The Ethereum Merge: Does it matter?

Transcript

Hi everybody. This is Mike Kollo from Clanz. I'm here to talk to you a little bit today about a very special topic that a lot of people have been talking about, which is the Ethereum merge. This is quite a big deal in the world of crypto and everybody talks to the idea that a Ethereum one of the main cryptocurrencies is about to get a bit of an upgrade. And in fact, this is one of the links from their website where it describes what this merge really looks like. So the merge it was all about moving from one kind of workstream called proof of work to a proof of stake. It has some perceived benefits, which we're going to talk a little bit about today.

But essentially it's about changing the way that information is validated on the blockchain. There are definitely benefits. And there's a little bit of oversell as well. And we're going to talk about a little bit out of that today as well. Two of the main things that people talk about when it comes to theory and upgrades are really about the energy consumption of proof of work. Work is pretty high energy consumption per state is lower energy consumption. And really decided to have sharding, which is this idea of propagating. More systems that can be spun up and use for different effects. Not to mention a whole bunch of other benefits as well. So let's kick it off.

You've got Ethereum, you've got Ethereum classic. It's been like Coke and diet Coke if you want. The theory is really the big boy it's a massive one with massive market cap. If you're in classic is a much much smaller version that essentially was created when a fork created a divergence. This was created between the two blockchains back in the mid 2010s. And tense, but the biggest thing is Ethereum is the thing that's moving to proof of stake if you're in classic, staying as proof of work. And in fact, you see quite divergent behavior of these effects and some interesting overlaps as well.

So one of the things that's going to happen with Ethereum is that it's going to move from, as I said, proof of work, proof of stake. There is something that has already been set up called a beacon chain. Beacon chain has been testing the idea of proof of stake. And as soon as Ethereum's ready, it's going to merge beacon chain's going to come in and merge into that. And essentially that will be how all of the theory and functions in terms of, transaction management in terms of validation and so on.

Here is a quick review for those of you maybe not familiar with the differences between a proof of work and a proof of stake. So really a proof of work is each block or each piece of information is mined based upon the amount of CPU that they have. So the amount of energy that they use in their computers to solve problems and the level of hardware they have. This basically means that if you want to hack the system you have to have the strongest computer. If I get stronger than 51%, really of all the computers that are in that chain. So in some sense, the currency for proof of work is having energy and having great technology. And then miners are rewarded. In the proof of stake, essentially there's no competition in the same way. It's essentially that people who have the blockchain's main currency or crypto the most, they get sent. The rules and they're able to essentially validate and they have the greatest incentive to keep the blockchain working favourably. What's interesting about this is for those of you with economics background you'll immediately see an interesting parallels between labor and capital. So labor is the idea that people work and everybody has an equal amount of time on their hands that they could spend working. And then essentially anybody has a chance of making it. Capitalists say that the more money you have, the more you're able to control the system and get paid for it as well. So we're going to talk about that in a minute. So proof of stake is really the idea that you've got big stake in the blockchain. And that's a good thing therefore you're aligned. And so there's two arguing. Arguments as to why this could help the price of Ethereum one.

One is around that if you're mining Ethereum, you're spending all this money on paying electricity bills, you have to sell some of the Ethereum and essentially pay your electricity bill. So the idea is that maybe if you don't have this selling pressure Ethereum could be going up as well. The other big advantages that this will massively reduce the amount of power that is consumed by Ethereum. And that means that you will drop by something like 99%, making a lot more carbon friendly, lot more planet friendly, and that's going to be really good for people. People are going to be more excited, investing more in getting more, and so on.

There's a couple of other rumors, which I think are a little bit less stable. So rumor one is that that gas fees or the transaction costs of writing things onto your Ethereum blockchains will decline. That's not necessarily the case that it really does depend on expanding the network capacity and throughput for that really to be true.

Rumour number two is that it will be faster after the merge and there is a little bit of evidence maybe moving with 13 seconds to 12 seconds. And that is, six, 7% decrease. So it's not to be dismissed. Especially when you're talking about such large volumes of transactions. So that is some benefit, but maybe not as much as people expect. There's an interesting byproduct of centralization, which I hinted at already, which is really this notion that if you've got capital or proof of stake driving, Decision-making then you can have very big concentrations of capital.

You can have capital markets institutions, private equity. Coming in here and buying up a lot of Ethereum and therefore controlling a lot of what happens on the Ethereum blockchain simply because they have large capitals. That is very much against the ethos of decentralization. And blockchains and so on. So there's a couple of interesting statistics here. Lido is one of the biggest protocols to hold Ethereum as a staking mechanism.

