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After years of delays, the "Merge" seems all but certain to take
place in September, with the cryptography underlying the
blockchain undergoing a radical shift to a system where the
creation of new ether tokens becomes far less energy-intensive.
"It's an exciting time for the ethereum ecosystem," said Omar
Syed, co-founder of smart contract platform Shardeum. "I think
there will be drama surrounding the Merge, but I don't think
there will be any technical hiccups."
Investors seem to agree, with ether outstripping big brother
bitcoin.
Ether has seen six consecutive weeks of gains, pushing it up
from a 1-1/2-year low of $880 in mid-June to levels closing in
on $2,000, even though it's way off its November 2021 peak of
$4,868.79.
Bitcoin has paled in comparison, rebounding 37% from its June
low to $24,116.
Ether is gnawing away at behemoth bitcoin's market share: it now
accounts for nearly a fifth - 19.7% - of the total crypto market
capitalization of $1.14 trillion, up from less than 14.9% two
months ago, according to CoinMarketCap. Bitcoin's share has
dropped to 40.2% from 44.9% in the same period.
"Crypto is still very tightly coupled, I think when the Merge
successfully completes it could drive up the price of bitcoin as
well," said Alex Miller, CEO of Hiro, which builds developer
tools to create applications for bitcoin.
If ethereum's creators succeed, as is largely expected, it could
be a game-changer for the blockchain, making it cheaper to mine
and easy to adopt for fintech and other crypto apps.
Of course little is assured about the elusive transition, which
has been delayed several times, with developers most recently
axing plans to push the button in June, unnerving investors who
began to fear it might never see the light of day.
The Merge is also is fraught with risk, and the fortunes of the
roughly 122 million ether in circulation, worth about $232
billion, could be at stake should it fail.
If the upgrade doesn't go well, it would "set the entire crypto
world back five or 10 years," Hiro's Miller said.
Graphic: Ether recovers -
https://graphics.reuters.com/
FINTECH-CRYPTO/WEEKLY/
klvykwqwnvg/chart.png
'DIFFICULTY BOMB'
The ethereum blockchain currently uses the energy-intensive
proof-of work (PoW) method of validating blocks, wherein miners
use massive amounts of power to quickly solve complex
computational problems to win newly minted coins.
On a parallel chain, ethereum has been testing a proof-of-stake
(PoS) system that only requires miners to "stake" their coins to
validate transactions and create new blocks. It promises 99.95%
reduction in the blockhain's energy consumption and prepares it
for faster transactions.
Not everyone's happy about the imminent merger of the two
systems - notably ether miners, whose expensive mining rigs will
be rendered obsolete, and can't be used for mining bitcoin
either.
Ether mining has hitherto been more profitable than bitcoin
mining. Ether miners made $18 billion in 2021 versus $17 billion
for bitcoin miners, according to Arcane Research.
Some miners have decided to shift to mining the next best
option, such as the tokens ethereum classic or ravencoin.
At least one miner has declared plans to resist and continue
mining ethereum, raising the spectre of some people keeping the
PoW chain running in its current form even after the merge,
likely competing with the upgraded blockchain.
However, that option has perils.
Ethereum creators have designed a "difficulty bomb" to
exponentially increase mining difficulty in order to discourage
the PoW parallel chain after the Merge.
Moreover, both Tether and USDC - the largest stablecoins - have
thrown their weight behind the Merge, reducing the likelihood of
a wider adoption of the parallel PoW chain.
FROTHY FUTURES
"The likelihood of a long-lasting chain split of Ethereum
following the Merge remains slim," said Alex Thorn, head of
firmwide research at Galaxy Digital.
Nonetheless, at least some investors are preparing for a hard
fork, or a parallel PoW chain, positioning in the derivatives
market indicates.
Ether futures were also trading at premium at $1,905 on the CME
exchange, "reflecting expectations around a proof of work fork,"
said Matthew Sigel, head of digital assets research at fund
manager VanEck.
"But that gap is not so huge so as to think there is extreme
froth," he added.
(Reporting by Medha Singh and Lisa Pauline Mattackal in
Bengaluru; Editing by Vidya Ranganathan and Pravin Char)
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