Q9 Markets | Achieving Consensus
16 September 2022
Q9 Capital: www.q9capital.com
Achieving Consensus
· ETH Merge completed, opening new era for the blockchain
· Red-hot CPI report rocks markets, cements odds for Fed hike
· What’s next on the Ethereum roadmap?
The Ethereum Merge is done, with the historic change going live on Thursday without any hiccups. The milestone, which has been promised by developers for many years, was hailed as one of the most significant moments in crypto’s short history.
Ethereum’s transition from proof-of-work to proof-of-stake was successfully completed at 6:42 UTC at block 1553739 where the protocol underwent the merging of the Beacon Chain with the Main Chain.
The proof-of-stake mechanism radically changes how the Ethereum blockchain works. It eliminates the need for mining new blocks as the network is now secured using staked ETH and validators. The upgrade casts aside the miners who had previously secured the blockchain, immediately causing a 99.95% decline in Ethereum’s energy use.
Carrying out this major upgrade to a decentralised protocol without any downtime is a brilliant engineering feat — akin to changing the foundation of a skyscraper while it still remains standing. Ethereum is home to about 3,500 active decentralised apps, ranging from exchanges to games and handling billions of dollars’ worth of crypto.
The long Merge rally however hit a snag mid-week as the latest Consumer Price Index (CPI) report rose 8.3% compared to this time last year — worse than expected and still near four-decade highs. Following the red-hot inflation report, BTC and ETH both fell roughly 10%, while stocks suffered their worst day since June 2020. The higher-than-anticipated inflation numbers renewed concerns that the Fed would implement a third consecutive 0.75-point interest rate hike in September to combat stubborn inflation.
Despite Wednesday’s selloff, BTC and ETH are still trading higher than they were when the Merge began. Since the Ethereum upgrade started a week ago, crypto’s total market cap has retaken the $1tn mark.
ETH/USD and BTC/USD, 3 Months
Source: TradingView
The event has bought renewed attention to crypto with Google searches for “Ethereum Merge” has now spiked to an ATH.
Source: Google Trends
Institutional Adoption
ETHs upgrade is likely to lead to strong institutional adoption of the token. Bank of America predicts the blockchain will emerge as a digital asset category leader, given its economic transition, scalability roadmap, and the vibrant digital economy being built on it.
The notable reduction in energy consumption may also allow some institutional investors to purchase ETH for the first time — those who were barred from buying tokens that run on blockchains that use the PoW consensus mechanism.
The Merge also changed properties of Ether, making it more akin to yield-bearing securities. Staked Ether will generate a return, expected to be around 5.2% after the Merge, according to tracker Staking Rewards. Coupled with an expected net decrease in Ether token supply soon after the update, that should make the coin more attractive to investors.
The ability to stake ETH and generate a higher-quality yield (lower credit and liquidity risk) as a validator or through a staking service rather than on black-box lending/borrowing applications should drive institutional adoption.
Institutional demand for ETH derivatives is also surging — with CME Group just announcing the launch of Ether options. Options are an essential part of trading strategies deployed by institutions, whether that’s to hedge risk or gain exposure to the asset class without having it on their balance sheets.
What’s Next? The Surge, The Verge, The Purge and The Splurge
There’s still much more to come for Ethereum. The Merge was just the first step in the five-part process to bring ETH to its “endgame”.
The end goal would see the network capable of high block frequency and block size as well as the ability to process thousands of transactions per second while remaining sufficiently trustless and censorship-resistant.
2023 is earmarked as the year that Ethereum will implement sharding, an important step in increasing the scalability of the blockchain’s ability to store and access data. The Ethereum Foundation describes sharding as the process of separating a database horizontally to spread the network’s workload. Ethereum will use sharding in synergy with layer-2 rollups by splitting the large amount of data across the network.
This is envisaged to reduce network congestion and increase transactions per second. It’s the decentralised alternative to making a database bigger, alleviating the need for validators to store all of the network’s data, themselves, which would require powerful hardware.
The subsequent steps in Ethereum’s ongoing development following the Merge are set to take place over the next few years.
The verge is the third part of Ethereum’s ongoing roadmap outlined by Buterin. Without getting too technical, this step will involve the introduction of verkle trees, which will optimize data storage and node size.
The Purge will involve removing spare historical data in an effort to alleviate network congestion by purging superfluous data. This will essentially reduce the amount of data needed to be stored by a validator, with Buterin touting this step allows the network to handle around 100,000 transactions per second.
Ethereum has a long technical road map ahead, but it’ll never be complete. There’s never a point where it’s done. The technology will only evolve and get better over time and will continue to innovate and do better things.
In the News…
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· 2022 Global Crypto Adoption Index
· KKR makes piece of PE fund available on public blockchain
· JPMorgan: China’s metaverse-related economy could reach $4tn
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· Starbucks brewing revolutionary Web3 experience for its rewards members
· Investment Giant Fidelity could allow Bitcoin trading on its platform
· Celsius CEO plans to restructure firm to focus on crypto custody
· Mysten Labs raises $300mn from industry heavyweights at $2bn valuation
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