Thread by @S4mmyEth

The @ethereum merge is one of the most anticipated events in #crypto

It’s expected to increase security, reduce latency and improve energy efficiency

Many are concerned that it will cause adverse price action for Ether

This thread examines the bull case🧵👇

Disclaimer: I own Ether.

Ethereum launched on July 30th, 2015 using a Proof of Work (“PoW”) mechanism

This is the same method that Bitcoin uses to validate transactions

However, there are environmental concerns around the energy costs used by the miners

Ethereum plans to transition to PoS by Sept 19th, 2022

The chains are currently being run in parallel while the Beacon chain is tested

The following diagram (source: Ethereum.org) illustrates the recent transition well:

BEAR CASE:
There is approximately 12.7m Ether ($19.8b USD) locked up in the ETH2.0 staking contract (according to Dune Analytics)

This equates to 10.4% of the circulating supply...

Investors are concerned that those staking their Ether will dump on the market upon unlock

ETH2.0 staking commenced in Nov 2020 when the price of Ether was $415

The current market price for Ether is $1,555 so some will take profits of a 3-4x...

BULL CASE:
1/Long Term Ether Bulls:
Those that locked their Ether up in the ETH2.0 staking contract for a 2 year period are bullish Ether long term

It is counterintuitive for a huge selloff to occur. Particularly during a macro bear market, 70% down from ATH

2/Means Tested:
80% is staked by those with more than 32 Ether (This equates to $13,280 in Nov 2020) - not your average retail investor

Most retail got into crypto in early 2021, with the blow off top hitting that Nov

3/ Queuing System:
Ether staked (ETH2.0) cannot be un-staked at once

In fact according to @korpi87 we can see that this could take as long as a year based on calculations of the maximum number of unlocks per epoch (6.4 minutes each):

https://twitter.com/korpi87/status/1528704465699602434?s=20&t=ILvTsySqwS6T3ck-6mvyfQ

4/ Fundamental Supply and Demand Shift:
There will likely be a reduction in daily Ether emissions once ETH2.0 is live

Compounding this with the deflationary mechanism from the EIP-1559 upgrade (which went live in Aug 2021) means that we could see further reductions in supply

5/ Mining Economics:
Let's look at the behaviour of the miners -

Under PoW mechanisms, miners tend to sell a portion of the yield to cover the issuance costs (electricity)

But if miners do not incur these expenses under PoS, then this could flip to net buy pressure...

We are beginning to see the impacts of Ether mining operations being wound down, with miners incurring losses over the past few months

The driver being reduced Ether prices, reduced network usage and the imminent “difficulty bomb” to be implemented prior to the merge

6/ Perspective Shift - Tech Company?
Ether is perceived by many investors as a speculative asset, with the capital appreciation being the main investment driver

But there are cashflows when Ether is staked in return for securing the Ethereum network, so lets use a techco lens...

With this in mind, why wouldn’t an investor that purchases stock in @Apple, @Google or @Microsoft, not consider Ether?

After all, the price to earnings (P/E) ratio would be a much more appetizing investment than your traditional tech stock

Ether P/E calculations:
The yield for staked Ether could go as high as 12%, an increase from circa 5% on Ethereum

With profit margins estimated to be already around 90% for PoW miners, this could increase to 99% with the new PoS model given the reduction in issuance costs...

If we compare this to the global average PE ratio for software companies, then Ether is severely undervalued based on those forecast returns

Interlude - Enjoying the content so far? My previous write-ups can be found here:

linktr.ee/S4mmy.eth

7/ Sustainability Improvements:
The post merge shift to PoS will have a positive impact on the environment given the reduction in energy required to run the network

In fact ETH2.0 is estimated to be 2,000x more energy efficient according to Digiconomist:

POST MERGE PROSPECTS:
1/Sharding:
This is the process of splitting a database horizontally to spread the load and will work in harmony with Layer 2 solutions, like @0xPolygon

The intention is to reduce congestion

2/ Layer 2 Solutions:
@VitalikButerin stated that the base layer of Ethereum wouldn’t be a quick upgrade

Sharding would only come in the last major phase of ETH2.0

As such Layer 2 solutions, like @0xPolygon or @arbitrum will be used in the meantime - probably harmoniously

3/ Strong Developer Community:
Ethereum continues to maintain the strongest developer community

According to Electric Capital, Ethereum has 25% of the Web3.0 developer community

RISKS:
However, there are risks to consider:
1/ Execution risk is the biggest concern when it comes to the merge

There has already been several delays

While the merge is scheduled for September 2022, there could be unforeseen events that cause a further setback

2/ Expectations Gap:
There may also be an expectation gap between users and developers

Users may anticipate drastic reductions in transaction fees and speed

However the scalability element (on layer 1) is not expected until sharding

3/ Counterproductive Slashing Impacts:
Validators who are staking their Ether could be subject to slashing penalties

This is intended to incentivize behaviour that is beneficial to the network

But there could be unforeseen impacts with stakers penalized unfairly

4/ Competing Chains:
Other chains may be better fits for different use cases or applications may become chain agnostic

Interoperability is becoming increasingly viable with @Polkadot

Or #Omnichain tech from @LayerZero_Labs may become the meta

5/ Regulation:
Regulation frequently poses a risk for new technology

Governments generally step in when they see retail consumers being exploited or activity that can harm society/ disrupt the status quo

That's all for this thread

Full @OriginsNFT article available at:

mirror.xyz/origins-resear…

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