The Ethereum merge to proof of stake is setting up to be one of the most important moments in the history of crypto.
The investing community is bullish on the merge for a few reasons:
- Ethereum will become “ESG friendly” by reducing energy consumption by more than 99%
- Ethereum will become a yield-generating asset for those that wish to stake their holdings to validate transactions
- Ethereum’s monetary policy will change such that new block issuance of ETH could drop below the amount of ETH being burned (EIP 1559) — resulting in 3 Bitcoin halvings at once
Meanwhile, developers, ecosystem entities, and the tech community at large are watching with bated breath to see if a decentralized community of builders can execute on their roadmap (after many delays).
The stakes are incredibly high. But this doesn’t come without risk:
- Ethereum has a decentralized set of developers and engineers — meanwhile, the merge must be coordinated with a number of businesses and ecosystem partners that are critical to how Ethereum and the ancillary markets around Ethereum function. We could see the network fork itself if any major issues were to arise.
- Proof-of-Stake fundamentally relies on circular logic where the largest coin holders of Ethereum will determine the state of the network, and earn the new issuance of ETH as a result. “The rich get richer.” This could centralize ownership of Ethereum over time which centralizes who gets to control the state of the network. Proof-of-work has a similar problem in that the largest miners control more and more of the hash rate over time. That said, proof-of-work has operating costs, forcing miners to sell coins back into the market, which distributes the holder base across a more level playing field over time (the data proves this out).
- If Ethereum stakers are rewarded with a 5-10% yield for staking ETH and validating transactions, this could impact demand for DeFi. If you can earn those yields by staking your ETH, do you need to take on risk locking it up in DeFi or yield farming?
- Regulatory risk. While ETH is seen as a commodity today by the CFTC, it will now become a yield-generating asset for validators. This could be viewed as “dividend payments” and therefore raise issues around securities laws.
The bottom line is this is a big moment for Ethereum and a big moment for crypto at large.
But we should also acknowledge that there are trade-offs to everything. In life. And in crypto.