Jun 29, 2022
When is the Ethereum Merge, and How Can You Profit?
What is the Ethereum merge and how can you bet on when it is going to happen? Read to learn how it all works and where you can bet on it.
Have you heard of the Ethereum merge? Do you know when it’s going to happen? It’s one of the most important questions facing the future of crypto-some believe it’s the most crucial question of all.
What is the Ethereum Merge?
In what might amount to one of the most consequential and long-awaited developments in the history of crypto, Ethereum is slated to shift to “Ethereum 2.0,” which promises to dramatically lower transaction costs (i.e. gas fees) and CO2 emissions, while also giving ETH holders better yield.
In theory, a much better tomorrow awaits everyone in web3 after Ethereum shifts from a “proof of a work” system, where transactions are validated through solving really hard math questions-a process which incidentally consumes a ton of computer power-to a “proof of stake” system, where network participants ‘stake’ cryptocurrency as a form of collateral to vouch for new additions to the blockchain.
“Proof of stake” will be dramatically more efficient than “proof of work,” according to the Ethereum Foundation. The way things function now, transaction costs are far too high to unlock the Ethereum network’s full potential. If it costs $50 in gas fees to complete a single transaction, it’s impractical to use Ethereum for ordinary purchases, for example.
With Ethereum 2.0, gas fees could fall to a few cents, less than the fees charged by credit card companies like Visa. According to enthusiasts, the fact that Ethereum has grown so big even in the face of enormous transaction costs suggests that Ethereum 2.0 could become 100x larger, powering large parts of the monetary system. That’s why many people are betting the farm on Ethereum 2.0-that will be the real crypto revolution.
In order to shift from the old system to the new system, however, Ethereum 1.0 has to be “merged” with Ethereum 2.0. Hence the term “Ethereum Merge.” The precise date of the Ethereum merge remains the subject of much speculation and controversy. Despite repeated promises by people close to its development that it will debut sometime in the second or third quarter of 2022, the Ethereum Foundation has a long history of missing deadlines and is notoriously non-transparent about its processes and inner workings.
PRO TIP: The Ethereum Merge is just one of dozens of popular topics being traded as prediction markets on Polymarket. From current events to politics, sports to pop culture, Polymarket is where people are trading future outcomes.
Unlike a normal company, The Ethereum Foundation doesn’t have to answer to shareholders. It’s only informally beholden to a decentralized community of Ether holders-it can work at its own pace, and it isn’t legally bound by any deadlines. Those who are eager to know the date of the merge are therefore crafting predictions out of scraps of knowledge that have been tossed off, sometimes accidentally, by people close to the project.
Polymarket is the only place on the internet to get real-time, unbiased data on the likely date of the Ethereum merge. The market odds reflect the combined analysis of hundreds of highly-informed, uniquely situated traders speculating on the likely date.
Currently, traders think the merge is extremely likely to happen by the end of the year, but very unlikely to happen this summer.
87% of Traders on Polymarket Say Yes by Nov 2022 ☝️
98% of Traders on Polymarket Say No by Aug 2022 ️☝️
What is Ethereum?
Ethereum was originally conceived in 2013 by programmer Vitalik Buterin as an open-source blockchain that not only provided a currency but could also serve as a platform for other projects. Vitalik settled on the names Ethereum and Ether, in part, for their resemblance to the word ‘aether’-a mythical substance that 19th-century physicists believed permeated the entire universe and was the invisible medium through which light traveled.
The etymological connection was actually something of a coincidence-Vitalik wasn’t thinking much about physics when he named his project-but the etymology has taken on a greater significance since the launch of the Ethereum blockchain in 2015.
Ether has grown to become the world’s second-largest cryptocurrency by volume and market capitalization, and it supports the highest volume of secondary decentralized exchanges, oracles, governance tokens, identity and consumer data protection protocols, and collectibles.
For example, Ethereum currently supports over 80% of NFT volume, making it the default network for trading NFTs. Ethereum has proven to be more than just a useful unit of exchange-it’s become a vital platform for the growth of a wide range of web3 projects and applications.
What are the limitations of Ethereum?
Like many blockchain technologies, Ethereum has encountered numerous setbacks on its road to fulfilling the goals outlined by Vitalik in his 2014 white paper. Even today, the network struggles with a number of challenges.
Like Bitcoin, Ethereum was built to use a process known as ‘proof of work’ (PoW) in order to validate transactions. This system requires all computers, or ‘nodes,’ along the network to agree on the transaction in order to generate new blocks that get added to the digital ledger. This system requires an ever-rising amount of computing power and electricity, which, in turn, translates to staggering levels of greenhouse gas emissions.
It is estimated that the Ethereum blockchain consumes more electricity annually than entire nations such as the Philippines (population 110 million) or Pakistan (population 221 million). For context, a single Ethereum transaction burns through an amount of power comparable to what the average U.S. household uses over the course of nine days.
Transactions on Ethereum have also suffered periodically from the inconvenience posed by high ‘gas fees’-the fee paid to Ethereum miners that process the transaction. Gas fees are a product of supply (of computing power) and demand (for transactions). As the network gets bigger and more complex, fees have generally trended upward, with all-time highs occurring with increasing frequency.
During historic highs and lows, traders have often been prevented from cashing their ETH out for fiat currency because the gas price was extremely high relative to the value of the transaction. At times, gas fees have exceeded the value of the transactions they enable, e.g. it could cost $100 to convert $50 of ETH to USD. This has been especially discouraging for traders with small amounts of ETH, many of whom hold ETH that is irretrievable unless they opt to purchase more in order to cover the cost of the gas fees.
What is the merge?
