The Merge: Ethereum transition to Proof-Of-Stake

September 15th, 02:45AM EST – will go down in crypto history as one of the big moments when one of the largest blockchain platform has transitioned from the Proof-Of-Work to Proof-of- stake consensus. With the event being successful – many users expressed their joy on LinkedIn and other platforms. Efforts from developers who were working round the clock to test and ensure the merge was successful and there would be no last-minute glitch did pay-off. Overall, it was a successful event.

Energy consumption post the merge

Ethereum did live up to expectations on the energy consumption front as the energy consumption has not dropped to just 2,600 megawatt hours per year, compared to 23 million megawatt hours before the merge. This is a 99.99% less energy than before the merge was completed. Miners who were the major energy consumers have now moved to the new ETH forked or other networks. Reports suggest most have moved to other networks with the major players on the ETH forked platform experiencing lower hash rates.

ETH price performance

Though enthusiasm before and shortly after the merge pushed Ethereum to $1,643, the momentum was quite short-lived, with prices plummeting fast below the $1,600 mark again. The most awaited event and the build up didn’t live up to investor and speculator expectations.

With ETH out performing BTC in returns over the last couple of weeks in the run-up to the merge, sentiment has now turned bearish as ETH is experiencing selling pressures with $127 mn worth liquidations and currently trading ~$1,460 down $200 from the high post merge. The drop in price or reasons that the Ethereum merge did not result in a upward price movement could e attributed to various factors such as the global bear market with all major cryptocurrencies under-performing, poor CPI inflation data and high interest rates to curtail inflation.

However, one of the major causes is SEC Chair Gary Gensler’s recent statement that proof-of-stake cryptocurrencies could be considered securities. Gensler argues the native assets of proof-of-stake blockchains could pass the Howey test, a critical test used to determine whether an asset qualifies as an investment contract, and therefore falls under federal security laws.

Staking on Ethereum post the merge

It is still early days to understand the staking market and domination from heavyweights in the industry. Currently, few days after the merge we have top 7 entities controlling more than 2/3rd of the stake. Lido and Coinbase are the largest stakers; with estimates suggesting that ~45% held by them.

With decentralization being the way forward such high concentration of stake with a few industry heavy-weights is not a very comforting sight. Although, Coinbase CEO has suggested that if such a scenario persist it would prompt his company to get out of the staking business. These are still early days and after a couple of months post the merge an analysis similar to this would hold more weightage.

Ethereum Fork ETHPoW

With all the focus on the merge and a majority of the community watching that the merge does go of successfully – this was also the launch of the Ethereum Fork ETHPoW. A network that would continue to exist as a Proof-of-Work network with miners continuing to mine new blocks. This moment was pitched as a triumph for ETH miners left behind by Ethereum’s transition to a 99.99% more environmentally friendly, miner-less proof of stake consensus mechanism.

However, soon after the launch there was chaos on the platform. This was caused as ETHPoW had chosen a chain ID already in use by a Bitcoin Cash testnet.

How this issue occurred is still unclear as the issue was well thought of prior to the fork and sources had confirmed that in order to avoid any problems they would not use a chain ID that belonged to any existing network. The use of an existing chain ID could result in scammers replicating transactions from the ETHPoW network, on the real Ethereum network, if both networks possessed the same chain ID.

Prior to the merge and launch of the forked ETHPoW, its token price had surged some 70% to $60.68, likely in anticipation of the network’s launch. Post the chaos the token lost 74% and was down to $15.33.

Proof-Of-Stake assets could be Securities

A time when the entire industry witnessed one of the largest blockchain platform has transitioned from the Proof-Of-Work to Proof-of- stake consensus – the SEC Chairman Gary Gensler said that the native assets of proof-of-stake blockchains, which allow holders to passively earn returns through staking, could pass the Howey test. This meant that they could be classified as securities as per the US Law and henceforth have a lot of regulation and mandatory disclosures. This leads to a heavy dependency that companies and investor will face. It means that the tokens will be considered similar to any financial instrument like shares being traded on a stock exchange.

The statement sent shock-waves that caused the ETH price to drop drastically. However, the same is being challenged by Senator Toomey who believes the SEC has not been clear about the framework it uses to judge which cryptocurrencies qualify as securities.

New Crypto Exchange launched by nig Financial Institutions

Investment firm giants Charles Schwab and Fidelity Digital Assets—today announced the launch of EDX Markets a new cryptocurrency exchange. Other backers include Citadel Securities, Paradigm, Sequoia Capital, and Virtu Financial. This will be a first-of-its-kind exchange that aims to give investors safer, faster and more efficient cryptocurrency trading. The exchange will use technology built by stock exchange The
Members Exchange (MEMX).

The world of digital assets has long been thought to be complicated, with things like private keys and other things related to storage and custody typically putting off the traditional investor. EDXM aims to bridge this and serve both institutions and retail investors, giving them a safe entry point to crypto.

16 September 2022
Tylden D’Souza