The Ethereum merge is the transition of the network consensus mechanism from Proof of Work (PoW) to Proof of Stake (PoS), which is scheduled to happen on September 19, 2022. Its market influence is complex and substantial not only for the Ethereum environment but also provides significant uncertainty and opportunities for other ecosystems. This article will show you the big picture of Ethereum, both pre and post the Merge.<h2>Welcome to the deflationary era</h2>The amount of ETH produced may be less than the amount destroyed, resulting in ETH deflation. The majority of freshly produced ETH is through PoW mining, accounting for roughly 90% of the total volume. This percentage of ETH will vanish after the Merge, resulting in a significant fall in fresh ETH creation, which the community refers to as "triple halving." However, the amount destroyed is tightly tied to on-chain activity: if future activities do not differ from that of the previous year in general, the amount remains constant. As a result, if ETH undergoes deflation, its price may rise in response to a short-term supply shortage.<h3>Net ETH Production before the Merge</h3>Whether before or after the Merge, the deflation rate of ETH follows the following formula:<blockquote class="">Total Newly Produced ETH — ETH Destructed = Net New Production</blockquote>Prior to the Merge, the total newly produced ETH is divided into two parts: POW mining rewards and Beacon Chain staking incentives. When a new block is created, the Ethereum Network rewards miners with ETH. Theoretically, the average time to create a block ranges between 12 and 14 seconds. If it is fixed at 13.5 seconds, the incentives for producing a new block are 2.1 ETH for each block generated, with a corresponding annual amount of 4.91 million ETH (rewards for a new block are made of base incentives + transaction fees + packing block rewards).Staking is the act of paying 32 ETH into the Ethereum Beacon Chain to activate the validator status; a validator is in charge of storing data, executing transactions, and adding new blocks. The validator may receive more ETH along the process. According to Ethereum.org, the current overall amount in staking is 13,883,221 ETH, with an APR of about 4.2%. Therefore the staking incentives are 583,100 ETH.When EIP-1559 becomes effective, Ethereum will remove the base charge from the gas fee. According to watchtheburn.com, 2.5696 million ETH has been destroyed since the announcement of EIP-1559 on August 5, 2021, averaging 2.5838 million per year. Net new production can be computed as follows:<blockquote class="">ETH POW Rewards + ETH Staking Incentives — ETH Burn Amount = 2.9093 million ETH</blockquote>With a total current supply of 121.81 million, the yearly inflation rate prior to the Merge would be 2.39%.<h3>Net ETH Production after the Merge</h3>After the Merge, POW minings will be renounced, and new ETH may only be produced through staking incentives; the formula above is thus modified to:<blockquote class="">Net ETH&nbsp; Production = ETH Staking Incentives — ETH Burns</blockquote>Staking incentives on the Ethereum Beacon Chain will vary slightly depending on factors such as hashrate and block production, but we expect the annual total rewards will remain consistent at 583,100 ETH. The amount of ETH burned is determined by the overall activity of Ethereum projects. As a result, the quantity of ETH burned in the coming year cannot be predicted; we will assume that the amount of ETH burned stays unchanged at 2.5838m.The following will be the net new ETH production after the Merge in the coming year:<blockquote class="">Net ETH Production = ETH Staking Incentives - Amount of ETH Burned= -2.0007m</blockquote>Considering the current total supply of ETH of 121.81m, the deflation rate will be 1.64%, indicating that the token is in a deflationary phase.<h2>Staking Demand Skyrocket</h2>Following the Merge, the newly redesigned Ethereum will handle transactions as usual, including transfers, staking inquiries, smart contract calls, and so on, imposing Tips in gas fees that did not exist on the initial Beacon Chain. Tips are an additional source of money that will increase your earnings. This would make it more appealing for new investors to consider staking, increasing the amount of ETH in staking. In other words, the ETH in staking will be removed from circulation, signaling a positive trend for its price. In comparison to deflation, the increase in the number of ETH in staking looks to be more effective at sustaining the price of ETH.Following the Merge, prior Tips and MEV fees collected from POW will be distributed to staking participants, aka validators. As a result, the entire compensation for validators will be