Ethereum’s Merge – a transition from the Proof of Work consensus mechanism to Proof of Stake – was finalized at 6:59 AM this morning. The Merge has been in the making for many years and was implemented by nine teams and more than 100 developers spread out across the globe. As has been repeated many times across multiple media platforms, the event cuts down the blockchain’s energy use by more than 99%.
The event had its own quirks. In one of the first transactions to occur on the new chain, someone paid 36 ETH (roughly $57,000) to mint a, you guessed it, NFT with a panda face.
A validator was penalized 32ETH – the amount required to become a validator on Ethereum’s network – for making incorrect attestations, a vote that testifies to the validity of a block’s transactions. Ether’s supply has declined by 150 ETH since the Merge, according to reports while its hash rate, or the amount of computing resources devoted to the task, remained constant during the event.
The Merge’s Problems
Even as The Merge solves Ethereum’s massive energy consumption problems, it brings problems of its own. For example, the PoS system encourages concentration of decision-making powers related to Ethereum among the biggest token holders of ether – its native token. The Merge could further help consolidate their status as venues for staking. For example, Nexo, a crypto lending platform, is reported to have moved 450,000 ether to Binance this morning while ethereum’s transition was going on.
As of this writing, 11.4% of ether’s total supply has been staked. Around four parties – a list that includes top exchanges like Coinbase and Binance – have staked the maximum amounts. A centralization resulting from the Merge could also potentially convert ether into a security and inflate transaction and compliance costs for apps on the ethereum blockchain.
Finally, the Merge, at least in its initial form, does not solve key operational problems on Ethereum. These include network congestion and high transaction fees. Developers plan to tackle those problems in the coming year but there is no timeframe.
While it has been hyped up in the media and among investors, the actual Merge event did not leave much of a mark on ether’s price. It remained mostly unchanged from yesterday because traders seem to have booked their profits from the event earlier. Meanwhile, the price of ETHW, the fork that will continue Ethereum’s Proof of Work chain, rose to a high of almost $60.68 this morning after major mining pools announced support for the chain.
Ether As a TradFi Asset
TradFi, DeFi, CeFi…the acronyms in crypto are many and meant to distinguish it from traditional finance and asset classes. But those differences have blurred this year, what with crypto’s own version of a financial crisis. Ethereum’s Merge might have made those distinctions even more faint.
A Bloomberg report yesterday outlined how the shift to PoS for ether will make it a valuable asset for Wall Street because it will convert the token into an instrument that provides predictable and periodic yields to investors. Some estimates peg ether’s yield at double its current range of between 3% to 4% after the merge. Others say it might hover around 5.2%. Regardless of the final figure, regular interest payments, like those made by bonds and certificates of deposits, should make ether attractive to Wall Street.
Can Ether Become a Reliable Asset for Wall Street?
Like everything else crypto, there are many unresolved questions about the marketing of ether as a yield asset.
The first one is the most basic one. Can the ether ecosystem, in its current form, pay the promised yield?
To a large extent, yields for the cryptocurrency will be determined by its price. Its record there does not inspire much confidence. Like its counterparts, ether has clocked in a volatile ride, one with wild price swings, in crypto markets.
The effect of those swings could have been ameliorated with liquidity and a well-developed derivatives market. But the market for ether derivatives is still nascent.
Ethereum developers say a decline in ether issuance coupled with demand for the asset will help sustain yields. However, ether demand is not guaranteed, especially with the current macro-economic environment which encourages a risk-off approach.
An example is Coinbase, one of the world’s biggest cryptocurrency exchanges. Its staking revenue declined by 16% to $68.4 million in the latest quarter as a result of the economic downturn.
There’s also the question of trust and accountability. Treasury bonds are considered safe haven for investors because they have a liquid market and are backed by the United States government, the world’s most trustworthy institution. Crypto and decentralized finance (DeFi) institutions do not engender much trust among investors.
Besides the problems of prevalent scams, hacks, and crashes to their systems, crypto institutions also have logistical problems. How does one assign accountability in DeFi applications? Are decentralized autonomous organizations (DAO) and oracles capable of stopping a run on assets? Available research does not inspire much confidence.
The Regulation Endgame
These are just a couple of questions but there are many more. All of them lead us back to regulation. Investors in Wall Street are protected because it is ringed with regulations. That is not the case with cryptocurrencies or DeFi. Many researchers and governments are crafting regulations. But that will take time. As will important developments in crypto, such as the Merge – which, contrary to reports, does not have a completion date yet.
Credit Card Regulation: An Opening for Crypto?
While crypto regulation may be some time away, the credit card industry is feeling the heat. A consortium of retailers, one that includes big companies like Walmart and Target and small outfits, has amped up its support for the Credit Card Competition Act 2022 introduced by Dick Durbin, the same legislator responsible for the Durbin Amendment that capped debit card fees, this year.
The legislation aims to open the industry, dominated by Visa and Mastercard, to competition by making it mandatory for banks that issue the cards to offer, at least, two competing networks to consumers.
Currently, consumers have little to no choice available to them. I looked at the cards in my wallet and all of them, minus one Discover exception, use the Mastercard network.
Their dominance of the payments industry has helped the two giants mint fat profits. The current inflation has further bulked up their coffers. Doug Cantor, General Counsel for NACS – an organization that represents convenience stores, told the BBC that their payments to the credit card industry increased by 25% in 2021 as compared to the previous year and are already up by 30% in 2022.
I’ve written about this before. As payments become expensive and subject to political whims, crypto’s rails, which span borders and systems, could become a cheaper and more efficient alternative. Of course, many things need to happen – lower fees, faster transaction processing time, and more apps – need to happen before that vision becomes a reality.