It controls about 33% and there's a bit more data on that. And it probably the next four or five together or control somewhere 50, 60%. If you're thinking about who's going to control the future on the needs and proof of stake. Steak, you really have to talk about who owns the most amount of Ethereum and.

And obviously the people that own the most amount of Ethereum are going to be staking it and making the system run. So they're also going to be earning the most as well. So now this is definitely sounding like capitalism. So here we've got state of play pre-merger, it's a wonderful video that I pick this out of.

And really this is talking about the Glassnode data, showing us where Ethereum is owned. So Lido has a huge bit of Ethereum, which is mostly staked. And then we've got Coinbase. Kucoin and we got Binance. So we've got all of these exchanges essentially. And then we've got this Lido, which is a huge part of this as well. And I think that's a really good moment to reflect on this idea of where concentration happens. So there's an interesting table I pulled together from "into the block" and that's about concentration in some of those coins and who holds it. So as an example, who controls Lido, if Lido is the entity that's staking the most ethereum who controls Lido potentially. And Lido is 66% owned by the whales so it's a majority of about 18 accounts. It's Lido staked with only 10 accounts control the dominant 65% of that blockchain. If you look at all of these changes like binance USD, by the way, came up previously. As another big staking entity for Ethereum again, you've got 94% in just five wallets there. So I don't even know how many individuals, but five wallets control 94% and that's massive. You could look at coin FTX, crypto.com. They're all highly concentrated. Interested coins so clearly, if there's coins, this gives governance abilities for those holders. And I'm sure that there's whales that then they're able to control some of the Ethereum. And it's movement potentially as so what we're going to see is just a concentration of ownership sticking.

So moving a little bit away from the more conceptual framework of what will be the future with Ethereum as a concentrated blockchain. There's interesting if you look at the derivative markets as well. The roots of markets as really seem to signal this idea of sell the news and buy the rumor.

Buy the rumour means as something's coming true you buy because prices are moving. And then as the news is a nnounced as soon as there's any kind of negativity or walk over right now, prices come straight back down again. So this was an interesting article, I picked out a Bloomberg and that it really talks about the idea that derivative markets are really focused on this idea. That probably after there's going to be a GIF. And then there's a lot of put options to that effect. And of course we've seen the beginnings of that already happening. We've seen a movement in prices bottom. Again, middle of the year, June, July, we've seen aggressive move up from bottoms.

A thousand dollars to 80% up really over this period of time. And there's a lot of kind of rumors, I suppose it was circulating around. This notion of where would the price go after the merger as well? If you look. At staking of Ethereum as well. That's very interesting. So staking follows the price pattern a lot more than you would have seen here that basically tells you that the smart contracts that are governing Ethereum being used in DeFi and then whatever have been pretty stable and back to 52 billion at the moment. That's a $230 billion market cap, so you're not seeing a massive adoption of Ethereum, not seeing a massive change in the use of Ethereum as a staking protocol, but you are seeing a massive rising prices and you've seen due to market. At signal to you that may be while this is a nice upgrade for proof of stake, maybe it's not going to be a debate or a all encompassing difference that we might all expect.

There's a couple of interesting byproducts of this as well. And one of them is that is essential before, if you're in classic is the old school Ethereum and Ethereum classic is a proof of work protocol, much, much smaller. But a lot of the miners who have been mining, Ethereum is a proof of work are going to find that they can go and mine if you're in classic.

And so they're going to be shifting, even in they're flooding the market. With a lot of miners with a lot, again, a hash rate improvements, so you might see that Ethereum classic actually benefits from a lot of those resources that are going to moving.

Over there it's an interesting also, trade. And there was mentioned, which I read about, which is Ethereum classic being used as a hedge. Hedge against Ethereum actually doing something wrong. So as if you're in transition, So proof of work, the previous state, if there are problems, if there's rollbacks.

If there's an issues that will happen, then Ethereum classic, Will be an interesting fallback as a very stable and proof of work, and slightly old school, but much smaller than to be fair blockchain. That's in the background. Would you have a lot more mind is now a lot more hash rate as well level competition.

To provide the hash rates are probably going to be coming down with a lot of the yields that you can provide for you as well. So super exciting times. And the other crypto, we're seeing a lot of these changes happening. I think one of the things to keep in mind when you're treating.

Is that there's a lot of expectations. So when you're thinking about weather you should get into Ethereum now, or you should be getting out of Ethereum, have a really strong think of what you think markets are currently doing and how you think you are different to. Those expectations, whether you're more optimistic or more bearish, perhaps. Thanks very much for listening.