Ethereum network in anticipation of 'The Merge'

The cryptocurrency market has been under selling pressure this week. Growing concerns around the health of the economy have so far not supported cryptocurrency valuations. Meanwhile, the developers of the second largest cryptocurrency by market capitalization, Ethereum, continue to work hard on the transition to version 2.0, which has been announced for years:

• Ethereum has lost around 15% in recent days, with declines halting around $3,000;

• Testing of the network took place on Monday, which ended positively, although the developers reported that there were 'minor issues' without revealing details. Currently, there are already two chains running in parallel on the Ethereum blockchain, but only one proof of work remains active, which is expected to be replaced soon. On 22 April, Ethereum developers are planning another large test, until then they are running smaller trials; 

• The full transition to proof of stake could take place in July 2022 according to Tim Beiko, one of the developers. At that time Ethereum will move to a chain called Beacon which will make the 'work' of miners on the network redundant and the supply of new tokens will be frozen;

• The proof of stake model is characterised by its efficiency and limited power consumption, which has been controversial in the crypto market in recent times; 

• The move from 'proof of work' to 'proof of stake' will mean a decline in the role of miners on the network, transactions will be validated by validators 'locking' their tokens into the Ethereum blockchain to validate transactions;

• The overall test results of the ETH blockchain in the 'shadow fork' The overall results of testing the ETH chain in a 'shadow fork' (enabling test environment) are positive, indicated by statements from developers calling the upcoming change a 'historic event' for Ethereum;

• A drop in mining by up to 90% and the growing role of validators making money from validating transactions by not blocking ETH on the network (not selling it) could contribute to a demand shock. In a supply-constrained environment assuming growing demand for the cryptocurrency, Ethereum could face a surge in valuation resulting from the announced historic 'halving';

• Halving is a reduction in the supply of cryptocurrency, which is associated with a decrease in the reward per mined block, with successive halving fewer and fewer new tokens come to market - mining them becomes less and less profitable;

• Ethereum halving will be the size of four Bitcoin halving, which will mean nearly 90% freeze in the supply of new tokens. It is worth mentioning that so far each of Bitcoin's halving has been followed by another bull market; the last one took place in 2020. The next BTC halving is likely to take place Q1 2024;

• Ethereum has attracted institutional interest and is driving the cryptocurrency market-related trends of DeFi and NFT, for which it remains the leading platform. However, investors are concerned that the announced 'merge' will again be postponed. Developers will only be able to announce the transition once it is fully prepared and will not disrupt the network. The cryptocurrency is also struggling with increasing competition.

Ethereum chart, D1 interval. The Ethereum price rally that began in mid-March ended with a sell-off at levels around 3500 USD, which coincided with the 38.2 Fibonacci retracement of the upward wave. Bulls are trying to defend the psychological border of 3000 USD, but stopping the decline may be problematic in the face of negative investor sentiment. We can see a potentially drawing head-and-shoulders formation, where the key levels may turn out to be around 2500 USD, from which the bottom breakout may accelerate the sale; these levels also coincide with the level of 78.6 Fibonacci retracement. 1800 USD can be considered as the next key zone, where the potential neck line is located. However, it is worth noting that the announced 'merge' may weaken the supply side and reward buyers, the long-term outlook for Ethereum valuation remains optimistic.