[TOP STORY]Ethereum Merge explained – Moneyweb


JIMMY MOYAHA: I’m chatting now with Marius Reitz, general manager at Luno South Africa, or Luna Africa, looking at the recent Ethereum merger. Marius, thanks so much for the early morning. Can you give us a bit of context for those that weren’t keeping up with the merger – what happened and why?

MARIUS REITZ: Good morning, Jimmy. Yes, Ethereum’s long-awaited network upgrade completed yesterday. This upgrade took the consensus mechanism, which is the way in which computers in a network reach agreement and secure the network from a proof of work to a proof of stake network. So in a proof of work network, typically how miners secure the Bitcoin network, it involves a lot of computational power; and the proof of stake involves stakers or miners, and they lock up their tokens for the right to then validate transactions on Ethereum.

So I think it’s significant. Ethereum previously used the same consensus network as Bitcoin. In crypto mining a lot of energy is required, and so this upgrade for Ethereum will reduce that by almost 99.5%. So I think it’s significant for the future of crypto. In addition to the drop in energy, it will also allow the Ethereum blockchain more upgrades in future. Ethereum currently processes roughly four times more transactions [than] Bitcoin on a daily basis. And it’s significant. Around NFTs and also DeFi, I think it will set Ethereum and the blockchain up for success in the future.

JIMMY MOYAHA: Yes. What I’m hearing you say is the miners – what we traditionally looked at as Bitcoin miners or crypto miners, Ethereum miners – are now going to be replaced by what they’ve termed ‘validators’ who will then stake the crypto. But this comes at a significant cost. Does that then mean that [fewer] people are going to be available to stake? I mean, 32 ethers as a cost to be a registered validator or an approved validator seems like a significant cost.

MARIUS REITZ: Absolutely. I think we’ll probably see large companies or platforms such as Coinbase, Kraken and these platforms, stake on behalf of their customers. So individuals, as clients of these platforms, can stake their crypto on these platforms, and then they act as act as almost mass stakers. So most of the staking will actually happen through these major platforms – I think around 50%, 60% of staking – but individuals holding the required threshold of 32 Ethereum will also be able to stake, but that will probably be in a minority.

JIMMY MOYAHA: Of course. That actually leads me to the next question, which would be: is Luno going to be one of those providers? It might be too early for you to confirm that, but I’m assuming that, given Luna’s position as an exchange, particularly in South Africa, it would be the logical option for them.

MARIUS REITZ: Look, I think our objective is to give our customers more choice and more options to earn. We currently already offer savings wallets. It’s based more on a traditional lending option. But we are definitely looking at staking as an option. We currently offer Ethereum to our customers, and if we can enable our customers to earn Ethereum … the hold Ethereum as a long-term investment, then that absolutely makes sense. So it is something that we are considering at this point.

JIMMY MOYAHA: Yes. So now this whole change and all of these new adjustments and that sort of thing to the Ethereum network don’t necessarily mean that transactions are going to become cheaper, do they?

MARIUS REITZ: No. It won’t immediately solve the issues with throughput. So the number of transactions that can be processed, as well as the cost, also won’t make Ethereum faster and it also won’t drive down the cost immediately. That will all come with future upgrades. I think this merge currently was just a change in the consensus mechanism to proof of stake. And it was significant, because it’s almost like changing the engine of a car while driving it. It was a massive upgrade if you consider the number of transactions being processed on the Ethereum blockchain on a daily basis. So this upgrade lays foundations for future upgrades, and it’ll make it easier for the Ethereum network to add future upgrades to address the issues around cost and also the speed of transactions.

JIMMY MOYAHA: Of course. And, given that Ethereum’s now basically effectively completely gone green, does that mean that we are now looking to Ethereum as a more attractive crypto, relative to the rest of the cryptos? We know in recent times the crypto space has taken quite a significant hit, taking a lot of decline across all cryptos, Ethereum included coming off $4 900 highs to sit at about $1 600. Does this potentially mean that we could see Ethereum surpassing other coins like Bitcoin?

MARIUS REITZ: It’s a good question. I think if we look at it from a price perspective, the Ethereum price did rally over the last three months. I think it’s around 45%, whereas Bitcoin stayed flat. And I see some suggest that Ethereum will some day surpass Bitcoin in terms of market cap. But Bitcoin has established itself as the core asset, as a good store of value, as a highly secure asset.

However, as we said, Ethereum processes four times more transactions than Bitcoin. Hence the need for this upgrade. I think it’s a case of different courses for different horses. I think proof of work works for Bitcoin at this point, for what Bitcoin is used for. And I think proof of stake sets Ethereum up, because of the shared volume of transactions and use cases such as decentralised finance, NFTs, sending and receiving of ether. So there are many, many more applications built on top of the Ethereum blockchain compared to the Bitcoin blockchain.

So you can’t really compare the two like-for-like. But I do think that this change in Ether, as you said, is maybe greener and to some investors that are more conscious about the environment probably catch the eye.

JIMMY MOYAHA: Absolutely. And I mean, it further draws that distinction between sort of your actual crypto coin itself and the blockchain network that things function on. I mean, especially with Ethereum we know that a lot of Ethereum’s users include large institutional banks around the world because of the type of the blockchain or the infrastructure that comes with the blockchain. That’s not necessarily directly correlated or directly related to the price of the coin.

So I think going forward this might be the direction that we see cryptos taking, where there’s a clear distinction between the value of the coin and the associated use of the underlying blockchain.

Marius, just before I let you go, your thoughts on the crypto space at the moment – do we foresee a recovery in the space, given that we’ve just recently heard that the IMF and the World Bank are predicting further global recessions? We’ve seen stimulus packages out of the US during Covid and recently out of China. Do we anticipate at the moment the crypto market will show some signs of life or signs of strength?

MARIUS REITZ: Look, I think the crypto market isn’t operating in isolation compared to the global economic markets. So I think there’s a lot of uncertainty still. We’re seeing that reflecting in the crypto prices. Bitcoin has moved sideways, and so [have] most other cryptos. Ethereum has had a good run because of the positive news and the fact that we had clearer timelines in terms of the merge actually taking place.

But I think there is still a lot of uncertainty globally. We have some big events happening next year around the Bitcoin halving. And I think that might provide some impetus for the Bitcoin price to increase. But I think overall in the short run probably some volatility up and down. It may be a case of a dead cat bounce, giving investors some hope that the price is going to improve again. But I think we’ll probably have to move into next year to see really what is going to happen.

JIMMY MOYAHA: Absolutely. So definitely wait and see what happens on cryptos. Don’t be so eager to jump in because of the merge. Thanks very much, Marius. That was Marius Reitz, GM at Luno.

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