made up of ETH incentives from staking, tips, and MEV. Because the performance of the three income contributors cannot be predicted for the following year, we will assume it will be the same as before the Merge. It is reasonable to make such an assumption because the Merge has no direct effect on network performance or capacity.The increased APR may entice more users to start staking and become verifiers. Keeping overall rewards constant, APR will be reduced, which begs the question: what is a realistic APR that may lead to the balance?The recent FOMC Meeting interest rate was reported to be between 2.25% and 2.5%; in this situation, earnings from ETH staking must be higher than those in the traditional financial industry to become more enticing. For the sake of simplicity, we will assume that the APR for ETH staking for the next year will be 4.2%, as it is on the present Beacon Chain. Many analysts believe that roughly 13 million ETH will enter staking, accounting for 10% of the total supply. As a result, the number of ETH in circulation will fall dramatically, increasing the market's readiness to buy ETH.The real level of circulation, on the other hand, may see a more severe decrease. First, there is ample room for staking on ETH compared to a normal staking rate of 40% on some other Layer 1 chains. Second, because ETH staking is less dangerous than other protocols, the interest rate provided by ETH staking is expected to be lower than that supplied by other protocols. Deposit interest rates are less than 1% on currently dominant lending procedures such as Compound and Aave. As a result, future ETH staking interest rates may go below 4.2%, heralding more ETH entering staking and departing circulation. Given these circumstances, the price of ETH is anyone's guess.<h2>Forked chains in short-run vision</h2>Most devs and community members have agreed to follow Vitalik's lead and abide to the Merge and POS modification. However, miners will evaporate during the process, making the need to discover a route out even more pressing. On the one hand, forking has emerged as a viable option. The hashrate of ETH could be shared and miners' losses reduced through forking. If the forked proposal receives approval from some of the environment's participants, it may become a separate ecosystem. If the branched chain is to have a long-term future, the token price must be proportional to the amount of hashrate it receives.On the other side, ETH holders may well be eligible to get various types of forked assets, which is useful to some extent. Some people may buy ETH simply to acquire such forked tokens, which alludes to the readiness to buy.&nbsp; This market demand will be released when the forked tokens are rewarded; however, the market influence may be transitory. The conditions for producing forked tokens are detailed below.<h3>The valuation</h3>Okay, now we will determine the valuation of the forked chains. POW's token price is positively associated with hashrate: the greater the price, the more miners will rush to participate in mining. When the price falls, miners using old equipment will leave temporarily.When Ethereum abandons POW mining, miners will have no place to claim their income. Some alternatives, less appealing than the last, are being examined. ETC's present hashrate per unit is less than 70% that of Ethereum. It is plausible to expect that upcoming forked tokens will have hashrate per unit equivalent to ETC, and miners will likely adopt it as an alternative. As a result, the following formula makes sense:<blockquote class="">Forked Chains Hashrate / (Yearly Production of Forked Chains x Price of Forked Tokens) = ETC Hashrate / (Annual Production of ETC x Price of ETC)</blockquote>If 20% of the ETH hashrate is relocated to a new forked network, the forked network's hashrate would be 176.6 TH/s. For ease of calculation, suppose the forked token uses the same production as ETC, as calculated below:<blockquote class="">Price of Forked Token = Forked Network Hashrate x (Price of ETC / Hashrate of ETC) = $138, or about 8% of the current ETH price.</blockquote>When 20% of the hashrate is transferred, this price serves as a floor for forked tokens. Hashrate isn't everything, and it does not imply that "the greater, the better." When adequate hashrate is provided, the price of tokens must be equal to the cost of mining equipment, or the hashrate will eventually shrink. Miners may accept lesser earnings as an answer: the usual reasoning for miners is to make a horizontal comparison with other projects and select the finest one; the price cannot be smaller than their determined level.