The Biggest Thing in Crypto Is About to Happen

Welcome to Bloomberg Crypto, our twice-weekly look at Bitcoin, blockchain and more. In today’s edition,  offers a primer on this week’s big happening, the Ethereum “Merge”: 

Merge mania

Hell Week. September Madness. Blockchain Rush. Whatever you want to call it, it’s crunch time for crypto as Ethereum, the network that runs the second-most-valuable digital currency, prepares to undergo a major software upgrade

Some time between Wednesday and Thursday, depending on your global location, the Ethereum network is set to officially finalize a shift known as the Merge, which will see it adopt a different mechanism for creating tokens and ordering transactions. Sounds boring? Well yes, but the transformation could have significant consequences across the cryptosphere, from upending miner business models to shaking up institutional investors’ ESG rankings.

Currently, Ethereum uses a “proof-of-work” model similar to that employed by many blockchains including Bitcoin to order transactions on its network and create new tokens. This involves having computers compete to solve complex puzzles for a financial reward, a process that expends a great deal of energy. After the upgrade, the network will operate under a much less energy-intensive “proof-of-stake” model, with transactions ordered by “validators,” who lock up Ether on special wallets. 

As my colleagues Olga Kharif and David Pan reported Tuesday for Bloomberg Businessweek, investors will be enticed to contribute to the post-Merge network by locking up, or staking, some of their tokens in exchange for yield (expected to be around 5.2% right after the Merge). One estimate suggests that as much as 80% of Ether’s total supply — worth around $170 billion at present — could be staked in future.

While some traders might opt to do this directly, crypto exchanges are already offering Ether staking to their customers, meaning that outside of a few whales, it’ll be the familiar names that can earn big from supporting Ethereum’s new future. Think how many people have bought Ether on Coinbase, for example — and now imagine that every time they buy, they’re offered the chance to stake some of that Ether with COINBASE in exchange for a return. (Coinbase is already offering staking in fact.)

Other big winners could be companies that would like to diversify their treasuries by adding crypto, as the staking model is expected to reduce Ethereum’s energy usage by 99%. The ability to bill stockpiling the world’s second-largest token as a victory for ESG would be a boon.

But where there are winners, there are always losers. Ether miners will effectively become obsolete, unless they switch to mine other blockchains barring a last-ditch attempt to create a separate proof-of-work Ethereum blockchain that many key crypto players have pledged not to support. And it could only make matters worse for big proof-of-work chains like Bitcoin, having already faced headwinds over their environmental impact.

For now, all eyes are on the Merge, with acolytes around the globe planning to not sleep for several days to make sure they don’t miss the big switch. Where will you be when it happens?

Charting it out

Hearing them out

What we’re reading (and writing)

• The Ethereum Merge Ups the Stakes — and Reshapes the Crypto Universe (Bloomberg Businessweek)
• Celsius Network Plots a Comeback After a Crypto Crash (New York Times)
• Do Not Pass Go, Do Not Collect 200 Bitcoin (Wall Street Journal)
• Crypto Lending Now Pays Less Than Safest US Government Debt
• Voyager Customers With Frozen Savings on ‘Edge of Seat’ Ahead of Auction
• Matt Levine’s Money Stuff: Crypto Wants Some SEC Rules (Bloomberg Opinion)

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Returning to London on Sept. 28, the Bloomberg Technology Summit will bring together Europe’s top business leaders, policy makers and investors to discuss strategies fostering growth and innovation. Speakers include executives from Copper, DarkTrace, and Farfetch. Learn more

— With assistance by Olga Kharif