Ethereum : How will the upcoming ETH2.0 affect users?

After many delays, the exact release date for the merger seems to be approaching.

The migration of ETH from Proof of Work (Pow) to Proof of Stake (PoS), also known as “merging,” is expected to end on September 19, 2022. This new date has been confirmed by Ethereum developer Tim Beiko. Tim estimated on the conference call that it might be September, but the timing could change.

The merger moves Ethereum mainnet activity onto the beacon chain. The merger is not expected to reduce Ethereum’s high gas fees, but it will have a significant impact on the network’s energy usage.

The “merger” could be a big catalyst for ETH’s price appreciation.

The merger will:

  • Increase pledge income
  • Ethereum (Dapp) Development Activity Increases
  • Lower carbon footprint
  • Reduce ETH supply

Coupled with Layer 2 (L2) solutions, Ethereum gas fees should also drop significantly and throughput should increase. Therefore, the demand for ETH will increase while the supply will decrease. This could drive ETH prices higher. There is speculation that the increase will be 2x or more.

Who will benefit?

  • Investors who hold ETH.
  • Higher staking yields will drive revenue growth for staking providers like LIDO, Aave, Curve, etc.
  • Stakers and validators will receive higher APRs.
  • Increased users should benefit L2 providers such as Optimism, Arbitrum One, Aztec Network.

What is Ethereum 2.0?

The first version of Ethereum went live in 2015. Ethereum 2.0. ETH2 (aka Serenity) is an upgraded version of ETH. The main difference between the two versions is that ETH 2.0 uses different mechanisms, proof-of-stake, sharding, and second-layer solutions. The transition to ETH 2.0 is a very complex technical endeavor that requires time and rigorous testing.

ETH 2.0 is a multi-phase transition of the Ethereum network from a Proof of Work (PoW) to a Proof of Stake (PoS) consensus mechanism. Just as PoW blockchains rely on miners to verify transactions, the PoS consensus mechanism relies on “stakers” to verify transactions by running nodes.

Ethereum : How will the upcoming ETH2.0 affect users?

The Ethereum ecosystem consists of holders, users, dapps and miners who will soon be replaced by validators and stakers.

Ethereum ecosystem developers initially introduced the beacon chain, a coordination mechanism responsible for creating new blocks in the chain, ensuring their validity, and rewarding validators for keeping the network secure until the “merge” is fully implemented .

The network load will be distributed among 64 separate shards that will process information simultaneously, making overall transaction times faster and more efficient.

In conclusion, ETH 2.0 will be more secure, efficient, scalable, and environmentally friendly.

Ethereum : How will the upcoming ETH2.0 affect users?

According to Glassnode, the total number of Ethereum (ETH) staked in Ethereum’s ETH 2.0 reached an all-time high of 12,789,829 ETH, which equates to more than 10.73% of the circulating supply. One of the big advantages of Ethereum over its competitors: the huge user base attracts more DeFi developers, which creates a powerful flywheel effect.

In terms of the number of stakers, we see over 70000 unique depositors and 329.000 validators.

Ethereum : How will the upcoming ETH2.0 affect users?

As we all know, Ethereum’s high gas fees and transaction speed have always been a pain point for users and developers. These are also leveraged by its competitors Solana, Fantom, NEAR, Cardano and other Layer 1 protocols.

ETH 2.0 will alleviate these problems. While total gas fees recently hit their lowest level in 10 months, which is actually a positive trend, the reasons for the decline have to do with the current bear market and TVL falling from $181.6 billion in December 2021 to $75 billion. It may also be related to the general decline in NFT sales and cheaper fees for adopting competing PoS blockchains.

Ethereum : How will the upcoming ETH2.0 affect users?

The impact of the merger

“Merge” refers to the point at which Ethereum will migrate from the PoW consensus mechanism to the PoS consensus mechanism, and the beacon chain merges with the proof-of-work chain:

Ethereum : How will the upcoming ETH2.0 affect users?

Source: Ethereum Foundation

From the perspective of an ETH investor, the main takeaways from the merger are:

  • Higher staking yields increase demand for ETH.
  • Reduce (90% reduction) ETH issuance (reduce supply growth).

The merger will not reduce gas fees , but it will help stabilize gas fees regardless of the price of ETH. Layer 2 scaling solutions like Optimism, Arbitrum One, Aztec Network, Polygon Hermez, zkSync, Loopring, Boba Network or Metis Network are competing fiercely to reduce ETH transaction fees on Ethereum and they are expected to lower gas fees 5 – 20x, depending on trade type:

Ethereum : How will the upcoming ETH2.0 affect users?

ETH 2.0 will use less electricity and will receive an environmental label. This may attract more institutional investors. Also, the PoS validator mechanism usually helps to decentralize more ETH. Ethereum staking demand will grow significantly. The ETH Staking Yield (APR) is expected to double, which will greatly increase the demand for staking and verification.

The main reason for being able to have a higher staking APR is that the fees paid to miners are now transferred to stakers/validators. IntoTheBlock calculates that, with fee incentives, the current annual return of 3.8% will rise to 7.4%:

Ethereum : How will the upcoming ETH2.0 affect users?

Reduced ETH supply may even lead to deflation

In July 2021, as part of the London hard fork, Ethereum Improvement Proposal (EIP) 1559 went into effect. It changes the fee mechanism of Ethereum. Previously, miners received block rewards and transaction processing fees. Now, they will still receive block rewards, but the fee will be split into a base fee and a tip. If the user wishes to increase the priority of the transaction, he can add a tip. However, the base fee (in ETH rewards) will be destroyed, which will reduce the ETH supply.

Also, after the merger, when the protocol migrates from PoW to PoS, miners will stop working and will be replaced by validators. In PoS mode, validators receive much less block rewards than miners currently receive in PoW mode. In other words, the amount of new ETH will drop. This would also significantly reduce the growth of ETH supply.

The combination of these two effects (base fee burn and block reward reduction) could have a deflationary effect on ETH supply: ETH net issuance = issuance – burning.

According to research by crypto service provider LuckyHash, the merger could lead to an annual deflation rate of 1%: “When the number of pledged exceeds 100 million, the annual issuance rate will stabilize at 1.71%, or an average daily output of about 5,600. If it is upgraded by then The post-Ethereum can maintain the current burn volume and achieve 1% deflation every year.”

Ethereum : How will the upcoming ETH2.0 affect users?

Ethereum : How will the upcoming ETH2.0 affect users?

Ethereum : How will the upcoming ETH2.0 affect users?

What should I do with ETH assets during the merger?

Do nothing. Our ETH will be automatically converted to ETH 2.0.

We can also stake ETH before the merger and get a 3.8% APR staking yield.

can use:

  • Staking platforms such as LIDO, Aave, Curve, Yearn Finance or Benqi.
  • DEX platform
  • Staking-as-a-Service companies such as Staked.us, Stakefish, Bitcoin Suisse and Figment.
  • Self-staking with at least 32 ETH.

Additionally, when staking ETH through a liquidity staking provider like LIDO, we receive stETH, which we can use on various DeFi platforms before the ETH merges.

Summarize

The table below provides a good summary of the impact of the ETH merger. It also provides key metrics based on your status in the ETH ecosystem:

Ethereum : How will the upcoming ETH2.0 affect users?

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/ethereum-how-will-the-upcoming-eth2-0-affect-users/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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