Notes 9/6: The Merge Boosts Ethereum, Binance Provides A Leg Up To USDC

The Merge – Ethereum’s anticipated transition from an energy-intensive Proof-of-Work (PoW) consensus mechanism to Proof-of-Stake (PoS) continues to move markets in cryptocurrency. The Bellatrix Upgrade, initiated on the Ethereum chain this morning, pushed the price of ether, Ethereum’s native token, up by 5% to $164.37 from its price 24 hours ago. On a weekly basis, the price of ether is up by 10%.

Momentum for the Merge has been building up within the Ethereum and crypto community in the last month. The transition from PoW to PoS is being marketed as a radical change in the world’s second biggest blockchain’s workings. While it dramatically reduces energy consumption, the transition does not represent a significant change in Ethereum’s workings, at least in the short term. It will not make Ethereum scalable or reduce its infamously high transaction fees.

The Merge’s Centralization Problem

The Merge’s proponents say it democratizes the network by reducing the cost of participating in the network to 32 Eth. [At current rates that translates to an investment of $53,259.84]. But the incentives to make that investment remain few since the blockchain’s next iteration will continue to be controlled by large players. Miners will be replaced by Validators in the PoS network. The amount of ether required for staking is fixed at 32 Eth but the number of validator nodes that an entity can run is not fixed. Thus, in a PoS system, you can gain an edge over other validators by running as many nodes as possible.

Binance Auto Converts Stablecoins On Its Platform         

Binance, the world’s biggest crypto exchange by trading volume, announced this morning that it plans to auto-convert existing balances and new deposits for three stablecoins – USD Pax (USDP), Circle’s USD, and TruUSD – to its own stablecoin BinanceUSD (BUSD) on a 1:1 basis. it also plans to stop trading for crypto pairs, including those for Bitcoin, involving the stablecoins. Users of the platform will still be able to deposit and withdraw from the stablecoins. The exchange said its move was aimed at “enhancing liquidity and capital efficiency”.

USDC Gains

At first glance, Binance’s announcement might seem like an attempt to hijack market share from USDC. BUSD is the world’s third biggest stablecoin after Tether and USDC. That ranking, however, belies its relatively low market capitalization ($19.4 billion, as of this writing) as compared to USDC and Tether ($51.7 billion and $67.5 billion respectively). In fact, the news is being spun as another fight in the crypto ecosystem.

Binance’s move sets the stage for the crypto ecosystem’s future contours. The stablecoins benefit from the change because it streamlines user experience and eliminates redundant steps – users will not need to convert their coins to either BUSD or USDT to begin trades – from the process. The elimination of trading pairs involving the stablecoins does reduce their liquidity in the near term but it will benefit them in the future.

This is especially the case for USDC. The Circle-backed stablecoin is fast replacing Tether as one of the most portable coins in crypto. A streamlined user experience at Binance will enable traders to quickly trade in and out of the platform using USDC and move onto other trading venues.

No wonder then, Circle CEO Jeremy Allaire tweeted that “converged dollar books” (streamlined order books without too many trading pairs, in simple words) are a good development for USDC. On the other hand, it represents more loss of market share for Tether .   

As with crypto maneuvers, however, this one is clumsily and arbitrarily executed. Can crypto exchanges randomly “auto-convert” one digital currency to another? What rights do owners of such tokens have during the conversion process? I checked the Binance website and its Terms of Use and could not find much detail.

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