Macro Problems Are Clouding Ethereum Merge Advances

One month after Ethereum’s Merge, Simon Peters, crypto market analyst at social investing network eToro, looks at what’s next for the network and its native token, ether (ETH).

AccessTimeIconOct 26, 2022 at 12:57 p.m. UTC
Updated Jun 14, 2024 at 6:51 p.m. UTC

The Merge of the Ethereum network celebrated its one-month anniversary on Oct. 19.

As that historic shift settles in, the picture is not easy to read. Key underlying metrics are moving in the right direction, despite the overarching noise of global markets at a turbulent time for investors.

Simon Peters is a crypto market analyst at social investment network eToro.

The price of ETH hasn't reacted positively in the month since then, but this is under pressure from macroeconomic factors causing broader investment market volatility rather than pessimism from investors about Ethereum’s specific case.

This volatility, as we all know, is caused by a rough confluence of growing inflation, rising interest rates and other investor concerns about market valuations.

In fact, beyond the market movement headlines, some notable changes have already taken place thanks to The Merge. But these don’t feed through to investment performance when everyone in the market is distracted by bigger problems.

In the same way that a company in this market can post a strong set of results and still see its share price slump, ETH is being dragged along by a market that isn’t interested in paying attention to revolutionary changes.

Deflation and decarbonization

So, what are those key changes? First off, the amount of ETH in circulation has quietly become deflationary since around Oct. 8. With EIP-1559 still in effect, where a portion of transaction gas fees are burnt, more ETH is currently being burned than created via staking and block rewards.

The onset of deflationary economics for the token is still early – too early to appreciate tangible impacts, and too early to reflect in price movement when markets are still heavily gauged toward fear. But the total number of ETH staked just tipped over 14 million. The overall trend is upwards.

Furthermore, and probably more significantly, the staking rate percentage – the balance of the ETH 2.0 deposit contracts divided by the total ETH supply – is at its highest level and continues to climb. Currently, over 11% of the circulating supply is locked in staking.

The Merge has also been successful from an energy and environmental perspective. The move from proof-of work (PoW) to proof-of-stake (PoS) has been estimated to cut the network’s energy consumption by 99.99%, according to the Ethereum Foundation.

Making the network more energy efficient is essential. This has particular importance in the current global macroeconomic circumstances, in which energy prices are high and emission reductions are expedient.

In a world where energy costs, consumption and its effects are being watched carefully by both households and governments, a PR victory here for Ethereum might be significant, in time.

Price distractions

The fall in ETH’s value will be pointed to as evidence of the failure and overhype of The Merge. But like any investment and market, The Merge won’t be judged on a tiny snapshot of performance and is something of a distraction after such a short time span.

The Merge was an inherently long-term change to the way the Ethereum network is governed and how it uses its resources. The promise of overnight miraculous change is anathema to grown-up, long-term, sustainable development and should be treated with caution by investors.

Ethereum is arguably the largest ecosystem within crypto. Thousands of projects and decentralized applications (dapps) rely on the Ethereum blockchain to store data and manage their functions.

As the Ethereum ecosystem has grown, scaling products have been vital to keep dapps fast and cheap to use in terms of gas, or transaction, costs. At its core, this is the main reason for transitioning from PoW to PoS.

Major TradFi institutions such as JPMorgan have already indicated that markets might not be pricing The Merge’s upside potential correctly because of overarching investment market volatility.

In theory, prices should increase when supply drops and demand increases. Whether this will overcome the current bearish macroeconomic climate, only time will tell. Market watchers are furiously looking for a turn – but it won’t arrive overnight. Long-term investors should focus on the long-term investment case.

Investors with a firm conviction in the long-term use cases of tokens such as ETH should ensure they are prepared for more volatility ahead because the economic story doesn’t yet appear to have turned the corner.

But the long-term thesis – which includes the considerations mentioned – for their investment should be a bigger factor in decision-making than pure market movement. That should always be the focus of anyone interested in the future of the Ethereum network, and the crypto sector more widely.


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Simon Peters

Simon Peters is a crypto market analyst at social investment network eToro.