<h3>The challenges</h3>The forking of ETH is not a panacea. In the short run, the problem would be resolving the prisoners' dilemma among miners; in the long run, the development route of the forked chain, including a new Layer 1 chain, is awaiting to be created.It will be ideal if just one network existed after forking, or if most miners want to support only one forked network from ETH. Consensus might be accelerated and optimized along this road, making Ethereum projects appealing to as many developers as feasible. Indeed, miners in various organizations may behave in their best interests, and multiple forked coins may result as a result.Some may be so unstable that just one or two projects survive, while others may fracture in the cradle owing to a lack of capability to continually create the ecosystem. Because power is diffused in such a case, surviving forked projects might be well behind Ethereum with POS by several worlds, which would be less than optimal for maintaining ecosystem growth and becoming the second ETC.The Merge, sharding, and Layer 2 solutions are only available to alleviate network congestion. But is forking an effective solution? If the forking's sole purpose is to increase current block storage and inherit the present Layer 2 network, it will be easily destroyed in future competition with its father Ethereum, and other emerging Layer 1 chains. In the Layer 1 world, there is never a shortage of ventures that specialize and win with a single advantage. The forked chain from ETH is a new Layer 1 chain that must compete in the market through advancement.<h2>Hashrate and the price of ETC</h2>The Merge is a PoW-to-PoS transfer, which means that PoW miners will be deserted after the Merge. However, the POW miners could still have an influence on the market.Miners could move to existing blockchains that can be mined with a graphics card as a viable option. ETC, ERG, RVN, CFX, FLUX, FIRO, and more blockchains currently support mining using graphics cards. Among the coins on this list, ETC has the highest hashrate and market valuation, as well as the best interoperability with Ethereum. Some of the hashrate on ETH will transfer to ETC, which strengthens network security and boosts trust in the ecosystem. If the development level can keep up with the rate of hashrate growth, the price may rise.However, present mining equipment for ETH is one step away from switching to ETC mining: the present hashrate on ETC is barren, and the impact on the network from hashrate migration might be enormous. ETC's current hashrate is only 29 TH/s, amounting for less than 1/30 of ETH's 883 TH/s. Regardless of a 51% attack, merely 3% of hashrate migration may result in a double in ETC hashrate, reducing ETC miners' revenues by 50%. To compensate for the loss of earnings, the price of ETC must rise, which creates a dilemma<ul><li>The secondary market's production, which is sustained by the ecosystem's adequate contributions, leads to an increase in price. For the ecosystem to provide adequate support, there must be a high level of security.</li><li>There must be enough hashrate if a high level of security is needed. Hashrate depends on miners, and since miners want to increase their income, token prices must be high enough to generate enough revenue.</li></ul>The cycle will be like this: ETC's price increased, and the hashrate and price briefly moved in the right direction. It will be interesting to watch if innovation and ecosystem development can keep up with price increases. ETC's price might theoretically increase by four times its current value if it can accept 10% of ETH's hashrate. The cycle may stop at any time, but until then, the hashrate and price of ETC will remain in a region around the equilibrium. The ideal situation for ETC is one in which hashrate, pricing, and ecosystem development are in harmony.Some final thoughtsAll in all, the post-merge landscape will be significantly influenced by the miners’ decisions over the forked chains. Only the most enticing to developers will succeed in the branched network, or perhaps multiple forked networks, and their tokens will have long-term worth. Not to mention that miners might start afresh with the genesis block on their own to maintain a new POW network, simply cease mining and sell mining devices or shift to Web2-related enterprises. The first alternative necessitates significant effort and resources; nevertheless, there are currently very few assets, users, and projects in the ecosystem, making it difficult to get started and a poor long-term solution. Whereas the other possibilities entail the end of mining, which is only a drop of water in the crypto world.

Discover the big picture of Ethereum and the market, both pre and post the Merge.

Ethereum Landscape Post The Merge: A Deep Analysis