Ether’s (ETH) market cap has shed approximately one-third of its value in bitcoin (BTC) terms in just 12 months. Even worse, it’s been an embarrassing seven years since ETH last rallied to a new high against the world’s leading crypto.

During the early months of Ethereum’s initial coin offering (ICO) in 2017, ETH rallied to an all-time high of approximately 0.15 per bitcoin. It hasn’t surpassed that level since.

Even in 2021, amid several positive catalysts for ETH investors, it only hit 0.088 per BTC. That was a commendable comeback from its September 2019 low of 0.016 but still 42% below its 2017 high.

Understanding Ethereum’s failure to re-make a new high in BTC terms in 2021 is instructive for understanding its current, 32-month-and-counting decline.

Ethereum’s failure to make a new high against bitcoin in 2021

Back in 2021, investors were excitedly listening to announcements about Ethereum’s switch to wealth-based block validation dubbed ‘The Merge,’ predictions of ETH’s deflationary supply schedule called ‘ultrasound money,’ and most importantly, a network-wide transition to passive yield payouts of over 7% APR.

Indeed, just two months into 2022, predictions reached a feverish 9-12% from even Coinbase Institutional analysts. Today, ETH’s actual yield is 3.5%.

In 2021, in addition to The Merge, buzzy new uses for ETH around artwork speculation and supposedly passive income were also attracting mainstream attention.

Despite Ethereum-based NFTs gaining prominence, a resurgence of ultra-high DeFi yields like Olympus’ nose-bleeding 7,300% APY, and a cornucopia of other Ethereum DeFi protocols, investors were only willing to bid 58% as much BTC per ETH as they were four years prior.

All of those use cases weren’t enough. Investors have bid less and less BTC for ETH ever since.

Read more: All of Michael Saylor’s Ethereum predictions were wrong

Layer 2s, SEC approvals, and benchmark-setting performance

Nowadays, Ethereum’s most exciting and prominent use case seems to be layer 2s — chains of transaction data blocks that are periodically broadcast onto Ethereum’s blockchain. Yes, more blockchains seems to be Ethereum’s latest idea for how to make a comeback.

For 32 months, it hasn’t worked. ETH has been declining in BTC terms since December 2021.

This is in spite of many additional, substantial victories by Etherians.

• The famously skeptical Securities and Exchange Commission (SEC) has finally admitted publicly, “The Commission has not concluded that ETH is a security.”
• The SEC also approved the listing of several spot ETH ETFs on US securities markets.
• Ethereum has not suffered any major network outage in years, unique wallets are at highs, nodes still number in the thousands, validators exceed 1 million, and most metrics of network health are stable.

Nevertheless, the crypto market appears to remain — as it has since inception — a ‘winner take most’ market.

Although there are millions of altcoins, ETH’s contention in second place has not been enough to convince investors to displace their confidence in BTC as the most compelling investment in the sector. Indeed, Ethereum competitor Solana has septupled against ETH since January 2023. Other altcoins are gaining prominence as well, such as Telegram, Binance, and Tron.

As it has for most years since 2009, BTC alone has a larger market capitalization than the combined tally of all altcoins. Its 53% dominance dwarfs Ethereum’s 15% and it has gained ground for more than two years.

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The Ethereum “Merge” update, which switched the Ethereum blockchain from from Proof-of-Work (PoW) to Proof-of-Stake (PoS), has been one of the most anticipated events in crypto so far.

One of the main reasons that this update attracted so much attention was the expectation that following the Merge, Ethereum would become deflationary due to transaction fees being burned rather than sent to miners, who were previously incentivised to sell some of their earnings to cover their costs.

Under the PoS system, miners are out of business. New coins are created and rewarded to the validators staking ether. 

But despite users’ high hopes, post-merge, the Ethereum blockchain is still producing more ether than it is burning due to low usage. 

For ether to be deflationary, the volume of burnt coins from transactions has to exceed the amount of ether rewards validators are earning. 

An estimated chart comparing these two variables has been uploaded on Twitter by De-Fi analyst korpi. According to their estimates, for Ether to be deflationary, the base transaction fee should be 15 gwei and there should be no more than 14,000,000 ether staked.

