Blockchain and Crypto, Member Exclusive

Bankchain Briefing: How will ‘The Merge’ impact the crypto industry?

  • This week, we discuss Ethereum 2.0 and its likely impact on the future of blockchain and crypto.
  • We also look at what Solana’s new crypto phone tells us about the future of DeFi mobility.
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Bankchain Briefing: How will ‘The Merge’ impact the crypto industry?

Almost exactly a year ago, I wrote an article on Ethereum 2.0, which refers to a series of upgrades to the Ethereum network in order to make it more scalable, secure, and sustainable. These upgrades represent a major transition for the Ethereum network, and by extension, the entire blockchain ecosystem.

Once implemented, Eth2 will boost network speeds from the current average of around 30 transactions per second to potentially 100,000 TPS. The upgrades will also improve network security and drastically reduce Ethereum’s carbon footprint.

Over the course of these upgrades, Ethereum will change its consensus mechanism from Proof-of-Work to Proof-of-Stake. PoW validates each transaction on the network by making a large number of computer nodes compete against each other to solve complex mathematical problems, which makes it expensive, energy-intensive, and time-consuming. In contrast, PoS uses an algorithm to validate blocks of transactions, which allows it to process them much more quickly and efficiently, at a fraction of the cost.

The transition to Ethereum 2.0 is a massive undertaking that has been in the works since 2014. The Eth2 launch involves three separate phases, the first of which is known as The Beacon Chain and has been live since December 2020. The Beacon Chain is a new PoS blockchain that was introduced alongside the current PoW network in order to test its functionality and lay the groundwork for future upgrades.

The second phase is known as The Merge, where the Ethereum network will officially switch to the Beacon Chain as its consensus mechanism. The Merge is expected to take place next month – on September 15, according to some sources. This will enable staking on the entire network and usher in the end of energy-intensive mining.

The third and final phase is termed as Shard Chains, scheduled for launch sometime in 2023. This phase will involve the splitting of the Ethereum network in order to further increase its capacity for validating transactions, storing data, and improving performance over time.

With less than a month left before The Merge, I decided to revisit this topic and explore why it’s important and how it could impact the industry going forward. I spoke with Jaydeep Korde, founder and CEO of Launchnodes, an Ethereum staking platform that allows users to lock in their holdings while earning interest, and is building the infrastructure for widespread ETH accessibility. Jaydeep believes The Merge will “rewrite the fabric of the financial economy”, and will provide investors with opportunities to generate inflation-proof, non-discriminatory wealth via staking.

Here's my conversation with Jaydeep.

Why is ‘The Merge’ so important? How will it change Ethereum, and how will it impact the blockchain and crypto industry as a whole?

A useful analogy is that Ethereum pre-Merge is like the analog internet: exciting, but just getting started. Post-Merge Ethereum will become like the internet after broadband became mainstream in people’s homes.

The Merge is extremely exciting for those in the staking ecosystem. After the Merge, nodes will be able to come on and off the network. Right now, they can only go on to the network. Post-Merge, you will be able to get your money back. Once you can get your money off the network, significant capital will be deployed to the network to stake – providing the opportunity to earn 8-12% interest rates in ETH, and then additionally through capital appreciation from the price of ETH going up as it reduces in supply. The assumption is that this interest will be sustained by the continued growth in traffic on the Ethereum network by applications like NFTs and DeFi, and ones that will emerge as the functionality of Ethereum grows.

For people who don’t know, what is staking and what is its significance? How does it enable investors and institutions to generate inflation-proof wealth?

ETH staking is set to be the new internet of finance, rewriting the fabric of the financial economy. Moving ETH’s valuation into a Proof-of-Stake model will change how ETH accrues value from mining to staking, and will allow investors to earn passive income – like interest in a fiat savings bank, but with much higher interest rates. ETH staking is on track to become a $40 billion industry, changing the way institutions operate and further enhancing blockchain adoption.

ETH staking provides opportunities for venture-style investment for both retail and institutional investors. The Merge is going to incentivize long-term investors with huge potential payoff, potentially earning up to 12% on yields. Institutional investors who have primarily been involved in Bitcoin will increasingly diversify their portfolios and utilize ETH.

What role does Launchnodes play in building the infrastructure for ETH staking?

Launchnodes turns its clients into solo stakers or independent stakers by providing all the component nodes with a diversity of clients for ETH staking, so that clients can keep all their returns and can build their own staking infrastructure, making architecture and client choices while also choosing public cloud or their own infrastructure to stake from.

By empowering clients to become solo stakers or independent stakers, Launchnodes is promoting the decentralization of the Ethereum network. At no point do we have access to our clients’ funds, or to mnemonic seed phrases, keys or passwords. Nor does Launchnodes create any user interface dependency on accessing or running nodes for our clients. This allows our clients to be truly independent solo stakers, making it easier and cheaper to stake ETH for everyone: individuals, exchanges, Lido operators, and crypto institutions wanting to solo stake.

