Conor on Web3

By Conor Svensson

The Merge

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The Merge
By Conor Svensson • Issue #33 • View online
5 reasons why Ethereum may finally flip bitcoin

TLDR;
  • Post merge, network power consumption goes down by ~99.95% and you can get a risk-free yield of 4-5%
  • Ethereum’s ecosystem is likely already more valuable than Eth’s market cap
  • Most of the significant Web3 innovations happened first on Ethereum
  • It has a functioning governance model
The Ethereum network’s Merge is almost upon us. After many years of hard work by the Ethereum community, Ethereum will be transitioning from proof of work to proof of stake consensus, reducing its power consumption by an estimated ~99.95% in the process.
The significance of this change is being widely followed by the broader cryptocurrency markets, so much so that a key source of research among the crypto finance community is the monthly Ethereum All Core Devs calls where decisions are made by key members of the Ethereum community on future changes to the protocol.
The Merge is being coordinated by various teams on these calls. It’s incredible that the activities being coordinated here are being syndicated as crypto market intelligence by financial research departments. It just goes to show how far widespread adoption of cryptocurrencies has come during the past few years.
At the time of writing the Merge is slated for mid-September. Crypto markets have already been pricing this in due to the significant price appreciation Ethereum has seen during the past month which is up roughly 60% versus bitcoin’s 15% gain.
This increase in capitalisation also means that Ether is gradually eroding bitcoin’s market capitalisation, with bitcoin’s just shy of $450bn versus Ethereum’s $200bn (next in line is Binance Smart Chain with $50bn).
It is feasible that in the months following the Ethereum Merge, that we could see Ethereum’s market capitalisation eclipse or flip bitcoin’s. The flippening as it is known in the Ethereum community has been speculated on for some time, but I genuinely believe that the Merge could be the catalyst for this event to finally happen.
I don’t see bitcoin fading into obscurity, I believe it will retain its utility as digital gold for Web3. However, there are a number of factors firmly in Ethereum’s favour to support this narrative.
Bitcoin and Ethereum have both taken a lot of criticism for their environmental impact. If the Bitcoin network were a country it would be 36th by power consumption sitting between the Philippines and Belgium. Whereas the Ethereum network’s power consumption is ~25% of the Bitcoin network.
During the most recent crypto bull market, we saw a significant number of institutions embracing cryptocurrencies and starting to hold them on their balance sheets. The investments were typically dominated by bitcoin and Ether. However, against a background of ever-increasing scrutiny of corporate ESG activities, the environmental impact of these cryptocurrency networks is something that does not sit well with many investors.
When the Ethereum Merge takes place, all of a sudden, these institutional investors will have an out. By holding Ether, these EGS criticisms go way, and this is something that will be incredibly attractive to them and their shareholders. Hence I believe there will be significant outflows from bitcoin into Ether.
There are many other cryptocurrencies that already use proof of stake consensus, however, due to the fact that Bitcoin and Ethereum make up almost 60% of the cryptocurrency market capitalisation, more risk-averse institutional investors are unlikely to hold significant positions in some of the alternatives.
The huge reduction in power consumption isn’t the only benefit of the Merge. Another factor that will be incredibly valuable to all holders of Ethereum is the yield that becomes available. All holders of the Ether cryptocurrency will be able to obtain a risk-free yield in the 4-5% range which again will be very attractive to investors.
This yield will be considered risk-free due to the fact that it is baked into Ethereum natively, regardless of whether holders store their Ethereum in cold wallets, hot wallets or on exchanges. They will easily be able to stake their Ether for this yield.
Contrasting this to bitcoin which offers no yield opportunities, many holders of bitcoin are likely to question why they are holding an asset when there’s an alternative with a not vastly dissimilar risk profile with the yield opportunity.
In addition, as I wrote previously, it’s likely that Ether will be deflationary too, further increasing its value.
The other factors Ethereum has in its favour aren’t specific to the Merge, but they are very important signals which reinforce why the overall value of Ethereum is likely to continue to grow.
The first of these is the value of the ecosystem that has been built on top of Ethereum. This is in the form of tokens such as utility tokens used for project governance such as ENS, Compound, Uniswap, etc, stablecoins such as USDC as well as NFTs.
Whilst very hard to collate exactly, it’s estimated that this is in the $2-300bn range already. When you combine this with the market capitalisation of Ether you already have a decentralised ecosystem that is likely more valuable than Bitcoin’s.
In addition, you have all of the emerging Layer 2 networks such as Polygon, Optimism, Abritrum, Starkware, ZK-Sync which have valuable ecosystems they are building out in their own right.
The reason why there is such a healthy ecosystem leads us to the next point which is that many of the major Web3 innovations emerged on the Ethereum network, including utility tokens, DeFi, NFTs and DAOs. Which is another topic I have previously written about.
Finally, and potentially most importantly of all, which is the reason the Merge is actually going to happen is the community itself. The Ethereum community is well functioning and able to enact major changes to the protocol. Between Viitalik, Danny Ryan, Tim Beiko and other folk at the Ethereum Foundation, and other groups like the Ethereum Cat Herders, the Enterprise Ethereum Alliance, plus all of the companies building out the Ethereum ecosystem of which there are too many to list you have a community that is able to govern itself.
Change isn’t always fast, but it does happen, and loose consensus is achieved. The achievement in itself should not be underestimated. The Bitcoin community does not manage to achieve this broad agreement so easily.
As a result of this, there have been a number of Bitcoin alternatives created over the years such as Bitcoin Cash, Bitcoin Gold, Bitcoin XT and Bitcoin Classic due to divisions in its community.
The end result is that Ethereum and other blockchains manage to evolve faster and that I do not see a future where bitcoin ever moves away from proof of work consensus or is able to offer a stable yield for its users. I believe this inflexibility will ultimately be detrimental to bitcoin and it’s only a matter of time before it’s reflected in the value of the Ethereum network eclipsing it.
How long this takes remains to be seen, but activity post-merge over the coming months will be insightful.
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Conor Svensson

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