Ethereum, the second largest blockchain network and one of the biggest players in the crypto space, is expected to complete its transition from the energy-intensive proof-of-work (PoW) to the proof-of-stake (PoS) mechanism within the next couple of days.

The price of Ethereum has been fluctuating, but one of the main reasons for it is the anticipation surrounding the next update to the network, The Merge.

What is The Merge?

Ethereum currently uses the PoW mechanism to validate transactions. The Merge is Ethereum’s shift from PoW to the PoS mechanism. This shift was planned at the inception of the blockchain in 2014 itself.

The Merge is expected to reduce energy consumption by 99.95%. This should enable mass adoption by various organisations and enterprises that have concerns about the environmental effects of mining.

The Merge, however, will result in a net drop in annual issuance of about 90% annually as the rewards to miners under PoW will no longer exist.

So now, you might now be wondering whether to buy Ethereum before The Merge or not.

The Merge aside, Ethereum (ETH) has been one of the most active Layer 1 platforms (tokens with their own blockchains) in the crypto ecosystem.

It is also the second-most popular cryptocurrency behind Bitcoin (BTC), and it is the most widely used network for decentralized applications (dApps) such as NFT marketplaces and decentralized finance (DeFi) projects.

Many changes are expected, in addition to the technical developments that ETH is undergoing.

As of now, Ethereum is run by the PoW system which means that miners received incentives for validating transactions and adding new blocks to the network. According to Ethereum.org, the current rate of ETH issuance for mining incentives is around 13 ETH per day.

Once The Merge occurs, the daily rewards will plummet to 1.6 ETH as the validation will be done through staking. This drastically lowers the overall issuance of ETH by 90%.

This implies that in the upcoming months, the issuance of Ether Tokens will reduce as the system moves to PoS and the value of Ether Tokens could rise as a result.

Overall, it is anticipated that the Ethereum price would increase as a result of The Merge. Due to the advantages of staking, ETH may also become more appealing to institutional investors.

While the Merge shifts the consensus mechanism to PoS, it will not expand the capacity or lower the gas fees of the network. The cost of transactions is mostly related to the demand for Ethereum block space.

No one really knows what will happen immediately after The Merge. Some industry participants remain skeptical that the prices would likely dip following The Merge. But the network’s Ethereum foundations are fundamentally strong.

Price declines could still happen in the short term, especially if concerns over The Merge arise. Given the three successful test net merges, the Merge is anticipated to go down without a hitch and will increase the blockchain’s dominance.

However, given the state of the economy, we can conclude that the prices are more closely related to inflation and interest rates than to Ethereum’s technological development. We will have to wait and see what happens next.