So, you probably heard that The Merge went down successfully last week. Now that one of the largest upgrades in cryptocurrency history is complete, what’s next for Ethereum (ETH 2.48%), and how should investors approach the world’s second-most valuable cryptocurrency?
First, we should make one thing clear: The Merge is just one step in Ethereum’s development. The blockchain is still a work in progress. In fact, it’s believed that Ethereum is barely halfway complete, at least according to one of its co-founders, Vitalik Buterin.
At the Ethereum Community Conference in Paris this July, Buterin was asked about his thoughts on the future of the blockchain. He said that once The Merge is finalized and launched, Ethereum would still be only operating at 55% of its potential.
Additionally, he discussed future improvements and implementations to occur that will help Ethereum eventually be able to handle as many as 100,000 transactions per second (tps), orders of magnitude faster than the 12 to 20 tps in its current state. But to get to that level of speed and capacity, Ethereum needs many more upgrades.
Details of The Merge
With any event as significant as The Merge, rumors and speculation typically circulate. Some of the most common misconceptions revolving around The Merge had to do with speeds and fees. Since becoming one of the most popular blockchains over the last few years, congestion on the Ethereum network has grown considerably. This increased traffic caused speed to trickle to a near-standstill and transaction fees to substantially increase.
Ethereum’s goal is to get rid of these bottlenecks one day, but that won’t be happening with The Merge. The Merge changed how Ethereum processes and verifies transactions by switching Ethereum from a proof-of-work consensus mechanism to a proof-of-stake one. The only way to streamline speeds and reduce fees is by increasing the network’s capacity, something that doesn’t directly happen by transitioning to proof of stake.
But the importance of The Merge shouldn’t be undersold. Now that Ethereum is on proof of stake, the foundation has been laid for the blockchain to evolve with more ease.
Without moving to proof of stake, Ethereum would have a difficult time scaling, a term used to describe a blockchain’s ability to handle more transactions at higher speeds. As mentioned, the move to proof of stake won’t directly make Ethereum faster or increase throughput, but it will enable the network to eventually increase its scalability.
The scaling solution
One of the primary ways Ethereum will scale is through a method called sharding. This process essentially splits Ethereum’s main blockchain into multiple chains, or shards. Sharding on a proof-of-work blockchain isn’t impossible but is much more difficult to implement compared to a proof-of-stake network.
Once sharding is launched, validators approving transactions will now have to only process transactions within their shard instead of the entire blockchain. Think of it like Ethereum going from a two-lane road to a six-lane freeway. With sharding, Ethereum’s network will finally increase its capacity, and subsequently user fees should come down and speeds will improve.
The plan is for sharding to go live sometime in 2023. Ethereum’s website states that priority was given to The Merge first and then once that was complete, attention will shift to implementing sharding.
Long-term potential
Of most importance, investors should understand that Ethereum isn’t a finished project. If the blockchain were able to reach a high of nearly $4,900 last year while still on proof of work, imagine the heights it could reach as developers continue to carry out upgrades.
These upgrades won’t happen overnight. In addition, Ethereum has been notoriously sluggish when it comes to deadlines. The Merge was under development for a number of years and the implementation date was pushed back several times.
Assuming that sharding will follow a similar path as The Merge in terms of timelines, investors should take advantage of this opportunity to add more Ethereum to their portfolios. Ethereum is building for the future by ensuring that it’s capable of supporting more users at faster speeds and cheaper fees, a great combination for price appreciation. With a price of less than $1,400, what’s not to like about Ethereum’s potential?
RJ Fulton has positions in Ethereum. The Motley Fool has positions in and recommends Ethereum. The Motley Fool has a disclosure policy.