Currently there are 14,534,406 ETH staked, with 429,758 validators earning 4.1% APY.

ETH Deposited to Beacon Chain & Validators

Since the Merge, the average transaction fee has remained under 15 gwei, meaning that the Ethereum cryptocurrency continues to be inflationary, albeit at a much slower rate than before.

Since the update on September 15th, just over 3,000 new ether have been created, whereas before the Merge, approximately 13,000 ETH per day were being sent to miners, and 1,600 ETH sent as staking rewards.

Read more: EthPoW: The pre-mined Ethereum fork no one wants

Despite the continued inflation, and negative price action since the Merge, average daily transactions on the Ethereum network yesterday reached 1.157 million, a number which remains relatively high considering that the average monthly transaction rate on the Ethereum blockchain for 2021 was 1.24 million transactions per day. 

The Ethereum PoS upgrade has been lauded for its environmental benefits given it uses much less energy than the PoW system. 

Etherum’s energy usage with a PoS system has been reduced by more than 99% from 112 TWh per year to 0.01 TWh per year. 

For more informed news, follow us on Twitter and Google News or listen to our investigative podcast Innovated: Blockchain City.

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Ethereum’s transition to Proof-of-Stake (PoS) seems to have caught the attention of the Securities and Exchange Commission (SEC) chair Gary Gensler, who said PoS cryptocurrencies might count as securities just hours after the Merge.

Ethereum switched over to PoS on Thursday, effectively allowing investors to ‘stake’ their coins, locking them for a certain amount of time on the blockchain in exchange for rewards. According to Gensler, this could label ether as a security under what’s known as the Howey test, given that it’s assumed to provide profits.

“From the coin’s perspective…that’s another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others,” Gensler said to reporters after a hearing in congress (via Bloomberg).

The SEC chair says he wasn’t referring to ether in particular, or any cryptocurrency. However, the comment could signal further scrutiny for Ethereum and its team.

SEC chair to heighten regulation amid Ethereum comments

The Ethereum comments come shortly after the US Treasury called upon the SEC and the Commodity Futures Trading Commission (CFTC) to “aggressively” investigate crypto companies that aren’t following the law.

The Treasury further recommended ways to combat the use of crypto for crimes, including increased monitoring in the crypto sector.

The SEC is currently in an odd position with the crypto community — lawmakers and entrepreneurs have expressed their support for the CFTC to be the de facto crypto regulator instead of the SEC. 

Read more: Gary Gensler still backing the SEC to be the best crypto regulator

While Gensler acknowledged the CFTC does need heightened authority to enforce regulation, he reiterated that the SEC will continue to push for authority when it comes to overseeing cryptocurrencies the agency deems securities.

For more informed news, follow us on Twitter and Google News or listen to our investigative podcast Innovated: Blockchain City. 

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After years of anticipation and delays, Ethereum’s transition to Proof of Stake, the Merge, is complete. It appears to have gone relatively smoothly — the network’s final PoW block was mined (as a 37 ETH vanity block NFT) at 06:42 UTC.

Here’s a small look at how the Twitter community reacted to the news.

Team behind Merge celebrates

Others celebrated the immediate effects of the change:

Some paid tributes to the team’s collaboration and development process, as well as the service of (now defunct) miners:

The transition went even more smoothly than had been anticipated:

Others point out problems with the Merge

However, the Merge was not entirely hiccup free…

For more informed news, follow us on Twitter and Google News or listen to our investigative podcast Innovated: Blockchain City. 

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In November 2017 at BeyondBlock Taipei, Vitalik Buterin laid out his vision for Ethereum 2.0: sharding for scalability and Casper as the consensus algorithm for the transition to Proof-of-Stake (PoS).

Sharding was laid out as “creating a blockchain where you have a hundred different universes, and each universe is a different account space, and you can have an account in some universe, or a contract in some universe, and you can send a transaction in some universe, and it can only affect things in that universe.” He continued to explain that all of the shards would be interconnected and would ‘share consensus.’  

Eventually, the lines between these shards could possibly be blurred and could even have execution across shards.  

