Institutional Interest in Ethereum Surges as Merge Date Nears
VYSYN Weekly Release: Renewed clarity on Ethereum Merge fuels interest in the digital asset
Several institutional investors are clamoring to gain exposure to the second largest cryptocurrency, Ethereum, as its long-awaited Merge nears its launch. With renewed clarity on the proposed date for the launch of The Merge, inflows into the digital asset have skyrocketed. However, amid the rising interest, opposition to the network's transition from proof-of-work (PoW) to proof-of-stake (PoS) has gained momentum as well.
The latest VYSYN Release will analyze positive developments on the Ethereum network as investors gain increased clarity about what The Merge will bring about. We will also highlight how the brewing opposition to The Merge has gained a formidable ally and what is in store for Ethereum post-Merge.
Institutional inflows into Ethereum products increase
With the wider cryptocurrency market making a speedy recovery, Ethereum has been enjoying a massive influx of investors, driving its price rally. According to a new report from the digital assets manager, CoinShares, institutional capital is piling into Ethereum-based investment vehicles.
As per the report, inflows into ETH-based digital asset funds reached $16.3 million over the past week. CoinShares noted that these funds have recorded seven consecutive weeks of positive inflows, a total of $159 million.
James Butterfill, Head of Research at CoinShares revealed that the rise in market sentiment for ETH-focused funds is largely due to renewed clarity on Ethereum's highly-anticipated Merge. He said, "We believe this turn-around in investor sentiment is due to greater clarity on the timing of The Merge where Ethereum shifts from proof-of-work to proof-of-stake.”
The Merge is currently one of the biggest events within the digital asset ecosystem. While Ethereum has long been the most popular smart contract network, its low scalability and throughput continue to undermine its efficiency. The Merge will see the Ethereum mainnet merge with the Ethereum 2.0 Beacon Chain.
This long-awaited merge will complete Ethereum's transition from PoW to a PoS consensus mechanism. The transition to PoS is expected to make Ethereum more scalable, secure, energy-efficient, and environmentally friendly.
Ethereum core developers have been preparing for this transition for several years, with multiple trials and failures. The development team recently provided more clarity on the timeline of the Merge, which is expected to go live on the 19th of September 2022. The team expects to conduct the last scheduled test, the Goerli and Prater testnet merge, this week, ahead of the mainnet Merge in less than six weeks.
Miner opposes Merge; ambitious plan to fork the blockchain
While preparations for the Ethereum mainnet Merge are ongoing, a prominent crypto miner has launched a campaign to resist the transition. Chandler Guo, a renowned Chinese crypto miner, recently revealed his plans to fork the Ethereum blockchain and create a spinoff, a PoW version of the network.
Guo noted that the reason for this opposition to the planned Ethereum Merge is to preserve the existing PoW ecosystem to help ETH miners keep their jobs. The current PoW model allows miners to mint ETH by solving complex puzzles using energy-intensive computers. The miners are rewarded for their work, as they not only create new ETH but also help in validating transactions and securing the network.
The Merge will eliminate the need for miners as the new PoS system requires network participants to stake large quantities of existing ETH to validate transactions and secure the network. Although PoS will make Ethereum more environmentally friendly, it will jeopardize the $19 billion ETH mining industry, leaving miners with expensive and potentially useless specialized hardware.
It is for these reasons that Guo is seeking to fork Ethereum as it undergoes the Merge. This Ethereum hard fork would also create a new cryptocurrency named ETHPOW. Guo revealed that he was a major proponent of creating Ethereum Classic (ETC), an Ethereum hard fork created in 2016 to fix a major hack on the network.
Still, creating and maintaining a new Ethereum network is no child's play. Guo would need a great deal of both technical and economic support. The proposed ETHPOW would need to generate enough demand to incentivize its mining, and at the moment, it does not stand a chance against ETH.
Industry experts remain skeptical that Guo's ambition will succeed. But Tron founder and CEO, Justin Sun, recently announced his full support for the course. Poloniex, a crypto exchange backed by Sun, also disclosed that it will list synthetic tokens representing both ETH and ETHPOW.
While acknowledging that he could profit from the hard fork as a whale, Sun argued that Ethereum’s PoW system “has its own unique value." A value that would be permanently lost if Ethereum ultimately moves to PoS. He said, "In fact, we may have underestimated the value of Ethereum as the only POW smart contract blockchain. I think to some extent that the Ether community may underestimate how much POW has contributed to Ethereum as the core consensus mechanism… I don’t think there is any wrong to preserve the PoW chain for the Ethereum community."
A double-edged sword
With the long-awaited Ethereum Merge less than six weeks away, the network's proponents are excited about the numerous prospects of the transition. One independent DeFi researcher, Vivek Raman, believes that The Merge can help Ethereum build a robust economic structure strong enough to challenge Bitcoin's dominance.
Raman explained that the transition to PoS will reduce ETH’s native inflation level from 4.3% to 0.22%, allowing the network to reduce ETH issuance by 95%. This drop would ultimately limit the number of ETH issued per day, which will make ETH deflationary and push its price up.
Should the Ethereum mainnet Merge prove successful, it will have a profound effect on the ecosystem. The biggest benefit would be an increase in Ethereum's scalability and throughput. With the current ecosystem, Ethereum can only handle approximately 30 transactions per second. Post-Merge, Ethereum intends to scale its network to handle over 100,000 transactions per second, making it one of the fastest and most scalable blockchains.
Still, some market analysts fear that The Merge could be a double-edged sword. According to Mark Cuban, investors’ excitement about the transition could exceed the actual use-cases of The Merge, resulting in a " buy the rumor and sell the news" event. In such cases, asset prices skyrocket before a highly anticipated move but fail to continue the uptrend or even collapse as soon as the event ends.
Nonetheless, Ethereum's founder, Vitalik Buterin, is optimistic about the network's long-term prospects. Vitalik is convinced that market sentiments toward ETH will remain positive post-Merge. He said, "Once the merge actually happens then I expect morale is going to go way up. I basically expect that the merge is going to be not priced in, by which I mean not even just market terms, but even psychological and narrative terms. In narrative terms, I think it’s not going to be priced in pretty much until after it happens."
Despite being a pivotal step for Ethereum, The Merge is only one step in a longer process. Vitalik noted that Ethereum will only be about 55% complete after The Merge. He noted that post-Merge, Ethereum will be undertaking "the Surge, the Verge, the Purge, and the Splurge," all aimed at making the network more efficient. The ultimate stage is still far off and there are bound to be hiccups along the way. But, when it finally arrives, it will mark a major celebratory phase for Ethereum, and of course, for investors with a long-term perspective.
About VYSYN Ventures
VYSYN Ventures is a longstanding venture capital company that specializes in funding and supporting disruptive startups in the blockchain and cryptocurrency industry. We have provided early-stage support to several projects that have grown USD market capitalizations of hundreds of millions and even billions. Our incubation program focuses on providing capital allocation, versatile marketing support, and tech assistance.