Editor’s Note: As Jeff shared on Friday, we’re “unlocking” several premium pieces of research and re-publishing them in the pages of The Bleeding Edge.
Yesterday, Jeff introduced the Perceptron and its reading for the future direction of the crypto market. Today, Jeff shares his analysis on the most important near-term catalyst for the crypto market – “The Merge.”
Originally published in the pages of Unchained Profits, read on to see what “The Merge” is, and what it means for one of the world’s most important blockchain projects.
Volatility continues to negatively affect the financial markets. And the digital asset space is no exception…
Since the beginning of the year, the world’s two premier cryptocurrencies – Bitcoin and Ethereum – have fallen 50% and 54%, respectively.
The industry is also reckoning with a major deleveraging event amidst the collapse of several token projects and hedge funds. And much of the industry is still waiting for the next shoe to drop…
I know it’s a painful time for digital asset investors. I’ve personally seen my own investments in this space sink as the broader crypto market declines.
And I know my readers are feeling the pain as they watch their own portfolios fall into the red during this period of heightened volatility.
But even as the cryptocurrency market sees a broader decline… there are several potential catalysts on the horizon I’m tracking.
And in this essay, I’d like to put one of these catalysts on investors’ radar.
It’s a network upgrade that will benefit one of the world’s most popular blockchain networks – Ethereum. And it’s creating an unprecedented buying opportunity ahead of crypto’s next run higher.
How Ethereum Remade the Blockchain Space
Ethereum was one of the very first layer-one blockchains ever launched. Founded in 2014 by a group of developers – including Vitalik Buterin, among others – the project started off by raising approximately $16 million worth of Bitcoin in 2014.
This marked the beginning of Ethereum’s formal history. It went live by producing blocks, or a ledger of transactions, about one year later.
If somebody introduced a new blockchain now, it might not seem that impressive. That’s because we have thousands of layer-one blockchains.
But what made Ethereum unique compared to other cryptocurrencies at the time was two specific developments… both of which made decentralized applications on a blockchain possible.
The first development was smart contracts.
As we know, smart contracts are small programs that are stored on the blockchain. What makes them impressive is that they can execute code automatically.
This would be like your air conditioner kicking on whenever the ambient air temperature in your home rises above 74 degrees Fahrenheit. This happens because it is programmed to do so when a certain condition is met.
For blockchains, this might involve a loan needing to be closed due to certain conditions taking place. For example, when a loan that is registered on a blockchain is paid in full, the smart contract for the loan is automatically closed.
These kinds of transactions are programmed to happen automatically, without any human inputs.
The second way Ethereum really stood out at the time was its method of executing code. It does this through the Ethereum Virtual Machine, or EVM.
The EVM is how the blockchain knows the order in which things should be done. This would be like an air conditioner executing several steps to bring the air temperature down. It might be programmed to run for two minutes if the temperature rises above a certain level.
Then at the end of two minutes, it rechecks the temperature until the air is below a certain level. Once below that level, the air conditioner will shut off and recheck the temperature every five minutes.
It’s a logical order of events that must happen in a particular sequence.
For a blockchain, this logic takes place via the EVM. It executes code. And this execution is also referred to as computation. The more steps required for the EVM, the more computation that is required by the network.
In order to reduce the likelihood people don’t spam the EVM, the network requires payment to execute the code. This is why we need ETH in our wallet whenever we make a transaction on the blockchain.
This ETH is used to pay for that computation. We know this as a miner fee.
The combination of smart contracts and the EVM allows Ethereum to cut out middlemen.
These two features are why applications such as the Unchained Profits portfolio recommendation MakerDAO (MKR) can facilitate lending and borrowing without any intermediary. This is also how businesses can spring up on the Ethereum network.
A $1 Billion Ecosystem
These factors are what enable Ethereum’s own thriving economy. To date, Ethereum hosts nearly 25 tokens, with valuations exceeding $1 billion. So not only is Ethereum its own blockchain network, but it enables new businesses and projects to realize incredible success.
This is in part what makes me so excited about the next generation of the internet. We’re witnessing the birth of new economies built on Web 3.0 technology.
The success of these applications sitting on Ethereum is pretty wide-ranging.
Just over the last two years, we have seen decentralized finance (DeFi), non-fungible tokens (NFTs), and tokens that mirror the U.S. dollar (stablecoins) realize incredible success.
This success helped Ethereum realize over 71 million wallets with tokens at the end of 2021. This is impressive growth. For context, around the start of 2018, this figure only breached 10 million wallets.
The network now regularly realizes more than $200 billion in transaction volume per month. This figure was frequently below $10 billion per month three years ago.
All this success has come at a cost, though. It’s pushing Ethereum’s capabilities to the limit. Ethereum’s massive popularity and the heavy congestion have resulted in severe bottlenecking of the network.
And right now, transaction fees across the network remain a major pain point for users. As I’ve pointed out in previous updates, transaction fees, or “gas fees,” can be elevated enough during certain time periods that they can make transactions prohibitively expensive for many.
Though Ethereum has seen enormous growth, I believe these issues are holding it back from reaching an even wider audience of users and developers.
And these are the reasons why developers on Ethereum are busy building out Ethereum 2.0…
The Benefits of “The Merge”
There’s a major misunderstanding I’d like to point out with Ethereum 2.0… Contrary to some reporting I’ve seen, the cost to transact will not be significantly reduced.
This might come as a surprise.
As I mentioned, Ethereum is costly to use. A simple transaction can cost anywhere from $5 to $25 depending on the congestion. And a very complicated transaction can cost you more than $100 at times.
This begs the question… If the effect on the cost to transact will not be significant, then why do the upgrade?
There are two main reasons for the upgrade… And at least one will indirectly pave the way for developers to address the broader issue of high transaction costs.
The first reason is to move the blockchain from Proof-of-Work (PoW) to Proof-of-Stake (PoS). This means new blocks will no longer be formed by computers that compute very difficult math problems before others.
Instead, new blocks will be formed by validators who stake their tokens to the network. This method of validating transactions is called Proof-of-Stake. This is another way of saying users put capital up front as insurance against malicious actors.
A benefit of this consensus mechanism is that the energy used to secure the network drops by more than 99%. At a time when climate change and reducing carbon-based electricity production are daily talking points in the news, this is a welcome result.
It also means fund managers with a desire to invest in Environmental, Social, and Governance (ESG) assets will now find ETH very attractive.
It’s estimated that assets under management for global ESG will grow to $53 trillion by 2025 – up from $35 trillion today.
So, when a fund is focusing on blockchain exposure, Ethereum will end up on the top of the list, both due to its migration to Proof-of-Stake and its liquidity.
Ethereum is the second largest cryptocurrency by market capitalization. And soon it will have a small carbon footprint and produce at least a 5% yield on staked tokens.
This shift will make the token one of the most sought-after ESG-related assets when it switches from PoW to PoS.
That alone will make ETH a “must own” for any long-term digital asset portfolio.
But there’s another transformation this network upgrade is enabling that the markets are discounting right now… And this shift is precisely what I predict will create a very attractive buying opportunity for investors in the coming months…
Editor, The Bleeding Edge
Editor’s Note: Tune in tomorrow to read part 2 of Jeff’s analysis of “The Merge.” Tomorrow, he’ll cover the roadmap for Ethereum and what it means for smaller projects involved in Ethereum’s layer-two scaling solutions. He’ll also take a deeper look at the amazing buying opportunity this network upgrade will enable for ETH.