Following a multi-year wait, the EthereumETH
merge finally happened, and it has significant implications for crypto investors, both individual and institutional.
Here is what you need to know.
What happened?
The formal merge, which occurred on Wednesday September 14th, updated how Ethereum processes transactions to remove the need for energy-guzzling computer hardware. Instead, participants, known as validators, will post holdings of ether, Ethereum’s native asset, as collateral for the right to add transactions to the blockchain. In industry terms this means that the platform will move from a Proof of Work mechanism, popularized by BitcoinBTC
, to a Proof of Stake setup. Ethereum has a process to select validators in proportion to the holdings staked into the system. The blockchain’s energy consumption could drop by as much as 99%.
Staking specifics. With staking comes the opportunity to earn passive income on holdings. The precise rate relies on several factors, including whether holders run their own validators or use certain third party services such as exchanges, but it averages around 4%. Investors can use some crypto exchanges that have become household names, such as Coinbase and Binance. Notably, Kraken agreed to permanently shut down its staking service in the U.S. after charges from the Securities and Exchange Commission that its particular service was an investment contract, and thus a security. The SEC has not commented on similar offerings from Coinbase or any other exchange.
These offerings are convenient, but remember to read the fine print. Each platform charges its own fee, with the customer receiving net rewards, and some have different lockup periods meaning that staked ether may not be recoverable for several weeks or months. There are also independent staking services, with the most prominent being Lido. This platform gained a foothold in the market by issuing a liquid token stETH to depositors that will be exchangeable 1:1 for ETH once the lockup period ends roughly six months post-merge.
Ethereum Competitors Are Being Put On Notice
A major selling point for prominent Ethereum competitors such as SolanaSOL
, AlgorandALGO
, PolkadotDOT
, Cardano, and others has been that they already offer PoS and throughput speeds of thousands or tens of thousands of transactions per second. By comparison, Ethereum posts a block every 13-14 seconds and can only handle a handful of transactions per second.
These scalability issues will not change immediately post merge, but Ethereum has several updates planned in the coming months – dubbed the surge – to eventually reach 100,000 transactions per second. When that happens Ethereum’s major competitors may need to find additional points of differentiation or risk losing mindshare, developer activity, users, and value custodied to Ethereum. Should this occur, it could reflect negatively on the price of those platform’s tokens. In fact, hype for the merge as well as excitement about the growing use cases for multi-purpose blockchains such as Ethereum in areas like decentralized finance, non-fungible tokens, gaming, and decentralized autonomous organizations, that some are predicting a flippening where Ethereum’s market capitalization will surpass that of bitcoin.
The Ethereum merge has been a long time coming, implications from this event will be felt for years to come, and users across every area should take notice.
