Crypto enthusiasts have been looking forward to the Merge, a major event in the development of the Ethereum blockchain, for years, and the time is almost here. Unfortunately, the community saw a major setback that could have threatened to derail the entire shift. However, crypto fans are undoubtedly relieved to hear that the Merge is back on.

What is ‘The Merge’?

The Merge will transition the Ethereum blockchain from being proof-of-work to proof-of-stake, which means ether will no longer be mined or involve solving complex mathematical problems. Instead, proof-of-work blockchains process transactions when users stake capital in the form of ether into a smart contract on the Ethereum blockchain.

The Ethereum Foundation has been working for years to transition the blockchain to proof-of-work because it is widely seen as more secure and less energy-intensive, among other benefits. The Merge is expected to occur in September.

Bugs in ‘The Merge’ Process

However, while multiple tests on the transition have gone smoothly, Ethereum lead Peter Szilagyi announced that they had uncovered some bugs with the process. He tweeted on Tuesday that their latest release was “borked” because it contained a “regression that causes the trie/state to go bad.”

Less than 10 minutes later, Szilagyi tweeted again, saying they might have discovered the issue. He added that if what they had thought turned out to be true, it meant “a high probability that anyone running the release will have their db fried.”

Szilagyi also said the “fun” part about the issue was that “data loss happens only on shutdown,” which is why none of their previous tests and benchmarks had caught it. However, despite the problems, the Ethereum developers figured out a fix in a day.

Go Ethereum announced that they released a hotfix to patch a state corruption in 1.10.22. The developers also advised users who had already updated to .22 to roll back their chain and rerun the last two days to ensure everything was OK.

What Will Happen to Ether After The Merge?

After the Merge is completed, more changes are likely than just the shift to proof-of-stake. Investors, in particular, are concerned about what will happen to the price of ether, the native token on the Ethereum blockchain.

Of course, ether investors want all price indicators to turn bullish as the Merge nears, but the futures market has fallen into backwardation. In that situation, futures trade at lower prices than the current spot prices.

Backwardation suggests ether prices will decline in the coming months. Data from Skew revealed that as of earlier this morning, one-month ether futures were trading at an 8% to 10% annualized discount, while three-month futures were discounted by about 5%.

Some crypto enthusiasts said the situation might not last long and that futures should go back to trading at a premium after the Merge, which is scheduled for mid-September. The event is called the Merge because it combines Ethereum’s proof-of-work blockchain with Beacon Chain, a proof-of-work blockchain that began in December 2020. The Merge is expected to reduce the amount of available ether, which should increase the price.

Why Ether’s Price Could Rise After The Merge

Arca Research Director Katie Talati claims backwardation shows that the market expects ether’s price to decline after the Merge. However, she added that the situation could be short-lived. She thinks the real price increase will come after the Merge on the back of increasing ether locked up and staking or securing the chain.

Trading firm Cumberland tweeted that the Merge will eliminate $40 million in sales from miners, resulting in a 90% decline in annual issuance. Additionally, the annualized yield on staking ether coins in the network is expected to double to at least 8%.

That increase will probably drive even more staking, vacuuming up large amounts of ether from the market in the process. Investors lock coins in a network to stake yield, which is the return they earn for doing that. Staking yield is sometimes compared to buying bonds.

When the Ethereum blockchain becomes a proof-of-stake network, users will have to stake at least a certain number of coins whenever they validate a transaction to earn rewards. On the other hand, proof-of-work blockchains like Bitcoin – whose price has fallen as of late – involve solving complex mathematical problems to verify transactions. On PoW blockchains, miners often liquidate the coins they generate to fund their operations.

Free Tokens?

Talati said backwardation is occurring because investors are purchasing ether at spot prices and then shorting the cryptocurrency’s futures. This combination enables them to collect the proof-of-work airdrop that’s expected when the Merge occurs, which she explained is “essentially isolating ETH price risk for the ‘free’ dividend.”

While most Ethereum enthusiasts are looking forward to the Merge, ether miners are naturally opposed to it. Some of them have even pushed back against the Merge suggesting that the main Ethereum blockchain be split so that the proof-of-work chain could continue after the Merge.

If the miners successfully force this split, ether holders will shift to Ethereum’s new PoS chain while also receiving the forked ether PoW tokens free. Of course, the possibility of receiving free tokens is driving some traders to implement basis trades, which involve buying ether at the spot price and then either selling or shorting the futures contracts. This positioning enables them to collect any free tokens that might appear if the chain splits while avoiding the risks associated with the ether price.

In this scenario, the ether futures market will likely shift back into contango, which is the normal state of the futures market that has futures trading at a premium. The shift to contango would occur as traders unwind their shorts following the Merge.

This article originally appeared on The Tokenist

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