High emissions and exorbitant gas fees are not “forever features” of the Ethereum ecosystem. In theory, they will be addressed by the upcoming merge (formally referred to as ‘Ethereum 2.0’ or ‘Eth2’) that is, essentially, a move to abandon proof-of-work in favor of the vastly more efficient proof-of-stake (PoS) model.
Although it has been touted by Ethereum advocates as a groundbreaking innovation, a number of blockchains-such as Cardano, Polkadot, Solana, and Avalanche-already run on proof-of-stake verification models.
Rather than relying on energy-intensive computation, proof-of-stake models require network participants to ‘stake’ cryptocurrency as a form of collateral to vouch for new additions to the blockchain. This is similar to the way traditional financial institutions back up the loans they make to their clients using pools of other clients’ money. As opposed to proof-of-work models in which new cryptocurrency is continually minted, proof-of-stake models enable a fixed amount of cryptocurrency to ‘circulate’ in a similar fashion to fiat currency.
The merge is also predicted to solve the problem of expensive, unpredictable gas fees. By deploying ‘shards’-numerous, identical copies of the Ethereum blockchain that will run in parallel to one another-the overall processing power of the network may increase by several orders of magnitude, making for faster, less expensive transactions.
Another reason that many are eagerly awaiting the Ethereum merge is that it will likely significantly increase the effective yield for holding ETH. Many of the most popular and institutionally-favored forms of passive investing within crypto-such as Bitcoin cash-and-carry, or depositing ETH in staking protocols like Lido-yield slightly negative inflation-adjusted returns.
The projected yields for network participants who stake Ether following the merge far outpace these popular options, with many analysts predicting that they may earn an APR somewhere in the range of 6% to 15%, far better than any investment-grade bond.
When will the merge happen?
While the looming possibility of the Ethereum merge is nearly universally regarded as a positive development, the matter of when it will actually occur remains a topic of high-stakes speculation-and a source of anxiety-for many crypto traders. Although Vitalik originally outlined his intention to move to proof-of-stake in his original whitepaper on Ethereum, the rollout has been pushed back five times so far.
Many people with firsthand, behind-the-scenes knowledge of the development process have offered firm assurances that the merge will finally occur sometime late in the third quarter of 2022. The general sentiment among crypto traders, however, remains skeptical. Another postponement would be consistent with a long history of the Ethereum Foundation missing deadlines.
A number of recent announcements, however, suggest significant forward momentum. Developers have revealed through Twitter posts that a batch of necessary trial deployments have already been undertaken or are currently underway. Since April, six ‘ shadow forks’-sub-networks that developers create using a very small set of nodes in order to stress-test proposed alterations-have successfully switched to proof-of-stake. Perhaps the most promising recent development occurred on June 8th when Ropsten, the oldest and largest Ethereum testnet, adopted proof-of-stake without a hitch. Testnets are where developers can try changes before they are deployed on the mainnet, with no risk of loss of real funds should any technical issues arise. As proof-of-stake is deployed across more testnets without any glaring issues, the greater the possibility that the merge will go live on the mainnet soon.
For many with significant ETH holdings, the merge cannot come soon enough. Current estimates place the amount of ETH deposited into the new Ethereum Consensus Model staking mechanism, ready to spring into action in order to validate transactions the moment that the merge goes live, at around $13 billion dollars.
Traders on Polymarket currently assign an all-but-nonexistent chance to the merge going live before the end of July, and a slim 13% chance of it happening by the end of August. The market currently shows a 69% chance, however, that the merge will happen by the end of September. If you disagree, you could make money by trading in the market.
A race to beat ‘the difficulty bomb’
Whether they run on proof-of-work or proof-of-stake, all blockchain verification networks are decentralized, and most major updates, or ‘forks,’ are typically backward compatible with earlier versions, meaning that there is no means by which computers along the Ethereum network that had previously run proof-of-work can be compelled to immediately shutter their mining operations.
The best that developers can do is to incentivize them to make the transition by making it prohibitively difficult to mine a new block on the Ethereum blockchain. The sudden increase in mining difficulty, which will exponentially increase the time required to verify a transaction via proof-of-work, is what is referred to as the ‘difficulty bomb.’
The Ethereum Foundation faces pressure to execute the merge before the “difficulty bomb” starts to explode. When that happens-and it could happen as soon as August-gas prices could skyrocket. Conceivably, if the merge doesn’t happen soon enough, or if it’s technically botched, it could threaten the whole ecosystem. Ethereum could potentially lose a significant share to another network with lower fees.
Why bet on the Ethereum merge on Polymarket?
For those who have been following Ethereum’s trajectory since its inception, last month’s volatility is nothing new. Back in 2017, the price of Ether reached a new high of nearly $1500, only to dip below $100 in a matter of months.
At the moment, the entire crypto universe seems locked in freefall, and many traders are looking for ways to recoup some of their losses. Betting against the value of Ether on Polymarket is one way that traders can hedge their stakes in Ether. Another way is to bet against the Ethereum merge.
PRO TIP: Think you know which way Ethereum is going? Bet on your belief on Polymarket right now.
Even though almost everyone-including some high-profile traders of the likes of Arthur Hayes, Travis Kling, and Mark Cuban-believe that the merge, once successfully executed, will cause Ether prices to rise, it also remains a real possibility that the merge will be mishandled. If the execution of the merge is botched, it’s likely that Ethereum prices will decline significantly.
For holders of Ethereum, a good way to hedge against this possible outcome is to trade on Polymarket’s Ethereum merge market. Taking a position that the merge won’t happen for many months is similar to purchasing insurance against a natural disaster: it reduces your exposure to a plunge in Ethereum driven by further delays to the merge.
Originally published at https://blog.polymarket.com on June 29, 2022.