Vitalik further mentioned how, as opposed to those chains which had settled on using some form of ‘super-node,’ he thought it was important that Ethereum could be run by a network of ‘consumer laptops.’ Vitalik did admit at the time that “there is no precise conception of what goes into Ethereum 2.0.”

What is Ethereum 2.0 now?

Ethereum 2.0 may include sharding and other changes in the future. For now, when ‘The Merge’ happens, it’ll simply just the change from the Proof-of-Work (PoW) chain as the primary chain, to the PoS chain.

It won’t even be possible for people to withdraw their stake until a planned hard fork several months after the Merge.

What is the Merge?

For months, people have began staking and participating in PoS on a ‘Beacon Chain.’ The Merge is when that consensus layer is combined with the existing state and actual transaction execution level.

Practically, it’s when PoS takes over security and consensus roles for PoW in Ethereum. It’s currently expected to happen at a ‘Total Terminal Difficulty’ of 5.875×10^22, around September 14th or 15th. Once it occurs, Ethereum will be entirely PoS.

Read more: Here’s what you need to know about Ethereum 2.0’s Merge

What about the EthPOW fork I’ve heard about?

There have been discussions about a potential PoW fork of the Ethereum state at the time of the Merge. Justin Sun is involved, as he often is when there’s an opportunity to profit from the efforts of other protocols’ developers. His exchange Poloniex listed tokens ahead of the Merge to allow speculation on it.  

The fundamental problem with non-majority forks for smart contract chains is that a variety of tokens are likely to only have value on a single chain. This is especially true for stablecoins where the issuer will often explicitly decide which chain will continue to have value.

Tether, Circle, and Paxos have all announced their intent to follow the PoS chain, which means their tokens on the other fork will be effectively valueless. This also means that any other protocols on the minority fork will have major issues — and lose value — because the assets won’t be worth $1 as expected.

This is compounded by the fact that there are other stable-assets like Dai that depend on the stable-value of these coins. These would also be expected to have serious issues, as would protocols that implicitly or explicitly expect Dai to be worth close to $1.  

However, there may be opportunities for well-connected actors to profit in the first couple blocks as the value tries to transition between $1 and $0. Many of the people promoting this fork likely hope to do so.

Essentially, this means stablecoins decide forks for smart contract chains — if they’re allowed to become important enough in the ‘ecosystem.’

What is staking?

Staking is the process of participating in consensus for PoS chains.  Ethereum 2.0 will use the Gasper consensus algorithm, which is a combination of Casper developed by Vitalik Buterin and Virgil Griffith, and the algorithm for LMD GHOST fork choice developed by Vlad Zamfir.   

Users with at least 32 ether who can run a validating node are able to earn staking rewards. Staking rewards are provided for proposing a block or attesting to a block. Currently, proposers receive rewards if someone is slashed.

Once the validator is active it’s eligible to be chosen as either a ‘proposer’ who suggests the next block for the network, or as an ‘attestor’ who signs off on the most recently proposed block.  

If you have more than 32 ether and want more staking rewards, then you’ll need to run more nodes as each is treated as having an ‘effective balance’ of 32 ether.

If you have less than 32 ether then you can’t individually participate in staking. You can choose to ‘pool’ your ether with other depositors through a service like Lido. This allows you to still receive some of the rewards from staking and doesn’t require you to manage your own hardware or the full amount of ether.  It also had a token that allowed you to get liquidity before staking withdrawals are available, and was in part responsible for destroying Three Arrows Capital.  

Currently no one who is staking can withdraw, and that is intended to change in a future hard fork.  

What is slashing?

Slashing is the punishment for bad behaving validators. If a set of keys votes more than once on a proposal, proposes two blocks for the same slot, or tries to modify history they can get slashed. Slashed validators lose a portion of their stake and are forced to exit from the consensus process.

What is inactivity leak?

Inactivity leak is a penalty for a node not being online. The more nodes that are offline, the more aggressive this drain is. When the network is still working, this drain is relatively small, but if a very large number of validators go offline, this becomes a much more severe leak.

