Why Ethereum’s Move to Proof-of-Stake Is Bullish

After years of development, it’s almost there. In the third quarter of 2022, the Ethereum blockchain is due to change from Proof of Work (PoW) to Proof of Stake (PoS).

Last weekend, the dev teams tested PoS with a shadow fork on the ETH mainnet. The test was a success and it was another milestone for the Ether community.

Once the official date for Ether’s move to Proof-of-Stake (The Merge) is announced, it’s likely that all eyes will be on ETH for the foreseeable future. This fundamentally changes a lot. So below we take a look at why “The Merge” can be assumed to be bullish for Ether.

1. Ethereum becomes eco-responsible

Ethereum’s energy consumption has increased enormously in recent years.

Source: digiconomist.netEthereum energy consumption

ETH now has a power consumption of over 110 TWh per year. The ETH network thus consumes as much energy per year as the whole of the Netherlands to secure its network.

Source: digiconomist.net, Ecological Footprint of Ethereum

Additionally, data from Digiconomist shows that a single Ethereum transaction costs 269.07 kWh. That’s the nine-day power consumption of an entire US household.

With the switch to Proof of Stake, the energy consumption of the ETH network drops to almost zero. According to Ethereum developer Carl Beekhuizen, the switch will reduce power consumption by 99.95%.

This represents a gigantic win for Ethereum’s mainstream image. For example, claims that non-fungible tokens (NFTs) and decentralized finance (DeFi) are destroying the environment are no longer tenable thanks to PoS. Additionally, the elimination of environmental concerns when investing in ETH means that large investors in particular, who need to comply with ESG mandates, for example, can invest in ether again without hesitation.

With Proof of Stake, Ethereum therefore receives a kind of ESG label, opening the door to new capital from large investors.

2. Ethereum staking profitability is increasing

With “The Merge”, transaction fees are no longer verified by miners and their hardware, but by proof-of-stake validators. As a result, any revenue miners have made so far no longer goes to them, but to Ethereum Staker.

According to Coinbase This doubles the profitability of ETH staking from the current 4% to 9-12%. The fundamental implications of this change are quite simple.

Until now, miners had recurring energy costs to run their hardware. To cover these energy costs, they had to sell their ETH mining rewards. With PoS, this selling pressure is much less because the cost of running an Ethereum validator is minimal.

In a world where interest rates are scarce, Ethereum could well represent an attractive alternative for many that investors can no longer ignore. For these reasons, it therefore seems likely that the demand for Ethereum will continue to increase after the successful switch to PoS.

3. Lower inflation than bitcoin

Another effect of the switch from Ethereum to PoS is the sharp reduction of newly distributed Ether. Namely, the transition from Ethereum to PoS not only eliminates mining rewards for miners, but allows the network to significantly reduce its inflation rate due to the security efficiency of the new consensus algorithm.

Simply put, this means that the Ethereum network does not have to spend so much ETH to secure the network with PoS.

As a result, the switch from PoW to PoS has a similar impact on ETH’s inflation rate as Bitcoin’s triple halving – ETH’s inflation rate drops by 90%.

This fact, combined with more profitable staking and the EIP-1559 upgrade introduced in 2021, makes Ethereum a deflationary asset. This scenario can already be simulated on Ultrasons.money.

Simulated fusion
Source: ultrasound.money

EIP-1559 currently removes approximately $9.4 billion (3.1 million ETH) worth of Ether per year from the maximum amount of Ethereum in circulation. The shift to PoS will see even fewer new ethers hitting the market. Overall, the change in PoS is expected to cause Ethereum to deflate to -2.1% in Q3 2022.

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