Yesterday, Ethereum completed its long-awaited software upgrade.
Known as the Merge, it has slashed the amount of energy the Ethereum blockchain uses to secure transactions by more than 99%.
It will also cut the amount of ether (ETH) in circulation… and trigger a supply shock that will send its price soaring.
Ethereum is the second-most valuable crypto network after bitcoin (BTC). It has a market value of $196 billion.
And it’s the backbone of the boom in NFTs… stable coins… decentralized exchanges… play-to-earn games… and crypto-based metaverse worlds.
That’s why, in today’s Daily Cut, I’m bringing you something different from our regular Friday mailbag fare.
You’ll hear from colleagues Teeka Tiwari and Jeff Brown on what the Merge means for Ethereum… and crypto in general.
And don’t worry if you don’t yet know what the Merge involves. At a high level, it switches the way transactions get validated on the Ethereum blockchain.
Before the Merge, Ethereum used something called Proof-of-Work (“PoW”). This involved validators running high-end computers all day trying to solve math problems.
One recent study revealed this was using about 78 terawatt hours of electricity each year. That’s roughly the same amount of power Chile, a country of about 19 million people, uses in a year.
And with PoW, a single transaction in Ethereum uses enough electricity to power one American household for about a week.
The Merge gets rid of that system and replaces it with a more energy-efficient one. It’s called Proof-of-Stake (“PoS”).
With PoS, instead of wasting all that energy solving math puzzles, ETH holders validate transactions according to how many ETH they hold.
They “stake” – or temporarily lock up – their ETH. Then they vote on whether a transaction is valid.
And if they’re caught cheating, their ETH is destroyed. This keeps the network honest while remaining decentralized.
Teeka first recommended ETH to readers of our Palm Beach Letter and Palm Beach Confidential advisories in April 2016 at just $9.
Today, one ETH will set you back $1,422. That’s a 15,700% gain for Teeka readers who acted on his recommendation.
That’s enough to turn $1,000 into $158,000. An initial investment of $6,330 is all you would have needed to become a crypto millionaire.
And last year, Teeka doubled down on his ETH recommendation.
He predicted Ethereum would become the second blockchain after bitcoin to reach a $1 trillion valuation.
That hasn’t happened yet. But here’s Teeka on why the Merge is a gamechanger…
Teeka: The next stage of transformational software development will happen on blockchains… not the internet… and not mobile operating systems like Apple’s iOS or Google’s Android.
Ethereum is the world’s most widely used blockchain development platform. Over the next decade, it has the potential to grow into the world’s most valuable software development platform.
In fact, I believe it will become the next trillion-dollar coin in market cap after bitcoin.
Ethereum is fully programmable. So you can build any app you like on it. It’s the same as how you can build any app you like on Apple’s iOS mobile operating system. Except apps on Ethereum are decentralized.
Today, Ethereum has more than 200 million wallet addresses. It does more than 1 million transactions per day… has more than $35 billion in its DeFi ecosystem… and more than $90 billion in stablecoins.
That’s made ETH one of the most sought-after cryptocurrencies in the world. As the Ethereum blockchain grows in value, the price of ETH goes up.
And with the Merge, we’re about to see a major cut in new supply.
Since PoS networks don’t rely on warehouses full of computers, like PoW networks do, they’re less expensive to run. So PoS networks need to issue fewer new coins as rewards than PoW networks.
Ethereum is in the process of switching to this PoS model. This will see a cut of as much as 90% in new ETH supply.
It will become a deflationary cryptocurrency. There will be fewer tokens in circulation. This will make each one more valuable.
Plus, my research reveals vast amounts of institutional money will come into DeFi as a way of earning income on their money. And most DeFi apps are built on Ethereum.
But they’ve been waiting for Ethereum to complete the Merge. And it makes sense…
Wall Street money managers are taking a lot of heat from environmentalists and millennial investors over investments involving high carbon emissions. That includes oil companies… mining companies… and PoW blockchains.
With the move to PoS, Ethereum kills this argument. It’s a green light to start buying. Demand will surge, just as supply is starting to shrink. That means higher prices ahead.
If you have yet to add ETH to your portfolio, I recommend taking a stake now. Just remember to keep your stake small – $200 to $400 for smaller investors or $500 to $1,000 for larger investors.
In 2017, Jeff recommended Ethereum to his readers.
Jeff is best known as our tech stock investing expert. But he’s also a member of the Chamber of Digital Commerce. It lobbies lawmakers to implement a light regulatory touch for crypto. It also pushes for clarity around crypto tax rules.
And Jeff’s met with offices of the House and Senate to help them understand the merits of blockchain technology.
He’s even traveled to Israel on a U.S. Certified Trade Mission on blockchain and digital payments.
And like Teeka, he’s bullish on post-Merge Ethereum…
Jeff’s response: The most important impact of the Merge is the dramatic drop in energy Ethereum uses.
The other main impact is that this will cut the number of ETH in circulation, making it scarcer.
But the switch from PoW to PoS also allows Ethereum to put something called layer-2 scaling solutions into the limelight.
In crypto speak, layer 1 refers to the original blockchain. Layer 2 refers to secondary protocols built on top of the original blockchain.
The main goal of these layer-2 protocols is to speed up transactions and reduce network fees.
And the Merge enables layer-2 solutions to be more effective.
Ethereum will still be pricey relative to other fully programmable blockchains. But layer-2 solutions will cut transaction costs from tens of dollars to pennies.
This gets less attention in the mainstream press than the energy angle. But this is the change Ethereum investors have been waiting for years to see.
Ethereum transaction fees – known as “gas” fees – don’t just cover costs for ETH transactions… but also minting non-fungible tokens (NFTs)… powering decentralized applications (dApps)… and executing smart contracts.
And they’re a major pain point.
Between January 2021 and May 2022, Ethereum’s average daily gas fee was about $40. And it reached its highest daily average in May 2022 of $196.
This shift is great for developers who are building dApps on Ethereum. It will allow them to develop features and designs that are no longer held back due to costs.
It’s also great for the crypto market. Layer-2 blockchains will compete to win over users. It’s a like the internet’s “browser wars” that raged in the 1990s. This type of competitive environment encourages innovation, which favors users in the end.
That’s all for today’s dispatch.
Remember, if you have a question for anyone on the Legacy team, be sure to send it to [email protected]. We love hearing from you.
Have a great weekend.
Editor, The Daily Cut