The Merge Is Done and $ETH Price Dropped, What Can We Expect Next?

Long-Term Faith in $ETH

In short term, macro environment, interest rate, market liquidity, and narrative can all affect asset price. If inflation in U.S. does not peak, and Federal Reserve continues its monetary policy tightening, we are very probably to see an even lower $ETH price for sure. However, the price of an asset is ultimately decided by demand and supply. If demand exceeds supply, price will increase regardless of the macro environment we are in.

Demand for $ETH

Demand for $ETH comes from two sources. Firstly, demand for investment allocation. $ETH price has dropped more than 70% from all-time high of around $4,500, this impacts crypto investors' psychology, and the substantial unrealized loss may deter them to accumulate more $ETH. However, $ETH is still such a new emerging asset class and is barely being allocated in traditional investors' investment portfolios. With the increasing importance and adoption of crypto, traditional investors, institutional investors, and family offices are expected to start to allocate $ETH into their portfolios.

ESG (Environmental, Social, and Governance) considerations are important to institutional investors like pension funds and insurance companies. The before Merge Ethereum PoW blockchain with huge energy consumption deterred them from considering an investment into Bitcoin or a PoW Ethereum. With the completion of the Merge, the 99.95% reduction in energy consumption of Ethereum for practical PoS consensus has re-engaged institutional investors who once had ESG concerns, the Merge 'Completely Changes' Ether's investment case for institutions.

Secondly, demand for Ethereum gas usage. $ETH is used to pay gas fee in Ethereum and more transactions occurring on the Ethereum network results in more demand for $ETH. Users have to buy back the $ETH spend periodically as otherwise, they will have no tokens to pay the gas fee for transactions. Since EIP-1559 was implemented in August 2021, 70% of gas fees are burned. This links the demand of $ETH from gas fee payment to the circulating supply of $ETH. If there are more transactions, more $ETH is consumed for gas payment, more $ETH is burned from the circulating supply, and users need to buy back $ETH more frequently. The good news is that the daily transaction count of Ethereum has held up well in this deep bear market.

Supply of $ETH

New issuance of $ETH drops drastically after the Merge. This has been discussed intensively before the Merge. Now, after a week of the Merge, what is the reality looks like?

From the Merge to September 28, 8,320 $ETH was issued compared to more than 160,000 $ETH if the Merge didn't happen. 

Annualized Supply change after the Merge is at 0.2%, the number would be 3.79% if the Merge didn't happen.

At the current rate, annual issuance of $ETH will be 603K, and annual burned will be 430K, a mere 0.14% net supply growth.

A Deflationary $ETH, we are almost there.

Shanghai Update and Unstaking $ETH

There are around 14 million $ETH staked, worth a value of around $20 billion. The withdrawal function is expected to be activated in the Ethereum upcoming Shanghai update. The timing is not yet clear, but the general expectation is in early 2023.

The activation of withdrawal will not lead to a selloff of $ETH:

• Estimated by Nansen, 70% of staked $ETH was purchased for more than it is currently worth (at $1,700). Stakers are unlikely to sell at a loss considering they decided to stake their $ETH previously without knowing when can be unlocked, presumably they are all long-term holders.
• A withdrawal queue is designed to prevent a mass sell-off of staked $ETH. Only six validators (32 $ETH per validator) may exit per epoch (every 6.4 minutes, so 1,350 per day, or only 43,200 $ETH per day out of over 13.4 million staked $ETH)

Sharding and True "World Computer"

In our previous article, Vitalik's Vision - EthCC Paris Recap, we mapped out the roadmap of Ethereum's future updates. After the Merge, Ethereum entered the Surge phase.

It is called Surge because this refers to a surge in Ethereum's computing capacity and speed using the Sharding.

You may have heard "sharding", "danksharding", and "proto-danksharding", but have completely no clue what these strange terms mean. They are all Sharding, a commonly used technique to scale a database. Danksharding refers to a type of sharding proposed by Dankrad Feist, a core Ethereum contributor. And proto-danksharding adds the name of Proto Lambda, an Ethereum researcher.

So what is sharding?

Take an excerpt from an Article by Nat Eliason

Say you have a database with 1,000,000 rows of information that needs to be processed. There are two ways you could speed the process up. You could increase the computing power available to process those 1,000,000 rows, a process called “scaling up.” Or you could split that database horizontally into five shards, each with 200,000 rows, so you can process the information using five separate machines. The latter strategy of splitting the data into shards so multiple machines can process it at once is often easier technically than continuing to speed up a single machine.

The current plan is to split Ethereum blockchain into 64 shard chains. Every shard chain will have an independent state, meaning nodes will store a subset of account balances, and smart contract codes, and process a portion of the total transactions. This will greatly increase the throughput from 13 transactions per second to potentially 100,000 transactions per second claimed by Vitalik Buterin, making Ethereum is capable of being a true “World Computer”.

Closing Thoughts

In short term, we may see even larger volatility in the market. In a Macro sense, the period of "Great Moderation" has ended, and we are entering into the "Great Volatility". In such an uncertain time, we need more faith and long-term vision rather than focusing on short-term gain or loss. I have faith in Ethereum, and I hope this article can help you guys as well.