Ethereum currently works on a Proof of Work model (consensus mechanism). The highly anticipated merge will transform this model to Proof of Stake, which is more environmentally friendly set-up.

In Proof of Work world, the miners contest to solve a complex mathematic tasks to validate transactions and get rewarded. The miner that is able to solve it first will get a reward for the hard work that he has put in. This process is very energetically demanding.

Mechanics behind P-o-W are extremely reliable, resistent, resilient and safe, but energy intensive.

In Proof of Stake world, transactions are validated by those who stake their ETH and this way contribute to the network. This is supposed to be a more eco-friendly (up to 98% reduction in energy consuption), efficient, faster and cheper approach.

Ethereum network is the most widely used blockchain. The number of developers on ethereum is growing every day. There are approx. 30 mil. active wallets on Ethereum network (the most popular wallet being metamask).

10% of all ETH in circulation are staked, with 390K validators, this makes it the most decentralized blockchain. Solo validators need at least 33 ETH, otherwise the liquidity pools must be used.

The amount of staked ETH is bigger than the total market capitalization of the 2nd biggest PoS blockchain – Solana (SOL).

What does the upgrade/merge of ETH mean?

The consensus layer, Beacon chain, a parallel blockchain (serving as a test for PoS) will merger with execution layer ETH (based on PoW), the result will be Ethereum working on PoS model (also called ETH 2.0).

This should allow the bigger adoption, cheaper and faster transactions (lower gas fees – if the network doesn’t have so many transactions the gas fees go down but in case there’s a traffic jam, there are many transactions, the gas fees go up).

There will be no difference from the user perspective.

The merge has 3 phases:

1. Beacon chain – PoS ETH chain, the very first stage, this is the test phase, testing of PoS concensus

2. The merge – existing ETH blockchain will merge with beacon chain and this will become ETH 2.0 (ETH 2.0 – this name caused confusion, hence this terminology has been changed)

3. Shard chains – scalability solutions on ETH (ETH at this moment can handle 15 transactions per second), sidechains and rollups (64 blockchians in parallel, up to 100 transactions per second). Sharding process is breaking large amounts of data into smaller pieces allowing the network work at faster speed. I will be covering sidechains and rollups in a different post.

Will the gas fees go down ?

The merge is not going to completely solve the gas fees, the gas fees are should be solved with the implementation of the shard chains in 2023.

Price potential for ETH

1. 4% – at this moment, the rewards for validators is 4%. After the merger, reward will go up to 10%, this will make staking more attractive and much more people staking = higher demand = upward pressure

2. ETH will be more ECO-friendly and this can attract ore institutionl investors

3. At this moment, ETH is inflationary, the merge will lead to deflationary behavior = more scarce

4. Network adoption = higher demand (Mark Cuban sees ETH at $10K)



Token economics in the context of the blockchain boom can practically tokenize anything, and this opens up completely new dimensions of economic development.

More about tokenization in another post.

Tokenomics seeks to create a sustainable token ecosystem that represents a real asset. In this ecosystem, everything is based on the possible interactions of the said token.

This asset can be anything, real estate, a book, a blog, a podcast, or even a financial instrument. The greatest power of tokenization is, that it allows you to transfer this value from the real world to the virtual one. And not only that, tokenomics will allow decentralization of control, or management of this value.

Tokenomics can only exist in the context and based on the blockchain technology. A token may exist, but without a blockchain there will be no tokenomics. The Blockchain enables decentralization required by the token economy.

In addition to blockchain, tokenomics also needs other elements.

Community

The first step to building a token economy is the existence of a community that supports the development and principles. The more significant the community, the greater the potential for developing the token. A typical example is Ethereum, which has a broad community that is behind its development, universal acceptance and maintaining the functioning of the whole structure. Similarly, there are other cryptocurrencies, such as Bitcoin or Litecoin. The community plays a critical role.

Token distribution

If there is a community interest, tokens, functionalities and usability must be promoted.

This is only possible if we first distribute tokens in the community. Distribution stimulates token economy and creates network growth that supports token growth.

There are several distribution options here. The best known is mining, where miners receive a reward for computing power for creating, protecting and validating transactions in a given token network. Another way is ICO which is the initial offering of coins on the crypto exchange. It’s like an IPO, which is an initial public offering in a world of stocks, when a company goes public. Another way is an airdrop, more about this in another article.

The goal of the distribution is to reach the token among the widest possible audience of token users, to create a broad user base and thus decentralize token management.

Price stability

Ensuring the price stability of the token is a big challenge. This can be compromised by third parties, for whom the token could become a target for misuse in order to make money on it. Therefore, it is necessary for tokenomics to have mechanisms in place to ensure price stability so that the user base can grow and the token can continue to evolve.

Dynamics

Every ecosystem has an internal dynamic that allows it to grow. Two aspects are important in this context: token flow and the monetary policy.

This aspect is critical for long-term sustainability and growth. We can create a unique token that is widely accepted by the community, but if we underestimate the side of internal dynamics and monetary policy management, we will not ensure the desired loyalty.

Management

An important aspect of token economy is management, that is, clear rules for the network development and maintenance. In my opinion, the basic proposition of the blockchain ecosystem is decentralization, which is achieved in the case of Bitcoin and replicated in Ethereum, but there are still many projects and tokens, where management is rather centralized, or less decentralized.

Usability in the real world

Another aspect is the real-world usability. If the project can be used in everyday reality, it makes sense to invest in it and develop it. It is also important whether the token is fungible or non-fungible, this also determines its usability.

Disclosures

This Content is for Informational Purposes Only
Nothing in this publication should be relied upon as financial, investment, legal, tax, or other advice. You should consult your own advisers as to those matters. Nothing contained in this publication constitutes a solicitation, recommendation, endorsement to buy or sell any securities or other financial instruments, provide investment advisory services, or adopt any investment strategy. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation. Furthermore, this content is not intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any digital assets.