The intention of this design choice is to drop inactive validators below the minimum 16 ether required to keep staking, so that eventually online validators will again be able to run the chain.  

Is staking secure compared to PoW?

That’s a complicated question. Probably. Maybe. Yes. No. Depending on how you want to structure your question, who you want to ask, and how you think about certain assumptions will strongly affect your conclusion to this question.

PoW has a tendency to centralize into mining ‘pools,’ whereas it’s more economical for a PoS staker to work independently.  

However, because PoS delegates awards proportional to those who already have the largest portion rather than those who are spending the most, it can tend to have a ‘rich get richer’ effect.  

Only, slashing provides an opportunity to impose a very strong cost on attackers. It can effectively destroy the value they hold, and eventually leave them unable to continue the attack as their nodes are removed from consensus.  

Andreas Antonopoulus has discussed how in PoW if you are under attack in this way then one of the most appealing solutions is to change the PoW algorithm and effectively make all existing ASICs worthless (if there are other chains they are not truly worthless, but if Bitcoin were to change then their value would plummet).

However, this is a very broad recourse, and does not specifically target the attacker, where as PoS can specifically target only the ‘bad’ actor.  

PoW has advantages for token ‘distribution,’ by forcing the burning of hard assets (energy) in order to acquire more coins, but it’s less clear that it has advantages for long-term security, especially when distribution of new assets slows or stops. 

A full discussion of the relative security tradeoffs between the two setups is beyond the scope of this piece.

What happened to sharding?

Sharding was still a part of Vitalik’s vision of Ethereum in 2021.  But since then, roll-ups have become better and a new concept called ‘danksharding’ has arisen as the future scaling option for Ethereum.  

The original vision of sharding involved separate universes which would share security at the consensus level. These shards provided separate ‘execution’ environments where the actual transactions and interactions would occur, and would require additional structures to allow communication between them. The complexity of this vision has made it less appealing over time.

What is a roll-up?

Roll-ups are somewhat analogous to Vitalik’s ‘ghost chains‘ that he described in 2014. They are effectively separate blockchains that attempt to share security with the base layer.

Roll-ups perform their execution off the main-chain and then post data to the main chain. Optimistic roll-ups assume transactions are valid unless a ‘fraud proof’ is submitted. Zero-knowledge roll-ups involve the validators for the roll-up submitting a proof that shows the transactions they performed are valid.  

They are also now the vision for Ethereum’s future.

Read more: What are Ethereum roll-ups and why do they matter?

What is danksharding?

Danksharding is a new vision for Ethereum scalability that is meant to deal with the fact that roll-ups create and post so much data to the base layer. It’s meant to provide a way for nodes to verify that data is available, without having to verify that data itself.  

Ethereum intends to rely on a scheme called ‘KZG commitments,’ which rely on creating a polynomial that allows other nodes to verify the data was encoded correctly when combined with validators sampling to make sure that data is available.

For this plan to work appropriately it does require that there be enough honest nodes storing the data to piece it together, and that nodes need to be able to communicate with each other to recreate the full block.  

Danksharding relies on proposer/builder separation in order to function. However, it’s not part of the Merge and is instead on the roadmap of Ethereum.  

What is proposer/builder separation?

Proposer/builder separation (PBS) is a way to separate out the building of blocks and the actual proposal of the blocks to the rest of the network. The idea is that Miner Extractable Value (MEV) has a centralizing effect in PoS, because it allows certain nodes to receive rewards disproportionate from their stake.  Separating out those roles is meant to democratize access to MEV and to blunt that centralizing incentive. 

The implementation of PBS is not final, but the general concept is that block builders would submit bids and block headers. Proposers would select a header and bid, likely favoring the largest bid. A committee attests that the block header was the winning header. The block builder shares the block body, and then a separate committee attests to that and it’s added to the chain.

Proposer/builder separation is not a part of the Merge but is on the roadmap for Ethereum.  

However, smaller validators who worry about the process of needing to build blocks can instead rely on tools like Flashbots MEV-boost. This is a tool that allows validators to configure their nodes to take blocks sent to them by ‘relayers’ who are sending the blocks full of MEV built by builders.

