and SOL options. If you expect high price volatility from The Merge, you can leverage Bybit's USDC-Margined ETH Options to speculate or hedge and use it as a risk management tool.
Chicago Mercantile Exchange (CME) plans to introduce ETH futures options on September 12, 2022, which shows heightened interest in cryptocurrency derivatives products. Unlike the CME’s ETH options, Bybit’s USDC-denoted ETH options will follow its regular settlement and distribution process based on the dollar value of the PoS coin. Bybit has assured its options traders that it will not enact changes on the strike prices of ETH options in case of forks. This entails options listed before and after The Merge.
To learn more, check out Bybit’s detailed guide on ETH options.
Trade Spot/Derivatives on The Merge
Though the long-term ETH price effect is hard to forecast accurately, Bybit has come up with three trading strategies for The Merge, applicable to all outcomes (bullish, neutral, and bearish):
To find out how each strategy works and how you can execute them, read more through this article: Ethereum Merge Price Prediction: 3 Strategies to Consider.
The Merge is the most important software update to Ethereum since its inception in 2015. Ethereum’s transition from PoW to PoS will undoubtedly improve its sustainability, security, and economic durability. Generally, as crypto nears an inflection point of mass adoption, Ethereum would be ready to serve as its foundation.
As a market leader, Bybit will create more stability and network efficiencies for the Ethereum community by getting ahead of the changes. Bybit is also committed to providing the best, first-hand information on what investors should take note of in the markets.
Curious to learn more about Ethereum Merge and its network upgrades? Read our analysis here:
Josiah is a tech evangelist passionate about helping the world understand Blockchain, Crypto, NFT, DeFi, Tokenization, Fintech, and Web3 concepts. His hobbies are listening to music and playing football. Follow the author on Twitter @TechWriting001