Why Is ETH Down After a Successful Merge?

Ethereum transitioned from "proof of work" (PoW) consensus to "proof of stake" (PoS), completing the long-awaited Merge. So why's it down?

Why Is ETH Down After a Successful Merge?
Vitalik Buterin and his triumph shirt

Last week, Ethereum transitioned from "proof of work" (PoW) consensus to "proof of stake" (PoS), completing the long-awaited Merge.

Why Did Ethereum Merge?

Before the merge, Ethereum was mined using specialized computer graphics cards. The PoW mining process was expensive and energy-intensive. Now, it's said that the Ethereum network uses 99.99% less energy than it did before the Merge. The cut in energy use by Ethereum is equal to 0.2% of the global energy use–the same amount as Finland uses.

This helps Ethereum avoid potential sanctions or bans in countries that care about pollution–particularly in the EU. PoS networks are also becoming more popular in light of energy price increases. In fact, Bitcoin is now the only remaining major PoW crypto.

Ethereum Is Now Centralized

Unfortunately, PoS networks have their own problem: centralization. Following the Merge, Coinbase and Lido dominate the Ethereum network. Over 40% of new blocks since the Merge were built by addresses belonging to Coinbase or Lido. The Maximal Extractable Value (MEV) sector is even more centralized: Flashbots, the leading MEV service provider, built over 80% of the new Ethereum blocks since the Merge.

ETHPoW, AKA Ethereum PoW Fork IOU (ETHW)

Leading up to the Merge, it became clear there would be at least one ETH fork that stayed on the PoW network. The winner appears to be ETHPoW, created by Chandler Guo, a powerful ETH miner and a principal architect of Ethereum Classic (ETC), the original ETH fork token. ETHPoW is a hard fork of the Ethereum network that includes all the pre-Merge ETH transactions and will extend forward as its own chain.

The market has not responded well to ETHPoW since the Merge, and the token is down 90% from its post-Merge high.

The entire project seemed like a rush job. At launch, ETHPoW used a Chain ID already assigned to Bitcoin Cash's Testnet. This rendered MetaMask users unable to move ETHPoW at its launch. MetaMask users reported connection errors for over 12 hours, but since they were probably trying to sell their ETHPoW, this launch hiccup may have benefitted the project long-term.

Why Is ETH Down After a Successful Merge?

The Merge went well, and there's a lot less ETH issued now, so why is ETH down over 10% since the Merge? I'm not an investment advisor, but to me it looks like two major factors are contributing to ETH's price drop: the macro, and loans.

The US economy is not doing well, and the Merge happened to time up with a negative announcement from the US Fed. Investors are more poor now, so they're less willing to buy ETH.

In the run-up to the Merge, investors borrowed significant amounts of ETH at high interest rates in order to get the ETHPoW tokens for free. Investors were borrowing so much ETH before the Merge that DeFi lending protocol Aave suspended ETH loans and the ETH borrow interest rates were almost 200% per year on other platforms.

Once these ETH borrowers received their ETHPoW, they probably returned their borrowed ETH and dumped the ETHPoW. This sell pressure, combined with a poor macro, could explain why ETH is trading 10% lower than it did before the Merge.