Ethereum will probably become deflationary as token issuance decreases while the burn mechanism is maintained, the bank said.
The planned Merge of the Ethereum blockchain, an upgrade that changes it from a proof-of-work (PoW) system to a greener proof-of-stake (PoS) mechanism, has several implications, Citigroup said in a research note on Thursday. .
These include low power consumption, a move to a deflationary asset and “a potential roadmap to a more scalable future through sharding,” the bank said.
Merge Of The Ethereum
Merge, the first of five planned network upgrades, was able to increase transaction speeds by just 10% by reducing block times, according to the report. However, the upgrade paves the way for the “Surge”, which is the next planned network upgrade and promises to bring 100,000 transactions per second (TPS) to the blockchain. , the report added.
The merger means the block time will drop from 13 seconds to 12 seconds, which may result in a slight reduction in fees and an increase in speed, the note said. Citi says the move away from PoW will reduce total ether emission by 4.2% per year, and when ether (ETH) eventually becomes deflationary, it could improve the case for the token as a store of value.
The PoS transfer will turn ETH into a “yield-bearing asset” with cash flows, the bank said, which can be converted into a form of income for the network. The potential cash flow will enable the use of different valuation methods not available to blockchain today, the bank added.
Since Ethereum can be both profitable and deflationary, it is unlikely to be the highest throughput blockchain. Because of its “enhanced storage of value assets,” it is more likely that an increasing amount of total value will be locked up and transferred, the note said. Post-Merge ETH can be considered a relatively energy-efficient and friendly crypto-asset, as energy costs are expected to decrease by 99.95%, the note added.