The hotly anticipated “Ethereum Merge” finally happened, and it was a smooth, almost shocking, success. Proof of work vacated the Ethereum protocol in favor of the energy efficient, possibly world-saving alternative of proof of stake.
However, the most current five-day price action for ETH (Ether) shows a sharp decline of approximately -21%. The same chart shows a -9% drop for BTC (Bitcoin). So how can we call the Ethereum Merge a success?
Given the current bear markets and the globally declining macroeconomic environment, speculative assets such as cryptocurrencies slid as investors looked to preserve capital. Called the “crypto winter,” this harsh environment for growth-style investing particularly hurts new asset classes which have not been tested by the global financial crisis, for example.
Yet in the run-up to the Ethereum Merge, ETH’s price surged from roughly 1,430 USD at the end of August to almost 1,800 by September 10. Meaning, enthusiasts, investors, and other ETH stakeholders traded the sentiment building around Ethereum. This is normal, but the Merge’s ethos remains one of safety, security, democracy, and environmental protection–not short-term profit taking.
This article delves into the fate of the ETH’s historical miners, the great appeal Ethereum now has to mainstream investors, and the further upgrades slated for the future.
Earning an income with Ethereum means to stake what you own, not mine new coins. The current staking reward for ETH stands at 5.02%. With miners no more, the post-merge yield could reach up to 7.5, with 6.9% likely.
For the sake of example, the current 1-year US treasury rate shows 3.96%. But when central bank tightening slows and the rampant inflation comes to a halt, can we count on the 1-year yield to maintain this height?
Ethereum understood that while proof of work is “battle tested” and perceived as secure, the hash puzzle method provided an ironic side effect of centralization. As protocols mature, only the most intense computing rigs can solve these puzzles in time and expect to earn an income, such as with Bitcoin.
In other words, computers from only three mining pools dominated the network hashrate and contributed to an increasing possibility–even if disbelieved–of a 51% attack. This describes the event of when a central, malicious actor effectively takes over the blockchain and purports their own false tale of financial events in a virtual Shakespearean play.
Thus, it’s not energy use (in solving hash puzzles) that provides security, but returning to the original ethos of cryptocurrency–democracy. By encouraging regular investors with modest to large ETH holdings to deposit (stake) their funds, they become part of an ever-growing ecosystem.
Sophisticated ETH miners likely would not have simply sold their computing gear, but join other protocols still using proof of work. After all, they can in theory stake ETH and mine other coins in tandem–alongside the global population of retail investors using American or European crypto exchanges.
A select few cryptocurrencies surged in the leadup to Ethereum’s Merge, but two in particular stand out: Ravencoin and Flux.
The hashrate provides an indication of a coin’s popularity with miners. A greater hashrate equates to faster processing power and more miners.
However, following the Merge, the prices of both against the USD plummeted by roughly 35-40% each. This reminds us of the speculative nature inherent to lesser-known and less-tested cryptocurrencies. And, it further points to the overdone sell-off affecting ETH’s price.
Ethereum’s co-founder Vitalik Buterin would have us know that Ethereum itself is about halfway complete. The rhyming is intentional.
Part of Buterin’s success lies in his quest for decentralization–not apparent fame, glory, nor riches. Yet to achieve this end of ultimate decentralization, Ethereum’s Merge is the beginning point which seems to have always required proof of stake. The goal remains to take a processing capacity of “15-20” transactions per second to a staggering figure gyrating around 100,000.
You read that right. Surge refers to “sharding,” or the process of adding additional layer-2 blockchain “lanes” to bundle transactions. Verge refers to the mathematical proof of “Verkle trees,” in effect eliminating much of the current need of validators hoarding data. In other words, moving data to the cloud. Purge refers to the ability to delete old history data, while splurge represents a catch-all term for all the extras.
In the current climate of a crypto winter also corresponding to a global economic downturn, growth investing gives way to hard financial analysis. ETH’s price remains relatively subdued despite the historic success of Ethereum’s Merge as the lasting impact of history continues to be not so well understood.
Yet contrarian investing–buying when others are fearful–consistently finds its way to the top of bear market trading strategies. In that entails the daring art and science of discovering opportunities before others. If Ethereum maintains the momentum of its success and builds a protocol capable of processing 100,000 thousand transactions a second at a minimal energy cost while propagating decentralization, then idealism gives way to a living and breathing new world.
Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.
The co-author of this text, Conor Scott, CFA, has been active in the wealth management industry since 2012, continuously researching the latest developments affecting portfolio management and cryptocurrency. Mr. Scott is a Freelance Writer for Deltec International Group, www.deltecbank.com.
The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade.
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