Read more: Ethereum 2.0 can be disrupted with small crypto stake, researchers find

Why is PBS important for danksharding?

In short, because danksharding shifts more responsibilities to the block builders. They are expected to download all of the different data, a role that increasingly would be beyond individual validators. This is exacerbated with roll-ups as they post a large quantity of data. Validators will instead only check that a small portion of the data in a block are present.  

This effectively ‘shards’ the responsibility of keeping and checking that all necessary data is available, allowing for greater scaling.

What other things are needed or useful for danksharding?

Ethereum Improvement Proposal 4844 is meant to introduce ‘Proto-Danksharding’. It’s not danksharding, as all validators still need to validate all the data, rather than responsibility being ‘sharded.’

What it does do is change how the data from roll-ups is stored. Instead of being around indefinitely, they will instead be pruned after a month, which helps reduce the amount of state that validators will need to continue to carry.  

It also changes how the Ethereum fee market works, breaking storage of this data out from the existing Gas calculation.  

EIP-4844 is not a part of the Merge but is on the roadmap for Ethereum.  

Ethereum Improvement Proposal 4444 is a change in how clients serve data to other nodes. It demands that nodes no longer broadcast historical data older than a year to other nodes. This effectively ends ‘full sync,’ where people would sync from the first block. Instead they would start from a checkpoint and sync from there.

EIP-4444 is also a part of the roadmap for Ethereum and is not part of the Merge.  

What happens to the data?

The short answer is that it’s stored by other people. Who are those people? Well that’s a little complicated.  

Individual applications will likely need to find ways to store and share that information, so Optimism and Arbitrum, for example, will be incentivized to ensure that the data needed for their applications is still available.  

Larger infrastructure providers like Infura will likely end up having an important role in maintaining this data as well. EIP-4444 specifically cites efforts by The Portal Network and The Graph to provide markets and availability for the data.

What will change for users?

Very little! Especially for those who are not actively participating in consensus. For those who are, they will need to change from their likely GPU based setups for PoW to staking setups for PoS.  

Read more: Here’s how insiders are getting rich off the Ethereum Merge

Will this make my transactions cheaper?

No, at least not meaningfully. However, it might in the future. If Ethereum begins to implement the steps towards statelessness, and no longer requires validators to download all the data, then it will likely become possible to increase the gas limit.

This is unlikely to occur until after PBS, after EIP-4444, after EIP-4844, and so should not be expected immediately. Many of these same changes will also allows roll-ups to increase their throughput, and the amount of transactions possible will go up.  However, the Merge and the shift to POS will itself not make your transactions cheaper.

Will this make my transactions faster?

No, at least not meaningfully.  

Will this make number go up?

It’s impossible to say but do let us know on Twitter.

For more informed news, follow us on Twitter and Google News or listen to our investigative podcast Innovated: Blockchain City.

The post The evolution of Ethereum 2.0: Your questions answered appeared first on Protos.

Ethereum has scheduled its Merge to occur this week, as early as September 15. Ethereum’s Bellatrix update is now complete ⏤ the final step ahead of Ethereum’s transition from Proof-of-Work to Proof-of-Stake.

The Merge is by far the year’s most publicized blockchain upgrades of the year ⏤ understandable, considering that Ethereum is the second biggest digital asset by market cap. However, less publicized is the enormous profit that wealthy insiders have extracted from retail traders around the event.

Five ways wealthy insiders profit from the Merge at the expense of average investors

1. Charging less wealthy people (with less than 32 ETH) for staking-as-a-service

If someone has less than the 32 ETH (~$54,000) required to activate validator keys in Ethereum 2, they can’t participate in Proof-of-Stake rewards, which pay a variable 3-18% annually. Missing out on even a conservatively calculated 4% worth of annual rewards is tantamount to losing half of an otherwise staked position every 17 years, so ETH investors need to utilize staking-as-a-service.

There are various services to stake ETH with a third party who will validate blocks on one’s behalf and pass along some of its staking rewards. Of course, administrators of these services charge a fee ⏤ the first example of wealthy insiders extracting money from retail traders through the Merge.

