Financial Idiot 014 - Let's dig into Crypto! Part 3

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DISCLAIMER: I'm an idiot and this isn't financial advice! You can lose money when investing, and you should never invest money you don't own or you can't afford to lose. I'm not responsible for your decisions!

Out of sheer luck, I noticed that the Ethereum Merge would take place two days from the release of this Newsletter (on 15th September 2022). What an excellent opportunity to talk about it. :)

In the first part of the "Let's dig into Crypto! "-Series, we talked about Proof of Work and Proof of Stake, if I remember correctly. Let's start with a brief look back.

Proof of Work means that mathematical calculations need to be performed to get a new valid Block for a blockchain. Proof of Stake means that parties with a certain mass of a specific coin are accountable for producing new coins. In an ideal world, that part is split among many different parties and thus guaranteeing that the network stays available and redundant.

Ethereum with the ETH Token is a PoW (Proof of Work) chain, but for a few years, there was always the plan to switch to PoS (Proof of Stake). Obviously, there are many things to consider when changing algorithms, and of course, there is a lot of work for developers. Over the last couple of years, the switch for ETH has been discussed and implemented. After many bugs, it seems like it is finally time that the switch is coming into the live system.

With "the merge ", the current PoW Chain of ETH and the PoS Chain (that has been running for quite some time parallel) will be merged into one single PoS Chain. Hence the name "The Merge ". You can find the original announcement here: https://blog.ethereum.org/2022/08/24/mainnet-merge-announcement.

I don't want to go into the nerdy technical details, as for the most part, I only understand a small portion of it, but I want to look at what could happen after it happened.

I think multiple scenarios could play out:

The merge will get postponed once again
The merge will go through without problems, and the new PoS chain will run without significant interruption

There are also some side scenarios related to 1. And 2.:

If the merge gets postponed again, the ETH price will tank down. Although I find it highly unlikely that this new timeframe of the merge will get delayed again, the option is still there. If that happens, I think there will be a Hughe dump of ETH. People have been waiting for this change for months, and moving it back again might have a Hughe impact.
The merge will go through, but enough miners stay alive to keep the PoW chain alive. As far as I heard, there are at least a few rumours of people that want to keep the PoW Chain alive, which would lead to a Hardfork as we saw in the past with ETC and Bitcoin Gold. I'm unsure how long a side chain can sustain, especially since significant platforms (https://coinmarketcap.com/alexandria/article/opensea-backs-the-merge-and-warns-forked-nfts-won-t-be-supported) declared they would only support the new PoS.
The merge goes through, and the PoW chain halts, but the new PoS chain is unstable. Although there was and is significant testing on the new Chain, mistakes can always happen. If that is the case and no new blocks are produced, and thus smart contracts will also come to a halt, it could be the end of Ethereum as we know it currently. As far as I know, Ethereum is the first Chain with such a large market capitalization and transactions over it, and nobody else has done something like the merge before.

Another thing to consider might be rapid sell-offs after the merge is through (https://coinmarketcap.com/alexandria/article/the-merge-won-t-spark-eth-selloffs-bankless-co-founder-says). It is a possible scenario, but most of the ETH staked to be used after the merge can't be unlocked in the next six months or so.

I think the whole process will go through relatively smoothly. There will be hiccups, but I don't believe everything will break. If everything breaks, we will see a selloff of cryptocurrencies we never saw before. If the second largest Chain breaks down into pieces, most of the crypto world will end with it. If everything goes clean, I think we could be at the start of a new Bull market. But as I've said before, I'm an idiot, and I don't know shit. :)

Depending on the outcome, the next Issue of "Financial Idiot "will be talking about the merge (now after it hopefully happened), or if it weren't a significant event, we would talk about my fiat Portfolio again and how it changed. See you on the other side.

PS: Here are a few interesting articles to read more about the merge in general: