Q9 Markets | High Stakes

9 September 2022

Q9 Capital: www.q9capital.com

High Stakes

• Final countdown to the Merge begins
• Cardano’s own upgrade scheduled for end of Sept
• ETH 2.0 already largest protocol for staking

With less than 6 days until the Merge, Ethereum’s dominant ascent continues with the ETH/BTC ratio reaching 0.085 — the highest level since December. ETH’s final hard fork before the Merge was activated on Tuesday, marking the beginning of its historical transition from proof-of-work (PoW) to proof-of-stake (PoS). The upgrade is on track to go live on Sept 14th or 15th.

ETH/BTC Ratio, 1 Year

Source: TradingView

The Ethereum Merge next week will…

• Eliminate roughly $18.7bn of daily sell pressure from miners who are selling rewards to fund their operations
• Reduce net issuance of ETH by 90%
• Start paying ETH stakers 6–10% APR for participating in network security
• Reduce electricity usage on the network by 99.95% by relying on validators instead of miners to process the blockchain

With an impeding upgrade of its own, Cardano (ADA) has leap-frogged XRP to become the seventh largest crypto by market cap — reaching $17bn. Charles Hoskinson announced that ADA’s Vasil hard fork will take place on Set 22nd.

Reaching Consensus

The imminent upgrade to the Ethereum blockchain is an enormous undertaking and requires consensus from a large decentralised community. There are about 400,000 validators on the network, which hosts 200 million unique addresses and facilitates around 1mn transactions a day. Most of the DeFi and stablecoin world is built on Ethereum.

Here is a timeline of the final steps to reaching the Merge:

Staking Your Claim

By moving to PoS, Ethereum’s miners will no longer get rewarded with ETH to mint new blocks. Instead, anyone holding Ethereum can now stake their ETH — that means locking the coins in order to help run the blockchain and maintain its security, in return for a yield.

Staking is the act of depositing 32 ETH to activate validator software. Validators are responsible for storing data, processing transactions, and adding new blocks to the blockchain (rather than miners). This will keep Ethereum secure for everyone and earn stakers new ETH in the process.

Today already 11% of outstanding ETH is staked, earning returns that can vary from 5% to 13%. The total amount staked has now surpassed $30bn worth of Ether on the 2.0 blockchain, making it the biggest PoS blockchain by value staked before even replacing ETH 1.0.

Source: Chainalysis

In order to stake ETH, some investors have staked directly by setting up their own validator nodes, which requires specialised software, hardware and a minimum of 32 Ether. Others have staked by sending Ethereum to a staking pool — similar to a mining pool, staking pools allow users to pool their resources, increase their chances of being selected to propose a new block, and share the rewards amongst themselves.

Many leading industry firms are turning to Ethereum staking. Data shows that the number of wallets staking $1mn or more worth of Ether has been steadily increasing.

Source: Chainalysis

Comparison of Staking Options

There is no one-size-fits-all solution for staking, and each is unique. Here is a comparison of some of the risks, rewards and requirements of the different ways you can stake:

The stakes are high for the Merge. Shifting an entire ecosystem simultaneously without a hitch poses risks, and a prolonged system downtime could be catastrophic. There are also other short-term risks about whether some vested interests such as ETH miners will baulk at the Merge and create a hard fork in the chain, leaving one version based on Proof-of-Work and a new one using Proof-of-Stake.

But without a drastic change to the protocol, Ethereum could get left behind. The new consensus mechanism also presents many benefits around security, access, the environment, democratisation, speed and additional staked income.

The network will get stronger against attacks as more ETH is staked, as it then requires more ETH to control a majority of the network. Stakers won’t need energy-intensive computers to participate in a proof-of-stake system — just a home computer or smartphone. And it becomes more democratic: any user with any amount of ETH can help secure the network and earn rewards in the process.

The stakes may be high, but so are the rewards.

In the News…

• Binance will convert users’ USDC into its own stablecoin BUSD
• UK elects crypto-friendly Liz Truss as new prime minister
• Poolin, one of the world’s biggest Bitcoin mining pools, acknowledges liquidity issues
• Animoca Brands confirms $110mn funding deal with Temasek, Boyu and CGV
• Singapore’s biggest bank DBS backs crypto despite market slump
• Bank of Russia agrees to legalize crypto for cross-border payments
• Ethereum Name Service overtakes Bored Ape Yacht Club in terms of trading
• Former Revolut employees raise $78mn for web3 energy startup
• Bankrupt Voyager Digital to hold asset auction on Sept 13th
• 21Shares’ parent company valued at $2bn after Marshall Wace-led fundraise