Citi: Ethereum’s Merge Will Have Several Consequences for the Blockchain

The Ethereum blockchain’s planned Merge, an upgrade that changes it from a Proof-of-Work (PoW) system to a more environmentally friendly Proof-of-Stake (PoS) mechanism, will have a number of consequences, Citi (C) said in a research report Thursday.

These include lower energy intensity, the transition into a deflationary asset and a “potential roadmap to a more scalable future through sharding,” the bank said.

The Merge, the first of five planned upgrades for the network, may only increase transaction speeds by 10% by reducing block times, according to the report. It, however, lays the path for the “Surge,” which is the next planned upgrade for the network and promises to bring 100,000 transactions-per-second (TPS) capability to the blockchain, the report added.

The Merge means that block time will drop to 12 seconds from 13, and this could result in a small decrease in fees and increases in speed, the note said.

Citi says switching from PoW will reduce overall issuance by 4.2% a year, and with ether (ETH) eventually becoming deflationary, this may improve the case for the token as a store of value.

The move to PoS turns ETH into a “yield-bearing asset” with cash flows, the bank said, which may be interpreted as a form of revenue for the network. Having potential cash flows would allow the use of a range of valuation methods that are not currently available for the blockchain, the bank added.

As Ethereum will be both yield-bearing and deflationary, it is less likely to be the blockchain with the highest throughput. Given its “enhanced store of value properties,” it is more likely to be where a growing amount of total value locked (TVL) is secured and transacted, the note said.

Post-Merge ETH could be viewed as a relatively energy efficient, and environmentally friendly crypto asset, as energy expenditure is expected to decrease by 99.95%, the note added.

Read more: BofA Says Ethereum Needs Scalability Improvements to Hold Its Market Position


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