Notes 8/5: Blackrock and Coinbase, A New Ethereum Chain

Blackrock, the world’s biggest asset manager, announced a partnership with Coinbase yesterday that enables the former’s institutional customers to purchase, trade, and custody cryptocurrencies at the latter exchange using Aladdin – the software solution for managers at Blackrock. Blackrock, as I mentioned earlier, is the world’s biggest asset manager with over $9 trillion assets under management.

Coinbase share prices, which have been hammered by the crypto winter this year, jumped on the news. A possible explanation might be investor enthusiasm at the prospect of more business for Coinbase from institutional investors. But the current downdraft in crypto markets might make it difficult to sell crypto as a viable asset class to them.

CNBC attributes the jump in Coinbase prices to meme stock investors while Barrons says the price increase might be the result of a short squeeze. There is “no good reason” for a jump in Coinbase share prices especially since trading volumes on the exchange – an indicator of revenue prospects from transaction fees – remain the same, said Dan Dolev, analyst at Mizuho Securities.

Meanwhile, the promise of institutional funds making their way into crypto does not seem to have done much for bitcoin price. The cryptocurrency edged higher to $23,400 but has backed down to trading at $22,965.40, a roughly 1.5% increase from its price 24 hours ago.

There’s A New Chain In Town

Ethereum’s Merge – the blockchain’s move from an energy intensive Proof of Work (PoW) consensus mechanism to Proof of Stake (PoS) – is supposed to be next big catalyzing event in the crypto ecosystem.

Various prognostications and developments regarding the event have already begun surfacing. Will Ethereum’s Ether overtake Bitcoin in market capitalization and become the world’s most valuable cryptocurrency? (My take: No). Was the recent jump in Ethereum Classic’s price a sign of miner migration to the chain after the Merge? The Ethereum Classic chain, by the way, has minimal activity on its platform and recently imported Ethereum’s upgrades from last year onto its platform. One of the changes in that upgrade was the difficulty bomb (more on that below).

If you’ve followed crypto news for some time now, these theories are not new. Possibly, the only mildly interesting development has been the announcement of a new chain that will continue to use PoW to mine ether.

Analysts have estimated that the Merge will put miners who use ASIC machines for cryptocurrencies that still use PoW for consensus out of business. They could shift to mining other, more lucrative cryptocurrencies like Bitcoin. But that possibility, it seems, is not being considered.

As the reasoning goes, a new chain will help them survive and recoup their investment. This chain will be called EthereumPOW and will have a new token ETHW that will be listed in cryptocurrency markets.   

Of course, there is no guarantee that the new chain will be successful or will even last for a long time. After last year’s London upgrade, the consensus algorithm has a difficulty bomb that will be activated after the shift. The bomb will increase Ethereum PoW algorithm’s difficulty level and make it harder to mine ether with time, making it almost inevitable for miners to shift to a PoS system.

There is very little substance about the new chain’s utility on the EthereumPOW website. It is full of crypto buzzwords that mean little beyond the ecosystem’s immediate bubble [Fairer Financial System or Internet of Assets, anyone?].

Plus, most applications and exchanges on the current Ethereum chain have already pledged to move to the Proof of Stake (PoS) system that will become functional after the Merge. This means that EthereumPoW’s death is almost certain in the coming years as miners transition to PoS.

So, what’s the point of announcing a new chain? In the short term, it will serve as a backup to ETH2 after its move to a PoS consensus mechanism. It will also  enable miners to make bank by selling worthless ETHPOW tokens. Once the token is listed on a cryptocurrency exchange, speculators and miners can dump it in the subsequent price bump and mint profits. Plus, a new chain or hard fork is always good news for the crypto ecosystem because it increases the overall market cap of the crypto ecosystem.

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