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Eco-friendly Ethereum Merge is a game-changer for institutions

This week, the long-awaited “Ethereum Merge” has finally arrived.

The world’s second-largest cryptocurrency’s new block verification system, which has a market capitalization of $180 billion, has been converted from a ‘proof-of-work’ system to a ‘proof-of-stake’ system. – a decision intended to cut off the 99% utilization power supply.

Under the new system, Ethereum transactions are no longer validated by cryptographic “miners” who solve complex mathematical puzzles, but rather by owners of existing tokens who stake a share of their holdings.

Citywire Selector sister post Citywire France interviewed Benjamin Dean, Head of Digital Assets at WisdomTree, about the development.

Citywire France: Why is this transition important for the Ethereum network?

Benjamin Dean: This is important because it proves that Ethereum developers are capable of meeting the milestones of their network’s ambitious roadmap. The transition occurs while the network is still active and running at full speed.

If something goes wrong and causes the system to crash, that’s a huge problem for a network like Ethereum, where a lot of economic activity takes place. [In May 2022, 2,970 decentralised applications were identified on the network]. But the developers have shown they can deliver. Ethereum has a long track record of success, and the merger is just one of them.

What are the risks associated with this operation?

There are several risks. The main one was that a bug was located at the protocol level. The good news is that many tests have been carried out upstream and have been for months. The risk is therefore low, but not zero.

Another risk is compatibility with applications built around and based on the Ethereum blockchain. It is understood that these applications can continue to function without problems. So far, everything looks good there.

The last risk concerns centralized organisations, such as trading platforms, hedge funds or even institutional investors, who have no control over the process. No problem seems to have arisen on this side either.

Will the merger solve all of Ethereum’s problems?

These are called growing pains or problems. The latter is the concept that problems arise as something develops, but it also means the project is successful. Gas fees, which are the price of transactions on the Ethereum blockchain, have become excessive and are still a barrier to mass adoption. Moving to a proof-of-stake protocol won’t change that.

Are we heading for more mass adoption because the ether is now “greener”?

I spend a lot of time with institutional investors, hedge funds, family offices and small private banks. Previously, most of my discussions about our crypto ETPs ended with “Our ESG filters prevent us from investing in bitcoin”. Even if they wanted to, they couldn’t.

But the tide is turning. Many of them came back to tell me that they had heard about proof of stake and lower power consumption. The merger could be a game-changer for them. They are now considering the possibility of occupying a space that they categorically refused and sought to understand. My discussions today are very different from those of a year ago.

So institutional investors are opening up a little more to cryptos?

They understood that it was not just about bitcoin. It remains the first of the crypto-currencies but only represents 40% of the market: if you focus on it, you miss most of the sector.

It was something very surprising for many of them. The space is growing and diversifying, and if they don’t pay attention to other cryptos, they risk missing out on opportunities for themselves and their customers.

Will the merger impact the price of Ether?

The price is an expression of future expectations regarding the value of the network. We have seen price volatility over the past few months, which expresses uncertainty about the outcome of the merger.

In an alternate reality, where the Ethereum merger did not go well and brought the network to a halt, I would expect this to be reflected in the price. It seems that everything has gone well so far, as evidenced by the weak movements.

What’s next for Ethereum?

For some time now, it has been possible to stack your ethers to generate a return. But the concern is the same as the Hotel California: you can stack, but you can’t leave.

Once your ethers are stacked, you can no longer withdraw them. In the coming months, an update will correct this problem. This will be another game changer, especially for clients of management companies like WisdomTree.