Ethereum is one step closer to its long-awaited software upgrade after the “dress rehearsal” merge at the second-largest blockchain successfully completed on Wednesday.

“It seems like a general success,” said Ethereum Core developer Danny Ryan during an Ethereum Core developer call shortly after the test merge, noting some software bugs were detected. “We’ve seen this in the past, fortunately it's very often minor things… we’ll probably see some post-mortems in the next day or so.”

Investors are carefully watching the steps leading up to Ethereum’s software transition, projecting it could dramatically shift the second-largest cryptocurrency’s value, especially as the crypto market remains defined by selloffs for most of 2022.

On Wednesday around noon, ether changed hands at $1,800 soon after the merge completed, seeing a slight rise of 1% on the day. It still remains down 51% year to date from $3,829.

“While the industry will be excited when the merge happens, most traders are probably wary of taking a position on something that’s likely to slip,” Michael Safai, a partner and co-founder of Dexterity Capital, told Yahoo Finance.

Ethereum developers and analysts say the so-called merge could reduce Ethereum’s energy use and significantly cut the supply issuance of its native cryptocurrency, ether. Discussed as far back as 2014, this upgrade has faced several delays over the years.

Vance Spencer, a former Netflix executive and current cofounder of the crypto venture capital firm, Framework Ventures, has closely followed the Ethereum core developer team’s progress toward the merge.

He told Yahoo Finance this week's merge is one of three “dress rehearsals” Ethereum developers need to complete before the protocol shifts can begin its final merge with its newer proof-of-stake blockchain, also known as the Beacon chain.

With no date set, Spencer is optimistic that the full upgrade should be accomplished by September.

“I get the sense from the developer community that they would not like to be rushed with such an important upgrade,” Spencer said. “That being said, there’s an important Ethereum conference in October that presents a natural end point for when it should be done and presented.”

The bull case for Ethereum’s Merge

Pending a successful merge, the most immediate change for investors revolves around forcing out Ethereum miners, according to Tom Dunleavy, a senior research analyst with Messari.

Unlike its current proof-of-work model where computer miners use energy to validate the network’s transactions, a proof-of-stake system relies on depositors or “stakers” who post ether on the blockchain as collateral.

In a report published Tuesday, Dunleavy noted that by most conservative estimates, proof-of-stake will reduce Ethereum’s energy use by 99%.

“With climate concerns and ESG-investing remaining a major topic for institutional investors, Etherum’s drastic energy reduction could open doors for additional capital flows and longer-term sustainability,” Dunleavy told Yahoo Finance.

Losing miners also means a major supply cut of new ether issued per day.

“By removing miners, it's moving billions of dollars of selling pressure from the market,” Spencer said.

Though ether’s supply schedule will vary based on its amount of staked ether, Dunleavy projects that if at least $15 million ETH is staked by the time of the merge, ether’s supply issuance per day will be cut by 90%.

According to Ethereum.org, investors have already staked $13.4 million in ether on the Beacon chain. Individuals and organizations can earn a 4.2% annualized yield for staking ether, with Dunleavy adding that this “bond-like yield” could range anywhere from 7% to 13% depending on the network activity and number of stakers.

“On the one hand, you have supply going down and demand going up through staking,” Spencer said. “This means there’s going to be a fundamental driver for the asset where we haven’t had it before.”

David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.

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