Cryptoverse: Electric Ether Jumps on the Brink of Merge

Representations of cryptocurrencies Bitcoin, Ethereum and Dash plunge into water in this illustration taken May 23, 2022. REUTERS/Dado Ruvic/Illustration

Aug 16 (Reuters) – Ethereum’s mega-upgrade appears to be happening. Finally.

After years of delays, it looks like the “Merge” will almost happen 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 around the merger, but I don’t think there will be any technical hiccups.”

Investors seem to agree, with ether outperforming 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 approaching $2,000, although it is a long way from its November 2021 peak of $4,868.79 .

Bitcoin has paled in comparison, rebounding 37% from its June lows to $24,116.

Ether is eating away at behemoth bitcoin’s market share: it now accounts for nearly a fifth — 19.7% — of the total $1.14 trillion crypto market cap, up from less than 14.9% two months ago, according to CoinMarketCap. Bitcoin’s share has fallen to 40.2% from 44.9% in the same period.

“Crypto is still very tightly coupled, I think once the merger is complete it could also increase the price of bitcoin,” said Alex Miller, CEO of Hiro, which builds developer tools to create applications for bitcoin.

If ethereum’s creators succeed, as is widely 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 canceling plans to push the button in June, angering investors who began to fear it would never see the light of day.

The merger is also fraught with risk, and the fortune of the roughly 122 million ether in circulation, worth around $232 billion, could be at stake if it fails.

If the upgrade doesn’t go well, it will “set the whole crypto world back five or 10 years,” Hiros Miller said.

‘DIFFICULT BOMB’

The Ethereum blockchain currently uses the energy-intensive proof-of-work (PoW) method to validate blocks, where 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 a 99.95% reduction in blockchain’s energy consumption and prepares it for faster transactions.

Not everyone is happy about the imminent merger of the two systems – especially ether miners, whose expensive mining rigs will become obsolete, and also cannot be used to mine bitcoin.

Ether mining has so far been more profitable than bitcoin mining. Ether miners earned $18 billion in 2021 versus $17 billion for bitcoin miners, according to Arcane Research.

Some miners have decided to switch to mining the next best option, such as tokens ethereum classic or ravencoin.

At least one miner has declared plans to resist and continue mining ethereum, raising the specter of some people keeping the PoW chain running in its current form even after the merger, likely competing with the upgraded blockchain.

However, that option has dangers.

Ethereum creators have designed a “difficulty bomb” to exponentially increase the mining difficulty to discourage the PoW parallel chain after the merge.

Also, both Tether and USDC – the largest stablecoins – have thrown their weight behind the merger, reducing the likelihood of wider adoption of the parallel PoW chain.

FOAMING FUTURES

“The likelihood of a long-term chain split of Ethereum after the merger remains small,” said Alex Thorn, head of company-wide research at Galaxy Digital.

Nevertheless, at least some investors are preparing for a hard fork, or a parallel PoW chain, indicates positioning in the derivatives market.

Ether futures also traded at a premium to $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 big that you think it’s extremely foamy,” he added.

Reporting by Medha Singh and Lisa Pauline Mattackal in Bengaluru Editing by Vidya Ranganathan and Pravin Char

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