By Alex Tapscott
The Ethereum Network (known as Mainnet), which until now has used the energy-intensive proof-of-work consensus mechanism to validate transactions and secure the Ethereum blockchain, has officially merged with the proof-of-stake “beacon chain,” becoming a proof-of-stake network. This is a remarkable achievement for the Ethereum community and a watershed moment for Web3. Ethereum is a $200 billion juggernaut with millions of users, thousands of supported assets, and billions of dollars in transactions daily. As we wrote before:
The Merge is roughly the equivalent of swapping out the jet engines of a 747 for all electric motors mid trans-Atlantic flight without changing the flight plan, upsetting the drink cart or pausing the in-flight entertainment system.
Naturally, miners who earn billions a year from proof of work (mining rewards last month were over $600 million) are not happy. This has led to months of speculation that the Ethereum network will ‘fork’ at the merge into two chains- one that adopts proof-of-stake and another that maintains the existing proof-of-work consensus mechanism. The group backing the proof of work ETH (known as ETHW) have signaled they will launch their mainnet within a day of the merge and as of writing, the ETHW token is being priced on FTX, a cryptocurrency exchange, at around $20, implying a value of approximately 1.5-2.0% of Ethereum.
With this fork, Ethereum-based assets, such as stablecoins, governance tokens, digital art (NFTs) and all other tokens, could theoretically exist on both chains. In reality, it will be up to the communities of developers and users who’ve built and who use those products to decide which chain to adopt. Most key stakeholders have signalled they will go with the proof-of-stake chain. This includes stablecoin issuers like Circle, NFT marketplaces like OpenSea, NFT platform Yuga Labs, creator of the Bored Ape Yacht Club NFT community, node operators like Infura (who we spoke to on a recent episode of DeFi Decoded) and many more. The small relative value being ascribed to ETHW suggests the market doesn't see it as a viable alternative.
What’s the investment opportunity?
We believe the Proof of Stake Ethereum fork is likely to win out. So, from an investment perspective, the merge could impact the supply and demand dynamics of Ethereum, which could in turn be good for the price of ETH. While the rate of inflation (meaning new ETH that gets created) will not decline, at least in the short-term, it’s very likely those who stake ETH will be more likely to hold on and not sell than miners. Mining requires capital investments in equipment and can sometimes have high energy costs. To fund their operations, miners sell a large part of the ETH they earn into the market. Stakers will not have any of those demands. They may decide to sell to earn a return in fiat, but it’s more likely they’ll retain the new ETH and re-stake it. This is roughly the same as implementing a dividend reinvestment plan (DRIP) for a stock.
Also, if miners and others go a different route and decide to continue on with a proof-of-work version of Ethereum, holders could benefit. The strange alchemy of forks sometimes leads to a ‘breakup’ value worth more than the sum of the parts. Holders might find themselves with ETH worth ‘X’ – the same as before the merge – plus another token worth…something (roughly $20 as of writing). Also, miners have turned their attention to other proof-of-work blockchains where they can still be useful, including Ethereum Classic and Ravencoin, leading to those coins outperforming in the short term, though it remains to be seen how this will play out over time.
What’s the big picture opportunity?
Big picture, The Merge is good for Ethereum users, developers, cryptoasset investors, and the broader ecosystem. It will, by some estimates, reduce the carbon footprint of Ethereum by 99%. It will clear the deck for the Ethereum core developers to focus on other network upgrades including improvements to scaling, security and usability. It will remove a major overhang that has been a source of angst for investors, users and other community members since Ethereum’s founding. It will solidify proof-of-stake as one of the two primary consensus mechanisms for blockchains, along with proof-of-work which we continue to believe will play a critical role. It will give certainty to the growing number of enterprises who use Ethereum and the Layer2 platforms that are helping Ethereum scale (most recently, Starbucks, which announced a major push into Web3). Enterprise adoption of Ethereum and Web3 is just getting started. The spark has been set and the move to proof-of-stake will be an accelerant.