2. Trading de-pegs of Lido’s staked ETHs

As noted above, passing along staking rewards without the minimum 32 ETH obviously incentivizes retail investors to deposit their smaller ETH positions with a staking service. The most popular staking services give back a proprietary “staked ETH” token as a representation of their position.

For example, the most popular Ethereum 2 staking-as-a-service provider is Lido, which gives users back its proprietary token, stETH, in exchange for their ETH deposits. Administrators for Lido control the private keys to $7.7 billion worth of ETH or a stunning one-third of all Proof-of-Stake ETH.

Lido has issued $7.2 billion in fully diluted stETH. It claims that ETH and stETH are supposed to trade a 1:1 parity, but alas, the pegs between ETH and the various staked ETHs break periodically, including stETH. This is the second example of wealthy insiders extracting money from retail traders through Ethereum’s Merge: trading de-pegged stETH.

Read more: Here’s what you need to know about Ethereum 2.0’s Merge

Lido’s stETH became the first popular target for wealthy insiders capitalizing on this de-peg trade. Amid the June 2022 collapses of Celsius and Three Arrows Capital ⏤ both of which held large bags of stETH ⏤ traders began selling stETH at a discount to ETH. At its lowest, stETH was selling for 9% less than ETH. Days later, it fully regained its peg.

Tens of millions of dollars worth of stETH transactions cleared while it was de-pegged, allowing arbitrageurs to make millions in profit at the expense of stETH’s overwhelmingly retail investor community.

Worse, stETH has continued to regain its peg and de-pegged, repeating cycles of arbitrage profits. Today, over $5 billion worth of stETH are trading about 3% lower than ETH, an arbitrage opportunity of yet another $140 million. If it cycles through regaining its peg and then de-pegs again, arbitrageurs could siphon even more money.

3. Arbitraging cbETH

A third example of wealthy insiders extracting money from retail traders through Ethereum’s Merge simply mirrors the above model. The same arbitrage profits are available with Coinbase’s version of staked ETH: cbETH.

Lido’s staked token is stETH; Coinbase staked token is cbETH. There’s over $1 billion worth of cbETH that de-pegs at fluctuating discounts. Today, cbETH is trading for 5% less than ETH ⏤ a delta of $50 million.

4. Lido bribes

Unlike Coinbase, Lido allows members of its DAO to vote on governance matters selected by its administrators. Votes are cast based on holdings of Lido’s so-called governance token, LDO.

Governance tokens are susceptible to bribes. Because votes are largely unregulated across jurisdictions, the industry of DAO bribes is well-established. So much so, in fact, that an entire organization controlling $4 billion called Convex exists almost exclusively to benefit from bribing another multi-billion dollar organization, Curve.

Similarly, LDO holders negotiate — or outright publish — their rates to sway their votes to the highest bidder. This is the fourth example of wealthy insiders extracting money from retail traders through Ethereum’s Merge: bribing LDO token holders to act in their best interest.

It bears repeating, as noted above, that Lido’s LDO controls voting for approximately one-third of all Proof-of-Stake ETH.

Read more: Here’s why Ethereum 2 staking is risky and increases centralization

5. MEV

A fifth example is simply ongoing Miner Extractable Value (MEV), which continues through the completion of the Merge and will morph into its Proof-of-Stake form: “MEV-Boost.” MEV (and its Proof-of-Stake equivalent, MEV-Boost) allow wealthy insiders to systematically front-run trades, disadvantaging average investors who cannot afford to pay for expensive, MEV-resistant software. MEV has extracted billions of dollars from average investors whose orders were front-run or forcibly re-ordered.

Wealthy insiders and financial professionals will continue to use these five tactics, plus many alternative strategies and variations, to enrich themselves during Ethereum’s Merge.

Untold numbers of fund managers have already quietly maneuvered into multi-million dollar trades that run counter to the interests of average investors. As long as they can find profit, they will continue to remain quiet.

For more informed news, follow us on Twitter and Google News or listen to our investigative podcast Innovated: Blockchain City.

The post Here’s how insiders are getting rich off the Ethereum Merge appeared first on Protos.