Hey yo, what is crack-a-lacking with my favorite people, those I like to call the
viewers of the tube!! Well some big things are crack-a-lacking in the crypto industry
with one of the most historical events to ever happen just 3 months away. What event?
Well find out in about 10 minutes….because it’s time for Chico Crypto!!
Sooo, does this historical event have to do with Bitcoin!? Well looking at the Bitcoin’s
performance vs Ethereum…you would think if so, Bitcoin would be performing much better than
it’s #2. Ethereum as of yesterday was up 2.8 percent over 24 hours compared with Bitcoin’s
-.7 percent. And over 7 days, Ethereum was up 17 percent compared with Bitcoin’s 8.7 percent.
Yes, this historical event isn’t about Bitcoin…it’s
about Ethereum. The Merge is coming and with everything going to plan,
it looks like it will happen in just 3 months. Right on schedule for June 2022.
The Ethereum Merge Kiln testnet went live last week, and went exactly to plan. From this Coindesk
article on the success of Kiln, we can see Ethereum core devs tweeting about the successes
and Cointelegraph says “The network’s transition event from PoW to PoS will dock
the Beacon Chain with the Ethereum mainnet. The Merge could come as soon as this June”
So why is this such a big deal? Well first we need to understand what is happening with the
Merge. This is when Ethereum is fully making the transition to proof of stake and the proof
of work chain, which has been running since July of 2015 will be completely shut off.
Now if you didn’t know…Ethereum has had a thing called the beacon chain running in parallel to the
proof of work chain since December of 2020. The beacon chain is the proof of stake chain, although
it has been extremely limited in what it does. The beacon chain has been solely for consensus
of blocks, and paying out rewards to the proof of stake validators for confirming those blocks. The
proof of work chain has been also doing consensus of blocks and paying out rewards to miners for
confirming those blocks, but it also has been doing the execution of the smart contracts.
So you can think of the beacon chain as the consensus layer and the proof
of work chain as the execution layer. With the Merge in June, these two merge together.
Proof of Work consensus is turned off, but execution is kept on and merged into the proof
of stake chain…creating a single chain…the executable beacon chain where all Ethereum
clients will work together. ETH1 execution clients and the ETH2 consensus clients.
So what does this mean for Ethereum? Well when the Merge takes place it can
be considered to Ethereum, what a halving is to Bitcoin…but this is halving on Steroids.
The Bitcoin halving is just a 50 percent reduction in emissions to the proof of work
miners that takes place every 4 years hardcoded into the Bitcoin network. Block rewards get cut
in half and the scarcity of Bitcoin gets ever more apparent when this takes place.
The Merge on the other hand is not hardcoded into the eth protocol. It's an update which has been
worked on for years and changes much more than the issuance and emissions of rewards. It changes
the structure of the ETH market by switching from miners to validators, it enables future upgrades
to the protocol such as data shards, it becomes an asset which generates a yield and much more…
So a bitcoin halving reduces emissions of rewards by 50 percent. What is the merge going to do for
issuance of rewards? In June, ethereum issuance is going to be reduced not by 50 percent, but
by a whopping 90 percent!! 90% is the equivalent of three Bitcoin halvings
which is why this is sometimes termed the triple halving for Ethereum.
Now if you didn’t know, Bitcoin in its history has only had 3 halving events..where
each halving event has been shown to push the price of the asset to new,
unfathomable levels. From 0 to after the 1st halving, above $1000. From $1000 to after the
2nd halving, near 20 thousand, from 20k to after the 3rd halving, so far to above 69k.
Obviously the halvings have had a strong effect on the Bitcoin price each time…so
what effect will a triple halving have on Ethereum, in just 1 GO!!
Well let’s discuss this in more detail. A 90% drop in issued ETH means the block
reward goes from the current 12,000 Ether to just 1,280 Ether per day.
That means going from a 2 Ether reward per block to an estimated 0.2 ether. That’s a
massive reduction which means all things equal yearly inflation will go down from 4.3% to 0.43%.
But things are not all equal. Ethereum has a wildcard.
From his chart of yearly inflation rates, we can see the 90 day average inflation of Ethereum
sunk below that 4.3 percent level all the way back in September of last year, it has since
dipped below Bitcoin’s near 2 percent inflation and as of late, has been below 1 percent already.
Why is ETH already below 1 percent inflation? Well Ethereum has implemented their burn upgrade
where a portion of the transaction fees are burned with each block. From watchtheburn.com
we can see since the burn upgrade released in August of last year, there has been over
2 million Ether burned already which has led to a net reduction in emission by over 65 percent.
Now as we can see, there has been over 3 million Ether emitted as rewards to
proof of work miners since that date. Let’s just say the merge happened back in August,
that would mean that 3 million plus ether would be reduced by 90 percent.
That would mean rewards would be just over 300 thousand Ethereum.
That would mean there would still be over 2 million Ether burned, rewards plus tips aka
transaction fees would equal about 650k Ether. Net Issuance wouldn’t be positive 1 million as
with proof of work but would be a negative 1.35 million ETH…ethereum would be deflationary!!
Do you get what I’m hinting at. When the merge happens in June… yearly inflation
won’t be .43 percent, but will be some negative number. Ethereum will be a deflationary asset,
with negative inflation whose supply is getting scarcer and scarcer by the block.
Now here is the beauty in all of this. Ethereum proof of stake validators have been dealing with
this 90 percent reduction since the beacon chain was launched. They are getting reduced rewards.
As we can see from staking rewards.com this has resulted in a reward rate of nearly 4.8 percent.
But when the merge happens this reward rate is going to over double, to over 10 percent. Most
likely between 15 to 20 percent immediately after. How and why is this going to happen??
Well the transaction fees and tips my friends! Checking out cryptofees.info we can see the 1 day
fees for Ethereum yesterday was over 8 million. That means there will be days where over 8 million
dollars in fees will be distributed. The proof of work validators are currently getting those fees,
but when they go bye bye…guess who gets them?? The proof of stake validators.
That is why the APY for staking is going to jump and jump BIG time…
There’s going to be an increase in demand from the
switch to validators! In PoW GPUs were used to mine but under PoS
ETH is the new GPU. To gain rewards by validating you need to stake ETH. This will create a long
term demand for ETH as investors buy it to stake it and gain yield from it.
Once this is realized, and it’s already starting to happen, there will be a constant
buy pressure as investors accumulate ETH. ETH becomes a yield generating asset.
So the Merge in my opinion, is not a sell the news event,
it’s going to cause the mother of all Ethereum PUMPs. It’s a hands-down buy the news event.
Why? Well we need to understand this last thing and change to the supply side which
only applies in the short term but it’s very important to understand it. The big reason the
Merge has low chances of being a sell the news event. The Merge won’t enable withdrawing the
ETH gained by validators, this comes in an upgrade after the merge which could take up to 4 months or
longer after the merge. During these months months 0 ETH will be able to be sold from new issuance.
Although transaction fees aka tips will be sent to a different address
and can be withdrawn by the validators…isn’t that going to be some sell pressure? Well actually no,
transaction fees come from ETH that is already in circulation…
So are you ready for the mother of all ETH pumps?
The countdown is beginning once and for all… Cheers I will see you next time!