Ethereum’s Merge: key questions answered

This article is part of Crypto Insights, a segment by major crypto exchange Bybit that dives into the latest and most pertinent issues in the crypto space.

Now that Ethereum’s Merge is upon us, it’s time to delve into some of the issues and answer a few questions that often come up about crypto’s biggest event of the year.

And if you don’t know what I’m talking about, please go back and read previous entries of this column as I, like many crypto commentators, have been writing about little else these past weeks.

Image credit: Timmy Loen

Will The Merge hasten institutional adoption of Ether?

In crypto lore, there is a great event that has long been foretold: the arrival of “the institutions” like pension funds, corporate treasures, and, dare I say, sovereign funds. There are already a few of these entities that hold some crypto, but there are many more sitting on the sidelines.

Those entities that do hold crypto – which include Fidelity Investments, the nation of El Salvador, and exchange traded funds in Canada – have been focused on Bitcoin (BTC). “BTC, the largest cryptocurrency by market cap, is the gateway – and indeed the only stop – for many institutions that ventured into the cryptocurrency market. As of June 2022, 6.47% of all Bitcoin that will ever exist is held by institutions,” CoinDesk reported.

After The Merge, will Ether (ETH) also be bought up by institutions? In an August report written in partnership with Nansen, Bybit analysts concluded that there was “no consensus” among the smart money and institutional investors surveyed regarding their attitude toward short-term trading around The Merge. Instead, the analysts found that “smart money” wallets, which include institutions and market makers, were more likely to accumulate ETH with the intention of holding it for the long term.

Note that the wallets surveyed are already active in the crypto markets. As for the rest of the institutions, if their Bitcoin investments serve them well, then it won’t be long before they examine another crypto asset.

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How long will it take for ETH to become deflationary?

Since the implementation of Ethereum Improvement Proposal 1559 in August 2021, Ethereum has been burning a part of its ETH transaction fees. However, due to the large amount of ETH being issued to pay miners for securing and validating the network, even with the burn, supply of the token has still been slightly inflationary over the past 12 months, according to data from Ultra Sound Money.

The Merge will change that by drastically reducing the amount of ETH issued while keeping the burn rate in a similar range. Ethereum researcher Justin Drake has created a sheet that estimates three different scenarios for the supply of ETH after The Merge.

Taking Drake’s most conservative calculations, the blockchain will need to issue a maximum of 963,000 ether per year to pay validators who secure and run the network. The annual fee burn amounts to 1.5 million ether. The result? Ultra Sound Money suggests the supply of ETH will soon become deflationary by 1.5% per year.

Take these numbers with a pinch of salt, however, as they are based on average network fees for the last 12 months, which have been significantly higher than they are at present. With macroeconomic headwinds seen to last a while, it may take some time for Ethereum to manifest these predictions.

Will ETH ever overtake BTC as the largest cryptocurrency by market cap?