Everything you need to know about Ethereum’s Merge testnet upgrade

• Beacon chain block reorg raised concerns of delay or catastrophic impact of merge on the Ethereum blockchain. 
• Layer-2 scaling solutions could play an instrumental role in the development and scalability of dApps on the Ethereum network, post the merge. 
• Analysts have a bullish short-term and bearish long-term outlook on Ethereum price.

Vitalik Buterin, co-founder of the Ethereum network, recently told investors that the merge could occur as early as August 2022, if no other issues arise. Though the event has been delayed several times in the past, the Beacon chain that runs in parallel with the Ethereum mainnet is ready to merge with the ETH blockchain, transitioning to proof-of-stake. 

Also read: Two reasons why Ethereum price could make a U-turn to $2,100

Could Ethereum merge be a catastrophe for the ETH blockchain

While proponents debate the chances of Ethereum successfully completing the merge, Beacon chain recently witnessed a “block reorganization” event, in the last week of May 2022, where the fork continued for seven consecutive blocks. According to data from Beacon Scan, seven blocks numbered 3,887,075 to 3,887,081 were knocked out of the Beacon Chain between 08:55:23 to 08:56:35 AM UTC.

A reorg occurs when a block in the chain gets knocked “off-chain” due to a competing block. This event can occur in response to an attack from a miner with high resources, or a bug. The reorg can result in an unintentional fork or duplicate of the underlying blockchain, an alarming consequence of a block getting knocked off. 

This event is significant as it has not occurred in the past several years and led to a brief crisis of confidence in the community. 

Proponents are left speculating whether the merge would be a catastrophic event for the Ethereum blockchain. Outdated node clients were identified as the cause of the Beacon chain block reorg. 

Preston Van Loon, an Ethereum core developer suggested,

This reorg is not an indicator of a flawed fork choice, but a non-trivial segmentation of updated vs out of date client software.

The reorg has raised questions in the community about the potential timeline of the merge, as Van Loon, Tim Beiko and Vitalik Buterin have outlined in the past that there may be a delay in the event if issues occur. 

Jesse Powell of Kraken is bullish on the success of Ethereum merge

While Ethereum core developers and the community are working consistently and methodically to make the merge a success, Jesse Powell, CEO of Kraken told Decrypt, he is not concerned about delays. 

While proponents criticize the delays and consider them as a sign that the developer community is not up to the task, there are fears that transaction fees woes will only get fixed with the arrival of the merge. The rising transaction costs is one of the reasons for institutional capital and projects flowing into Ethereum alternatives like Solana, Cardano and Avalanche. This implies the Ethereum merge is a high stakes event, for the DeFi and web3 community and the believers of proof-of-stake. 

Powell does not care about numerous delays in the Ethereum merge process, instead he believes success is more important than speed for an event of this magnitude. 

Why the merge is key to transaction fee reduction

The aim of the Ethereum network is to fix high transaction costs and concerns in the ETH community. The merge is a key push in that direction, changing consensus mechanisms to less energy intensive and more effective proof-of-stake. 

Experts believe the merge is considered as one of the primary steps to reduce gas fees on the Ethereum blockchain, layer-2 and sidechain networks. Projects like Polygon network, the Ethereum scaling solution, and layer-2 solutions like Optimism, Boba Network, Arbitrum One could get affected by reduction in network cost. 

Since layer-2 protocols process transactions independently, they complete more transactions per second at a lower gas fees and then they are added to the Ethereum blockchain at a later time. The move to proof-of-stake would reduce the need for layer-2 and the Ethereum blockchain itself would process higher volumes of transactions at low cost. 

Vitalik Buterin argues, proof-of-stake offers,

Greater efficiency and their better ability to handle and recover from attacks.

Alan Chiu, CEO of Boba Network, a layer-2 optimistic rollup said, 

As Ethereum L1 becomes more efficient, L2’s will simply become that much more efficient right alongside, all while maintaining their current added benefits.

Ethereum on ETH2 contract hit an all-time high 

10.73% of Ethereum’s circulating supply has been staked on the ETH2 deposit contract. 398,000 unique validators have staked upwards of 12.76 million ETH, a new all-time high. As the amount of Ethereum staked on the Beacon chain hits another key milestone, it reveals investors and market participants’ enthusiasm for the merge. 

Ethereum staked on the deposit contract

Ethereum holders continue massive accumulation

Ethereum holders have continued accumulating the largest altcoin ahead of the merge. According to data from crypto intelligence platform Glassnode, the number of addresses holding at least 10 ETH has hit an 18-month high. The combined holdings of these addresses is 291,608 ETH. 

The massive accumulation of Ethereum by holders reveals that investors are undeterred despite the recent slump in the altcoin’s price. 54% of Ethereum holders have witnessed massive gains, supplementing the narrative of ETH accumulation. 

ETH addresses holding 10+ coins 

What’s next after the merge?

Puff, a contributor to the Iron Bank, a lending platform on the Ethereum blockchain believes increased opportunities for scaling would drive capacity on ETH. Puff argues,

Would bring us one step closer to shard chains. With sharding deployed, we anticipate that the improved scalability and capacity on Ethereum will reduce costs and increase the accessibility of decentralized applications.

Experts expect an increase in participation on the Ethereum network, with a higher utilization of decentralized applications, scalable and fast transaction processing, higher control of individuals on their own assets and a higher degree of decentralization. 

Instead of becoming obsolete, layer-2 solutions will become a real catalyst to the potential of the Ethereum blockchain. Tyler Perkins, CMO of zkSync argues that the merge could have no effect on layer-2 solutions whatsoever. 

Perkins argues, 

L2s will be most impacted by sharding, which is planned for after the merge, as it will increase the amount of data storage available to rollups, dramatically increasing their throughput.

Analysts have a bearish outlook on Ethereum price in June 2022

Based on the on-chain activity, fundamental and technical factors, there is a bearish outlook on Ethereum in June 2022. Two key factors could result in a slump in Ethereum price. Experts believe a boom in DeFi could propel Ethereum price higher, as the altcoin has lost a majority of capital across its dApp ecosystem. As of June 5, total value locked (TVL) on the Ethereum network based apps is $68.71 million, 65% of DeFi TVL. 

The colossal crash of Terraform Lab’s sister tokens LUNA Classic (formerly LUNA) and UST resulted in a massive retreat from Ethereum’s TVL, it hovered around $100 billion before Terra’s collapse. Analysts believe TVL could continue to decline in June 2022. 

ETH TVL in dApps across its ecosystem

The second key factor is the bearish indicators from technical analysis of the Ethereum price chart. Ethereum price has fluctuated inside a range defined by a horizontal trendline support and a falling resistance. The pattern is identified as a descending triangle and analysts have predicted a bearish continuation, Ethereum price could resume its downtrend. 

The descending triangle could resolve after Ethereum price breaks decisively below its support trendline, thereafter falling by as much as the triangle’s maximum height. If Ethereum price breaks below the descending triangle’s lower trendline, it could drop to $1,350 in June 2022, a 25% decline from current levels. 

ETHUSD price chart

The Ethereum price outlook is bullish in the short-term, as the altcoin saw one of the biggest liquidations in the last few months, where $800 million worth of orders evaporated from the market. Such a large volume of liquidation resulted in a squeeze and Ethereum price bounced off support at $1,715 to hit $1,900 level. 

The total rate of liquidations in Ethereum reveal that bulls are controlling the market, as 90% of orders pulled out were shorts. 

Ethereum positions liquidated

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