Home Markets Crypto Markets Brace For Ethereum Merger Next Month [Video]

Crypto Markets Brace For Ethereum Merger Next Month [Video]

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Crypto Markets Brace For Ethereum Merger Next Month [Video]

After years of delays, Ethereum (ETH-USD) is willing to ditch its all-important consensus layer for a new one.

This software change, also known as the “merger”, represents a crucial milestone for the digital asset industry’s most widely used blockchain and its cryptocurrency, Ether.

The merger will see the Ethereum blockchain move from proof-of-work to proof-of-stake.

Currently, Ethereum is a blockchain protocol secured by miners who validate its transactions in real time using their computing power in exchange for new tokens. After the merger, the protocol will be secured by validators who deposit capital in exchange for a percentage return on their pledged funds.

The upgrade is a technological feat that will drop Ethereum’s energy consumption, with proponents believing it will bolster Ethereum’s long-term prospects.

But with a completion date right in the middle of major macroeconomic events in September — and with the merger requiring some coordination from a multitude of industry groups — the process could be far from straightforward.

What will happen during the merger?

As Ethereum co-founder Vitalik Buterin explained during a opening speech in July: “The Ethereum protocol is currently in the process of this long and complicated transition.”

This process includes several software upgrades, all of which rhyme with Merge, and none of which can be completed until the merge is complete.

The merger itself changes Ethereum’s consensus layer, or the blockchain’s governor to determine who owns what on its ledger.

“It’s a big deal,” Jeff Dorman, CIO at Arca, told Yahoo Finance. “In the sense that this is a telegraphed event that the Ethereum community has been heading towards for the past 3 or 4 years and to end it is powerful.”

In Ethereum’s current proof-of-work model, protocol transactions are processed by crypto-miners solving increasingly difficult calculations in exchange for ether. Once the merger is complete, Ethereum will only employ staking validators who pledge capital (at least 32 ETH) on the blockchain to receive staking rewards.

DENVER, CO - FEBRUARY 18: Ethereum co-founder Vitalik Buterin speaks at ETHDenver on February 18, 2022 in Denver, Colorado.  ETHDenver is the largest and longest running Ethereum Blockchain event in the world with over 15,000 cryptocurrency enthusiasts attending the week-long meet.  (Photo by Michael Ciaglo/Getty Images)

Ethereum co-founder Vitalik Buterin speaks at ETHDenver on February 18, 2022 in Denver, Colorado. (Photo by Michael Ciaglo/Getty Images)

At the same time the protocol effectively removes its proof-of-work consensus layer, the rest of the Ethereum blockchain – also known as the execution layer – will merge with a new proof-of-stake layer called the Beacon string.

Bitwise CIO Matt Hougan suggested that the merger is “like going from gasoline to electric on a car, changing how Ethereum’s main engine works.”

“They’re replacing wheels as it goes,” Kevin Zhou, co-founder of hedge fund Galois Capital, who is “net short” on the merger, pointed out.

“It’s kind of like a Y2K moment, where not everyone is 100% sure what’s going to happen,” Dorman d’Arca said of the merge. “Maybe it’s a non-factor like the year 2000, maybe it’s more important than that.”

Immediately, the power consumption of Ethereum will experience a sharp drop after the merger.

By eliminating mining, Ethereum Foundation projections and analysts see the power consumption of the protocols – which currently requires as much power as Finland — reduction of 99.5%.

Optimistic the merger will improve Ethereum’s long-term value, Dorman d’Arca is also quick to suggest that the anticipation of immediate appreciation in value could dash market expectations.

“At the end of the day, the event itself won’t be that big from a financial standpoint,” Dorman said. “It’s really in 6 and 12 months that we will see the effects.”

When will the merger be complete?

The penultimate leg of the merger, known as Bellatrix, begins on September 6 and ends between September 10 and September 20 once its final leg, known as Paris, is launched.

The timing in the September 10-20 window depends on when Ethereum reaches its Total Accumulated Difficulty, or TTD, which lead Ethereum developer Danny Ryan has predicted will mean approximately 12:13 a.m. New York time on September 15.

According to the Ethereum Foundationthe final stage will reach “finality” approximately 12 minutes after TTD is reached, which, if all goes well, will be the time it takes for the protocol’s first block of transactions to be created and registered by the Beacon Chain validators.

As we highlighted earlier this monththese dates also fall between the next U.S. inflation report and the Federal Reserve’s next interest rate decision, leaving cryptocurrency traders poised for significant market volatility around of the merger.

What does it mean when the merge occurs?

For Michael Anderson, co-founder of crypto-focused venture capital firm Framework Ventures, the risks of the merger going wrong are minimal given his past “dress rehearsal” tests.

Crypto infrastructure providers such as Alchemy, which power NFT marketplaces and DeFi applications on Ethereum, have “worked hand-in-hand with the Ethereum Foundation,” said Mihir Chitalia, Alchemy’s client product engineer.

However, crypto trading platforms such as Coinbase (PIECE OF MONEY) and Binance don’t take any risks.

People watch the logo of Coinbase Global Inc, the largest U.S. cryptocurrency exchange, display on the Nasdaq MarketSite jumbotron in Times Square in New York, U.S., April 14, 2021. REUTERS/Shannon Stapleton

People watch the logo of Coinbase Global Inc, the largest U.S. cryptocurrency exchange, display on the Nasdaq MarketSite jumbotron in Times Square in New York, U.S., April 14, 2021. REUTERS/Shannon Stapleton

The two announced that they would suspend deposits and withdrawals for ether and other ERC-20 tokens, such as Shiba Inu (SHIB-USD) coin, around the merger while a number of exchanges offer merger-specific trading products and discounts.

At least part of the reason for these operational pauses comes down not just to what’s changing in the Ethereum merger, but what its biggest losers could do according to Thomas Dunleavy, senior research analyst at Messari.

“Around this time period there could be a lot of confusion around who owns what,” Dunleavy said.

A cohort of Ethereum miners led by Chandler Guo are not happy to lose their mining revenues. Ethereum mining generated $19 billion last year, says a Messari report.

These miners are attempting to fork Ethereum’s codebase to continue mining a proof-of-work version of its blockchain. Futures trading on the acquired exchange Circle Poloniex set the value of the token offered by Guo – ETHW – at around 3% of the relative value of ether against the dollar.

As Dunleavy put it: “Anyone can create a copy of an existing blockchain just by running a full node and downloading the chain’s history, but if people don’t recognize or use the forked string, then all assets in it are worthless.”

“[Exchanges] I just don’t want to risk anything going wrong,” said Zhou de Galois.

What happens to ETH?

Over the past week, Ethereum has achieved a market capitalization that has fluctuated between $187-228 billionplus a supplement $36 billion in total value locked. This puts the money from the merger on par with publicly traded companies like Wells Fargo (WFC), Walt Disney (SAY) and Toyota (MT).

While cryptocurrencies rebounded along with the broader market, ether’s gains since the start of July have significantly outpaced bitcoin, with ether rising around 50% over the period while bitcoin increased by 7%. Much of the relative momentum is coming from optimism around the merger, according to all the market sources we’ve spoken to.

“We’re an industry that likes to jump from story to story,” Framework’s Anderson said. “And that’s just the story of the day right now, and [it’s] exciting because we’ve only had a negative feeling for the last two months.”

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