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

Ethereum will probably become deflationary as token issuance decreases while the burn mechanism is maintained, the bank said.

AccessTimeIconAug 5, 2022 at 10:51 a.m. UTC
Updated Aug 10, 2022 at 4:41 p.m. UTC

Will Canny is CoinDesk's finance reporter.

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, Citigroup said in a research report Thursday.

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

The Merge, the first of five planned upgrades for the network, may increase transaction speeds by only 10% by reducing block times, according to the report. The upgrade, 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 that could result in a small decrease in fees and an increase in speed, the note said.

Citi says switching from PoW will reduce overall issuance of ether 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 aren't available for the blockchain now, the bank added.

Because 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 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.

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Will Canny is CoinDesk's finance reporter.

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Will Canny is CoinDesk's finance reporter.