It’s going to be a big week for the crypto market.
On Thursday, the Ethereum system upgrade dubbed “the Merge” will occur, moving one of the largest and most important blockchains in the world away from its current proof-of-work setup to a proof-of-stake model. The technical change brings with it a wealth of questions, including what sort of precedent it sets for rival blockchains that are sticking to their proof-of-work guns.
The Merge is often discussed in the context of the anticipated changes to the environmental weight of Ethereum — proof-of-stake doesn’t require the same level of compute inputs, meaning the blockchain won’t need to marshal a Bitcoin-like fleet of computers to keep its network running. That’s good.
But if you were hoping for that much more from the upgrade, hang tight. Other goodies might be a bit farther down the line.
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Reading through the analyst, investor and founder perspectives that we collected last week concerning expectations for the upcoming Merge changed my perspective on the event. Given how long the Merge has been in the offing, you might expect that it will swoop in and de-kink every part of the Ethereum blockchain. It will not.
Instead, what it appears set to unleash is more of a foundation for future change than an utterly new present. Naturally, with the scale of Ethereum — it is perhaps the most popular blockchain for developers to build on and on top of today — it was maybe a bit silly to expect the world from a single upgrade cycle.
Merging
The tradeoff between environmental impact and decentralization is an interesting one.
On one hand, the upcoming Ethereum Merge should lower its huge compute, and therefore electricity needs. On the other, critics argue that proof-of-stake is inherently less decentralized than proof-of-work; I suppose you can choose between an aristocracy of ETH-stakers post-Merge or the various Bitcoin-mining giants and pools out there. I don’t care much either way, but hot damn is it a religious conflict in crypto land.
All that’s to say that the impact of the Ethereum Merge is uncertain; it’s up for spirited debate. So when we collect opinions below, bear in mind that there are certainly others out there who would disagree. Still, it’s worth considering informed opinions to guide our thinking.
The first somewhat surprising note is that the Merge won’t lower the cost of transacting on the Ethereum blockchain. Sandeep Nailwal, a managing partner at Symbolic Capital and co-founder of Polygon, told TechCrunch the following:
One big misconception about the Merge is that it’s going to lower gas fees on Ethereum. This isn’t the case — it will lower the network’s carbon footprint by nearly 100% but won’t get rid of the high gas fees that have been a big issue for the ecosystem.
That perspective was echoed by James Key, the CEO and founder of Autonomy Network:
Most people don’t realize that the Merge won’t actually increase the scalability (cheaper transaction fees) of Ethereum immediately — this is the first stage of many and the scalability will come in later upgrades.
So if you were hoping to be able to mint that NFT onto the Ethereum chain for a few cents come the weekend … don’t get your hopes up.
However, the Merge will unlock other possibilities. By incentivizing staking more generally, staking — the locking up of a particular crypto asset in return for yield — could see something akin to a boom. Staking is somewhat analogous to buying bonds — you lock up (stake) your currency (USD) in a particular asset (blockchain) and are rewarded with a return.
Why will staking wind up a winner from the Merge? Jupiter Zheng, the head of research at HashKey Capital, has a good take:
A few sectors may benefit immediately after the Merge, namely scalability solutions and liquidity staking services. In regard to liquidity staking, we predict that staking yield will rise (meaning validators will see increased transaction fees and maximal extractable value). This in turn may increase user participation and broaden the market potential for liquid staking services.
That is good news for ETH bulls — folks who have a portion of their net worth in Ethereum tokens already. But what will the Merge unlock for nocoiners and the yet-to-be-coined? There’s an argument that the Merge will in fact help with crypto adoption more generally. Per Mihailo Bjelic, the co-founder of Polygon:
To be frank, adoption of web3 startups will mainly be driven and determined by the same factors as in the Web 2.0 world — product-market fit and commitment of the founders. That being said, with the Merge and introduction of fast and efficient development platforms built on top of Ethereum, web3 infrastructure is pretty much ready for mass adoption and will additionally boost the adoption for web3 startups in general.
To summarize, the Merge will be good for cutting power demand and boosting the value of staking. And while it won’t solve my largest beef with the blockchain world more generally — slow, expensive transactions — it could set the foundation for a more frictionless future in web3. Cheers to that, if it happens.
TechCrunch will be all over the Merge this week, so strap in and stick with us. It’s going to be a busy few days.