Brilliant transition of “The Merge” – What’s in it? And, an e-merging flip side

While the Ethereum community is celebrating its great success, SEC Chair Gensler sends the newly PoS-powered ETH currency South. Approx. -15% was the dip (when writing this post) since Sep, 15th, “The Merge” day which is net still -10% compared to the overall crypto market.

The surprise was not a dip per se, but the trigger. It was not technical problems with the merge transition, which might have been expected, or even profit taking which some have anticipated. No, it was – once again – the regulator speaking out.

But more to it at the end of my post as first, I really want to celebrate the long awaited and so smoothly executed merge and point out what it brings to the world, in a nutshell:

As of Thursday, the blocks in the Ethereum blockchain are validated via proof of stake (“PoS”) consensus mechanism.

This means:

1) Ecological:

  • As of now, the energy consumption for validating blocks on the Ethereum chain is reduced by > 99.95%
  • This makes Ethereum and ETH investments ESG-compatible, and, especially attractive for institutional investors

2) Security-wise:

  • The security of the network will be significantly increased to around USD 20 billion, compared to USD 5 billion for the already very secure Bitcoin network on PoW:
  • A 51% attack would cost USD 11 billion / hour due to the significantly increased decentralization achieved, …
  • … and even this could be nullified by the slashing mechanism: Bad actors staked ETH would be burned and their access to the network revoke

3) Economical:

  • Staking becomes possible, i.e. positive real return can be generated on ETH as a digital asset (5.5 – 13.2%), and thus for the first time it becomes even possible valuate a blockchain network via traditional cash-flow based methods
  • Not only capped but even reduced, i.e. deflationary supply through reduced ETH issuance and increased burns; ETH might therefore eventually increase in value
  • Especially due to the gained increased security, the Ethereum ecosystem as a whole gains attractiveness for new on-chain applications and L.2 solutions e.g. in the #DeFi or #NFT sector

This means not (yet):

  • That Ethereum runs smooth on PoS, even if the merge itself has been fantastically sound transitioned
  • A solution to the still existing scaling problem, which leads to comparatively high transaction costs during congestions – this is to be implemented as per the Ethereum roadmap (“The Surge”) with top priority through sharding
  • A flattening of the still high ETH volatility curves, compared to traditional asset classes
  • More clarity in the still highly blurred regulatory environment of the crypto market, particularly in the U.S., on the contrary (see below)
  • That one or the other (not further listed here) risk does not materialize, …

… and slows down the evolution of Ethereum to the decentralized world computer or – bit smaller – to the settlement layer of the internet of value.

Now, back to Gensler, the SEC (U.S. Securities and Exchange Commission) Chair: Literally hours after the Merge, he said that PoS cryptocurrencies might count as securities, as PoS allow investors to stake their tokens to gain rewards. Profit generating assets can legally, under certain conditions, be interpreted under the TradFi-known principles of the Howey test as a security, and thereby fall within the regulatory remit of the SEC and respective laws. So far, Ethereum has always been considered as a commodity, just like BTC and regulated as a (crypto-) currency, instead, and commodities are regulated in the U.S. by the CFTC (Commodity Futures Trading Commission). Besides the still missing digital assets regulation in the U.S. there is also a tussle of competences over crypto regulation. And, particularly the SEC and the CFTC are publicly competing for the dominance over the space. This is unfortunate for the U.S. and the crypto space in the Western world as a whole, but particularly now does it pour kind of randomly uncertainty over Ethereum, particularly. We’ll see how things evolve, if and under which circumstances ETH could be considered as security – personally, I am quite skeptical from a pure legal perspective.

Exiting times, more to come, stay tuned …

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