Mail merge

Ethereum Merger on September 19: Risks and Opportunities

Hello and welcome to Protocol Fintech. This Wednesday: Keeping the merger on track, Gensler’s stance on crypto regulation, and Stripe’s markdown.

out of the chain

I know credit cards have loyalty programs, but this is getting ridiculous. Ryan Deffenbaugh pointed to a handful of tweets showing a corporate card rivalry heating up from coast to coast. “It’s 1 a.m. in Santa Monica and I’m listening to two guys on the street yelling about Brex vs. Ramp,” Anduril’s Luke Metro reported. I was prepared to attribute this to an LA Tech Week incident, but then Will Manidis from ScienceIO shared this: “The men were going to war and now they’re arguing if Brex or Ramp gives you better perks at Sweetgreen NoMad.” I’ll let you guess which startup-friendly card is what character “French Dispatch”.

—Owen Thomas (E-mail | Twitter)

Keeping the merger on track

In crypto, it’s simply known as “the merger,” the key milestone when a major industry player transitions to a new transaction verification system.

On September 19, Ethereum is set to make this highly anticipated transition from its original proof-of-work system to a new layer based on a proof-of-stake mechanism.

The switch will supposedly transform Ethereum into a more scalable, secure, and environmentally friendly network. But it involves a complex process that experts say is fraught with risk, potentially causing serious disruptions in crypto’s second-largest ecosystem.

There is fear around the merger, but also excitement. Sara Xi, chief product officer of Prime Trust, compares the merger to moving goods from one train to another while the two are moving.

  • The change will likely bolster Ethereum’s credibility as a more environmentally friendly ecosystem than, say, bitcoin. The blockchain is abandoning a “mining” system long denounced for its excessive energy consumption. Ethereum says the merger will reduce grid energy consumption by 99.95%.
  • The merger should also strengthen the value and market position of Ether, Ethereum’s native cryptocurrency, according to Mike Fasanello, chief compliance officer of LVL. Even after the crypto market crash, ether currently has a market capitalization of nearly $200 billion, the second most valuable cryptocurrency after bitcoin, which is worth $410 billion.
  • Ethereum, which also supports other cryptocurrencies, plays a vital role in crypto as the industry-dominant blockchain for smart contracts. The merger could cement its position, Xi said.

A big concern is scams. The Ethereum Foundation is concerned that scammers are trying to trick investors into thinking they need to take action to upgrade to “ETH2” — a shorthand used by developers to refer to the new network — or swap their current tokens for new ones.

  • “There is no ‘ETH2’ token, and you don’t have to do anything more to keep your funds safe”, ethereum said.

Another key question: what happens to Ethereum miners? Andy Long, CEO of White Rock Management, said that for miners, the merger means “the end of the super normal returns they have enjoyed of late.”

  • The Ethereum proof-of-work network, known as Mainnet, relied on miners to validate blockchain transactions. Ethereum’s proof-of-stake layer, known as Beacon Chain, will rely on constructors, which aggregate transactions, and validators, whose ability to select and validate transaction blocks depends on the amount of cryptocurrency they own.
  • There is speculation that Ethereum miners will choose to continue on their own, leading to the creation of a fork, similar to the one that created Ethereum Classic in 2016. This could create confusion and potentially damage the value of Ether.

Technical issues could also hurt the rollout of the merger and damage Ethereum’s reputation with investors and smart contract developers. But there are still plenty of reasons for optimism, Xi said, that “trains aren’t crashing.” Many roll on the merger.

—Benjamin Pimentel (E-mail | Twitter)

A version of this story first appeared on Protocol.com. Read it here.

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on the money

Stripe was depreciated by another big investor. A regulatory filing reported by Axios showed that the T. Rowe Price Global Technology Index Fund marked Stripe shares at $23.04 as of June 30, which is down 64% from the end of 2021. Stripe had already cut its internal valuation used for employee stock compensation this summer.

Celsius is suing a former fund manager (who previously sued Celsius). The crypto lender, which filed for bankruptcy in July, accused KeyFi incompetent asset management. KeyFi had sued Celsius last month, alleging that it had not been paid for its work and that Celsius mishandled client funds.

President Biden is expected to release a plan for student loan debt. The Washington Post reports that Biden is considering forgiving some borrowers $10,000 while extending the pause on payments. The management of SoFi, which makes private loans and refinances federal loans, said recently the company assumes the break will be extended.

Mt. Gox payouts are getting closer, and it could cause crypto chaos. While it’s still unclear how much bitcoin may hit the market (and when) after the failing exchange’s trustee delivers the recovered crypto to creditors, the influx of bitcoin could swing the price of cryptocurrency in an already trying year for digital assets.

Fintech company OG has been acquired in a $1.6 billion privatization deal. Computer Services Inc., or CSI, a 57-year-old provider of payment processing and regulatory compliance services, has been bought by private equity firms Centerbridge Partners and Bridgeport Partners.

Brian Armstrong said Coinbase will continue to cut costs as the crypto winter drags on. Coinbase CEO said CNBC as the company seeks to reduce its fixed costs and continue to shift its revenue mix towards subscriptions and services.

Understood

Sam Bankman Fried doesn’t worry about losing $75 million to prop up Voyager before it files for bankruptcy. “We want to do what we can to stem the contagion, and sometimes that means trying to help where that’s not enough,” he Told The Wall Street Journal. “If that never happened, I would feel like we were way too conservative.”

SECOND Chair Gary Gensler has a message for crypto: “The SEC will serve as a cop on the beat.” In a WSJ editorial, he said investor protection should “come standard,” like seat belts in cars.

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Thanks for reading – see you tomorrow!