As we approach the autumn equinox, all eyes are turning to Ethereum, when it is due to complete the next stage of it’s ‘merge’ or upgrade – a move that Forbes magazine has predicted ‘will change crypto forever’.
Having enjoyed a pretty upbeat conference in Paris, crypto’s biggest ‘Alt coin’ seems to be on the up. rising almost 60% between its Feb-March 2022 lows to new highs this August. And unlike the past, when it would largely shadow Bitcoin’s volatile movements, Ethereum has been a lot more stable pricewise, depreciating far less than it’s elder sibling during market swings.
Given this trend change – and the potential upsides of Ethereum 2.0 – some believe it may be in the early stages of what’s known as the ‘Flippening’.
ESG Heaven: Switchover to PoS
Many believe this is down to two things:
Firstly, it’s move over to a Proof of Stake protocol, which proponents believe will make it much more scalable and energy efficient than Proof of Work, and (eventually) help to lower/eradicate the so-called ‘gas fees’ that have made it so unattractive to retail buyers/users in the past. From what I understand, the final ‘dress rehearsal’ for this process was completed in the early hours of 12 August – the day of the Aquarius Full Moon.
After August’s much lower-than-expected US inflation data buoying up investor sentiment, the bear market crypto rally that began at the Leo New Moon, when Jupiter turned retrograde, picked up momentum in the lead-up to the Aquarius Supermoon, with Bitcoin and Ethereum briefly returning to hover at levels last seen in December 2020 and June 2022.
The next stop in the journey being The Merge onto the Beacon Chain, or PoS mainet, which was scheduled to happen in mid-September, according to a Crypto Mile interview with Dankrad Feist from the Ethereum Foundation.
The Big Guns: Institutional investment
Positive headlines in the form of an announcement by the American crypto exchange, Coinbase, that it has completed a deal with Blackrock, one of the world’s largest investment firms, to provide its customers with Ethereum buying and staking facilities. These include the option to open nodes on the new Ethereum network, which will enable those with 32 ETH or more to begin validating transactions on the blockchain, thereby earning additional fees on top of interest earned from Coinbases’ new VIP staking wallets.
According to one analyst, Ethereum’s open interest on the future’s market has surpassed that of Bitcoin, suggesting that institutional interest in crypto’s second biggest coin is growing which may mean that its market cap will soon overtake that of Bitcoin. This is what’s known as the ‘Flippening’ in insider circles.
Coinbase Prime now provides institutions with an end-to-end staking experience. Clients can create a wallet, decide how much to stake, and initiate staking with a Coinbase Prime account. Staking 32 ether sets up an ethereum node, and is the equivalent of a mining operation on the bitcoin blockchain.Yahoo Finance
Sept 2022: Move over to the Beacon Chain
Many believe that this trend will continue to grow as we near the second stage of Ethereum’s merge, the migration away from the old PoW over to the new PoS mainnet, which is due to complete any day now (sharding is only likely to complete in 2023, according to CoinMarketCap). Once this switchover of layer 2 applications to the new Beacon Chain network is complete, many believe we will see an explosion of institutional interest in the blockchain, which will then boast greener energy credentials and be more secure.
With ESG ratings a hot topic in the investment sector, this is certainly likely to make it an attractive prospect. Could this lead to it over-taking Bitcoin, which still operates on the more energy-intensive PoW protocol? We will have to see. Many such as Raoul Pal, certainly believe that Ethereum’s value is likely to pump substantially in the months ahead – something that is likely to accelerate as a result of another modification in the pipeline – a 90% decrease in the number of tokens minted.
Decrease in ETH Supply = increase in value?
The value of Ethereum is also likely to be boosted due to new limits placed on ETH supply, i.e. how much Ether is issued every year, making it a deflationary cryptocurrency. Vitalik Buterin, Ethereum co-founder, used his platform at the Ethereum Community Conference (EThCC) in Paris to announce the new monetary policy for ETH post-merge, which will see Ether issuance decrease from around 5 million tokens per year to an amount controlled by an equation dependent on the amount of ether staked at any one time. Although variable, he admitted that the amount of tokens minted each year would decrease significantly – some believe this could be by as much as 90%. With fewer coins in circulation, the price should go up in value, making it a more attractive coin to buy and hold for investors – in much the same way as Bitcoin, which is often described as digital gold.
Ether will become a deflationary cryptocurrency with the annual issuance of the cryptocurrency being slashed by 90%.Yahoo Finance
Staking as a new form of Verification: Pros and Cons
Staking ethereum, in the proof of stake consensus mechanism, allows those running an ETH node to verify transactions and take rewards through generous yields, thus encouraging people to ‘save’ or ‘stake,’ rather than buy and sell frequently. It also increases network security.
Buterin also talked about the “Surge” update, which is touted to make transactions on the network faster and cheaper – good news for retail investors, who have baulked at the high price of gas fees in the past. However, this is only likely to happen in 2023 with sharding, which will enable the network to generate blocks faster, so don’t expect GFs to reduce in the short term.
The only major downside with this switchover is that the merge will eradicate all Ether mining activities (which run on the old Proof of Work protocol) – bad news for certain members of the ETH community, who will lose a major source of income. Some have suggested that this could lead to what’s known as a ‘hard fork’, with miners being forced to move back to Ethereum Classic, which still runs on a Proof of Work algorithm, a move that could split the ETH community in two and essentially create 2 competing currencies.
Furthermore, some are worried that the new PoS setup could lead to certain interest groups with a large stake in ETH banding together to create power blocs which end up making the blockchain less decentralised. It would seem though, that for the ETH foundation and developers, this is a risk worth taking to gain more energy efficiency.
Layer 2 expansion
Driving demand further are the many use-cases for Ethereum’s layer 2, which allows for the creation of added value through smart contracts and applications that run off the blockchain, not to mention the burgeoning NFT market. All of these transactions will incur fees, which will be issued to stakeholders who run nodes.
Although some have argued that this could put control of the network in stakeholders’ hands (and therefore potentially blocs of institutional investors), thus affecting how decentralized the blockchain really was; however, others argue that under PoW, miners were in control, hence the high gas fees.
Ethereum Merge Chart – 15 Sept 2022
Given all of this, I thought it might be interesting to see what the chart looks likes for the upcoming merge.
I originally chose Sep 19 for the chart as this was the date touted by the Ethereum foundation at their Paris conference. However, this was only approximate – the merge ended up happening on Sept 15th.
I have therefore deleted my original assessment of the Eth Merge chart set for Sep 19 and created a more detailed video analysis, showing the difference between both dates, which you can watch below.