Cryptoverse: Electric Ether Jumps on the Brink of Merging

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

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Aug 16 (Reuters) – It looks like the ethereum mega upgrade is happening. Finally.

After years of delays, the “Merge” seems almost certain to take place in September, with the cryptography underlying the blockchain undergoing a radical shift towards a system where creating new ether tokens becomes much 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 Merge, but I don’t think there will be any technical issues.”

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Investors seem to agree that ether outpaces big brother bitcoin.

Ether has posted six straight weeks of gains, moving it from a 1-1/2-year low of $880 in mid-June to levels approaching $2,000, though it’s a long way from its November 2021 peak of $4,868. 79.

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

Ether is gnawing at giant bitcoin’s market share: It now accounts for nearly one-fifth — 19.7% — of the $1.14 trillion total crypto market cap, up from less than 14.9% two months ago, according to CoinMarketCap. Bitcoin’s share has fallen from 44.9% to 40.2% over the same period.

“Crypto is still very closely linked, I think when the merger is successfully completed it could also drive the price of bitcoin up,” said Alex Miller, CEO of Hiro, which builds developer tools to create applications for bitcoin.

If the makers of ethereum succeed, as is largely expected, it could be a game-changer for the blockchain, making it cheaper to mine and easy to use for fintech and other crypto apps.

Of course, little is assured about the elusive transition, which has been delayed several times with developers recently abandoning plans to push the button in June, leaving investors nervous who began to fear it might never see the light of day.

The merger is also fraught with risks, and the fate of the roughly 122 million ether in circulation, worth about $232 billion, could be at stake if it failed.

If the upgrade doesn’t go well, it would “set the entire crypto world back five or ten years,” Hiro’s Miller said.

Reuters graphics

‘DIFFICULTY BOMB’

The ethereal blockchain currently uses the energy-intensive proof-of-work (PoW) method of block validation, where miners use massive amounts of power to quickly solve complex math problems to extract newly minted coins.

On a parallel chain, ethereum has tested 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 energy consumption and prepares it for faster transactions.

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

Ether mining has been more profitable than bitcoin mining so far. According to Arcane Research, Ether miners made $18 billion in 2021, compared to $17 billion for bitcoin miners.

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

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

However, that option has its risks.

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

In addition, both Tether and USDC – the largest stablecoins – have thrown their weight behind the Merge, reducing the chances of wider adoption of the parallel PoW chain.

FOAMING FUTURE

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

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

Ether futures also traded at a premium of $1,905 on the CME exchange, “a reflection of expectations surrounding a proof of work fork,” said Matthew Sigel, head of digital asset research at fund manager VanEck.

“But that gap is not so big that you think there is extreme foam,” he added.

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

Our Standards: The Thomson Reuters Trust Principles.

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