Last week’s Merge was the “most significant development in the history of the Ethereum network,” according to Fidelity Digital. And from a purely tech
Last week’s Merge was the “most significant development in the history of the Ethereum network,” according to Fidelity Digital.
And from a purely technical standpoint, the blockchain network’s transition from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism was a marvel. Widely compared to changing a jet engine mid-flight, the software upgrade proceeded with nary a glitch on Sept. 15.
Overnight, too, Ethereum, the world’s second-largest blockchain platform, reduced its energy usage by 99.95% from a rate as high as 94 TWh per year in May — roughly equivalent to the nation-state Chile — to an almost negligible 0.01 TWh on Sept. 16, according to Digiconomist.
This should carry some weight with regulators threatening to clamp down on blockchain networks for environmental profligacy. It could also bring more institutional investors into the crypto space.
To this last point: Institutional investors like pension funds, insurance companies, foundations and others matter because they tend to be longer-term investors and are not inclined to trade on rumors or overreact to 24-hour news cycles. Broad participation from this group could help solve crypto’s persistent liquidity and volatility problems.
Yet, others believe that while the Merge offers corporations and large financial institutions a more eco-friendly platform, as well as new staking opportunities, it doesn’t yet solve one of Ethereum’s core deficits: its lack of scalability. Not yet, anyway.
“The Merge is a watershed moment for the crypto industry, but the impact to accelerate adoption by institutional investors will take more time,” Jim Kyung-Soo Liew, associate professor at Johns Hopkins University’s Carey Business School, told Cointelegraph.
“Ethereum does not have a better statement on TPS [transactions per second],” John Peurifoy, co-founder and CEO at Floating Point Group — a trading platform provider — told Cointelegraph. The Merge doesn’t increase block size or block speed. “We’re not there yet.” That will have to wait for the Surge, another Ethereum upgrade scheduled for 2023. That will implement a sharding solution that could boost network speed dramatically.
Still, solving the energy consumption problem and reducing carbon emissions are no small achievements. Ethereum’s carbon footprint, once as large as Finland’s, now compares to the Faroe Islands, said Digiconomist. Or, put another way, a single Ethereum transaction is now “equivalent to the carbon footprint of 44 Visa transactions or 3 hours of watching Youtube.”
“The bolstering of Ethereum’s environmental, social and corporate governance (ESG) credentials should be good for regulatory-driven institutions that want to start to explore the Ethereum ecosystem,” Marc Arjoon, Ethereum Research Analyst at CoinShares, told Cointelegraph, while Jack Neureuter and Daniel Gray, writing in Fidelity Digital’s Report on the Merge, added that the transition to PoS could have “a positive reinforcing effect for those who feel strongly about the environmental impact resulting from the usage of blockchains.”
Indeed, two Bank of America analysts recently suggested in a note to clients that some institutional investors who were previously “prohibited” from investing in PoW-generated tokens could now participate:
“The significant reduction in energy consumption post-Merge may enable some institutional investors to purchase the tokens that were previously prohibited from purchasing tokens that run on blockchains leveraging proof of work (PoW) consensus mechanisms.”
An increased return for Ether holders?
The Merge also introduces other potential benefits for traditional financial institutions. “Ethereum’s shift to proof-of-stake makes ether an asset which can earn interest for holders in the form of staking,” noted Fidelity Digital. This could increase the total return for Ether (ETH) holders and “may make the asset more attractive to prospective investors.”
“One reason to be excited” if you’re an institutional investor, said Peurifoy, is that you can stake your ETH as a PoS Ethereum validator and receive about a 5% annual percentage yield (APY). “That’s a pretty good rate, and it has relatively low risk associated with it.”
Staking could come at a cost, though. In a Sept. 15 article headlined “Ether’s New ‘Staking’ Model Could Draw SEC Attention,” the Wall Street Journal reported that United States SEC chief Gary Gensler recently suggested that Ethereum, with its generous new staking opportunities, could trigger the Howey test — and U.S. courts might declare Ether a security.
“Now that Ethereum more closely resembles traditional financial instruments, regulators may start to view it as such,” Arjoon told Cointelegraph. In other words, Ethereum’s new staking opportunities might bring in more traditional investors but also SEC oversight in the United States.
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