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The value of Ethereum (CRYPTO: ETH) has climbed 30% in just the past week on news that "The Merge" is tentatively scheduled for Sept. 19. Investors are speculating that there will be a lot of improvements to the blockchain and related layer 2 blockchains, which live on top of the Level 1 Ethereum blockchain. But is it time to buy?
I think there are three major catalysts for value growth in Ethereum after "The Merge."
Right now, Ethereum can handle about 12 to 14 transactions per second, which means it's not suitable for high-volume traffic. Unfortunately, this isn't going to improve after "The Merge," but there are other reasons to be optimistic.
Developers have been working on a concept called sharding, which would increase the scale of Ethereum's Mainnet, but the anticipated benefits could be on layer 2 blockchains like Polygon (CRYPTO: MATIC), which are the current focus of scaling solutions. In effect, sharding creates many blockchains out of one foundational blockchain.
One of the biggest concerns about Ethereum is the energy used to run its proof-of-work consensus mechanism in which vast numbers of computers must solve complex math problems to verify transactions. The Ethereum network is estimated to consume about as much energy as the Netherlands.
Moving to proof of stake, in which token holders will validate transactions, will reduce energy consumption by about 99.95%, according to Ethereum's estimates. This will ease one of the concerns that Ethereum's detractors have from the equation.
Investors looking to generate passive income from Ethereum can do so by staking Ether, which generates a yield from users of the blockchain. The good news is that staking will take Ether out of the market, which could increase the value of Ether that's left trading.
If the blockchain increases activity, it could also increase the value of Ether because stakers see higher yields as a good alternative for their cryptocurrency.
There are good reasons to be bullish on the Ethereum blockchain and Ether as a cryptocurrency, but there are risks as well. The yield portion of staking is only paid when blockchain usage is high, and users are willing to pay high transaction fees on Ethereum. In other words, a headwind for Ethereum is its high transaction costs, but that cost is what pays yield.
Ethereum also needs to scale more efficiently in order to compete with other blockchains. "The Merge" isn't going to do that scaling work, and investors are hoping layer 2 blockchains or future sharding will expand the network's capabilities. There's more work ahead, but I think it's still time to be bullish on Ethereum as "The Merge" approaches.
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