In just over a year, our customers staked over $400 million USD – an amount set to skyrocket with ETH’s upcoming Merge. 

What are your thoughts on the current ‘crypto winter’? Does the future look bleak for crypto right now? Do you think ‘The Merge’ could help the industry regain some of its lost momentum?

The crypto winter is bad because retail investors have gotten hurt. At the same time, though, it’s forcing people to focus on building, not bullshitting, which is positive. The Merge will inevitably create a stir and the price of ETH will likely go up. I want the momentum the industry regains to be about building useful functionality like we have seen in DeFi, not simply a momentum of asset price rises.

What is the role of regulators in all of this? What kind of regulation is needed to facilitate growth and innovation in the blockchain industry? 

We need regulation and best practices, but it’s not easy to achieve. Regulators normally have to check the financial functionality and viability of new services or products, and then check that the technology providing them works. With staking and DeFi, the financial functionality and the technical aspects are hard – perhaps impossible – to separate out neatly because of the speed at which they operate.

Ultimately, we need to build regulation muscle that will support the retail investor – the ability to earn an interest rate on crypto assets is something that’s extremely powerful and has the potential to democratize wealth-creation for all retail investors. From a regulatory perspective, you have to find the right balance of regulation versus letting opportunity flourish. 

When it comes to regulation, we’re all learning what’s needed – and these needs change quickly, because crypto moves at warp speed. This is something that regulators need to take into account: regulatory needs change quickly based on the constant innovation of the industry.

What Solana’s new crypto phone tells us about the future of DeFi mobility

Solana, the blockchain company that has been competing with the likes of Ethereum for the fastest and cheapest transactions, is launching a Web3-ready Android smartphone called Saga. This device will have the Solana Mobile Stack, as well as a siloed secure environment for storing private keys and seed phrases, called the Seed Vault. These functionalities will allow developers to create DeFi and Web3 experiences for mobile.

Marius Ciubotariu, the co-founder of a Solana Project called the Hubble Protocol, says that so far, DeFi has been a clunky beast to operate. Successful development of Web3 mobile experience can push the needle in ways that smartphone industry leaders haven’t yet been able to do. “It’s not uncommon for the most devoted DeFi participants to whip out a laptop in the middle of dinner so as not to miss an opportunity,” he said, emphasizing that a mobile experience could change the game for crypto enthusiasts and investors.

For the DeFi space to fully absorb mobile possibilities, some changes will have to be made. For Ciubotariu, traditional smartphones don’t offer the software/hardware support that DeFi requires. Meanwhile, industry giants like Apple need very strong consumer demand to justify allocating R&D funds to rethinking their entire architecture for the blockchain. This is where Solana’s advantage seems to be: a fresh slate allows the company to build without the inertia produced by legacy architecture and design constraints.

The possibility of Web3 becoming mobile is encouraging fintechs to build products that were out of reach before. For the Hubble Protocol, this means novel ways of earning passive income can become a reality. “In this model, consumers can stake tokens, and instead of receiving an APY, they receive a utility – such as VPN services,” says Ciubotariu.

Moreover, once a consumer has access to this VPN service, they can tokenize their unused bandwidth and earn rewards for doing so. Similarly, for the Solana Foundation, Saga’s promise to bring NFTs to mobile may lead to businesses being able to incorporate tap-to-mint acquisition, NFT-gated commerce, and IRL events in their customer experience.

Once it launches, Saga will have to perform under the scrutiny of both smartphone power users and those well-versed in the DeFi and NFT space. However, the true test will be how the device balances blockchain-ready hardware with the competitive demands of a high-end smartphone. Until NFT-minded gamers and crypto enthusiasts can test run this phone en masse, all we can do is wait, because this saga has yet to unfold. 

Highlights from our recent coverage

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Recent market volatility may indicate a rough patch for digital currencies, but recent data suggests that they may have the requisite consumer demand and merchant adoption to power through. With cryptocurrency ownership reaching an all-time high this year, it looks like paying with crypto could become mainstream sooner than we thought.

Plaid amps up crypto portability by adding leading exchanges to its network

Plaid's new crypto functionality allows consumers to connect their crypto wealth to their personal finance applications. The service has complete integration with notable crypto exchanges like Binance.US, Gemini, Robinhood, and SoFi.

What we're reading

  • Federal Reserve issues guidance for banks considering crypto activities (Reuters)
  • Citigroup furthers crypto push with two digital asset hires (CoinDesk)
  • Over 1 million customers complete Revolut’s crypto learning courses (AltFi)
  • Crypto exchange Bitfinex may be facing criminal investigation in US (CoinDesk)
  • Coinbase racks up $1.1 billion loss as crypto trading volumes slump (FT)
  • Celsius CEO cashed in after bankrupt crypto lender’s token surged (CoinDesk)
  • BlackRock teams up with Coinbase in crypto market expansion (Bloomberg)
  • Crypto winter may temper fintech earnings (Reuters)
  • Coinbase Prime adds Ethereum staking for US institutional clients (CoinDesk)

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