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Merge, an update to the Ethereum blockchain that will convert it from a Proof-of-Work (PoW) system to a more environmentally friendly Proof-of-Stake (PoS) mechanism, will have a variety of repercussions, Citi (C) warned in a research study published Thursday.
The bank stated that they include decreased energy intensity, the move to a deflationary asset, and a "possible roadmap to a more scalable future through sharding."
According to the research, The Merge, the first of five planned network enhancements, may only increase transaction speeds by 10 percent by decreasing block times. The article said that it paves the way for the "Surge" upgrade, which is the next scheduled update for the network and promises to deliver 100,000 transactions per second (TPS) to the blockchain.
The Merge will reduce the block duration to 12 seconds from 13, which might result in a slight decrease in fees and a gain in speed, according to the notice.
Citi estimates that transitioning from PoW to PoS will lower annual issuance by 4.2%. With ether (ETH) eventually becoming deflationary, this may strengthen the case for the token as a store of value.
According to the bank, the transition to PoS transforms ETH into a “yield-bearing asset” with cash flows, which may be regarded as a type of network revenue. The bank noted that future cash flows would let the application of a variety of valuation methodologies be now unavailable for blockchains.
As Ethereum will be yield-generating and deflationary, it is less likely to have the maximum throughput of any blockchain. According to the report, given its “improved store of value features,” it is increasingly likely to be where a growing proportion of total value locked (TVL) is protected and exchanged.
Post-Merge ETH might be considered a reasonably energy-efficient and environmentally-friendly crypto asset since energy consumption is anticipated to fall by 99.5%, according to the report.
