Will Ethereum integration provide a new destination for institutional investors?

Last week’s merger was “the most significant development in the history of the Ethereum network,” according to Fidelity Digital.

And from a technical point of view, the transition of the blockchain network from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism was remarkable. Compared to changing a jet’s engine mid-flight, the software update caused problems on September 15.

And overnight, Ethereum, the world’s second-largest blockchain platform, reduced its energy use by 99.95% from a peak of 94 TWh per year in May – the equivalent of the national territory of Chile – to a paltry 0.01 TWh. September 16, according to Digiconomist.

This should carry some weight with regulators threatening to clamp down on blockchain networks for local corruption. It could also bring more institutional investors into the crypto space.

To this last point: Institutional investors like pension funds, insurance companies, foundations, and others are valuable because they tend to be long-term investors and don’t tend to trade on rumors or overreact to 24-hour news cycles. The broad participation of this group will help solve the problems of constant liquidity and volatility of crypto.

However, others believe that while the merger will provide corporations and large financial institutions with an environmentally friendly platform, as well as new equity opportunities, it has yet to address one of Ethereum’s major shortcomings. Not yet, anyway.

“The merger is a watershed moment for the crypto industry, but its impact on accelerating adoption by institutional investors will take time,” said Jim Kyung-soo Liu, an associate professor at Johns Hopkins University’s Carey Business School.

“Ethereum does not have a better description on TPS [transactions per second]John Perifoy, co-founder and CEO of Floating Point Group – a trading platform provider – told Cointelegraph. The merger will not increase the block size or speed. “We’re not there yet.” It implements a sharding solution that can significantly increase speed.

Still, solving the problem of energy consumption and reducing carbon emissions are no easy feat. Ethereum’s carbon footprint, once as big as Finland, is now comparable to the Faroe Islands, according to Digieconomist. Or to put it another way, a single Ethereum transaction is now “equivalent to 44 Visa transactions or 3 hours of YouTube with 3 hours of carbon.

“Strengthening Ethereum’s environmental, social and corporate governance (ESG) credentials should bode well for regulatory-focused institutions looking to start exploring the Ethereum ecosystem,” Marc Arion, Ethereum Research Analyst at CoinShares, told Cointelegraph, Jack Nurether and Daniel Gray, in a Fidelity Digital report. Writing about integration, he adds that the shift to PoS “could have a positive reinforcing effect for those who feel strongly about the environmental impact of blockchain use.

In fact, two Bank of America analysts recently suggested in a note to clients that some institutional investors who had previously been “dissuaded” from investing in PoW-generated tokens may participate.

“The significant reduction in power consumption post-merger will allow some institutional investors to purchase tokens that were previously prohibited from purchasing tokens that operate on blockchains’ Proof of Work (PoW) consensus mechanisms.

Increased returns for Ether holders?

The merger also introduces other potential benefits to traditional financial institutions. Fidelity Digital says, “Ethereum’s proof-of-stake conversion makes Ether an asset. This could increase gross profit for Ether (ETH) owners and “make the asset more attractive to future investors.”

If you’re an institutional investor, “one reason to be excited,” Perifoy said, is that you can pay your ETH as a PoS Ethereum validator and earn a 5% annual percentage yield (APY). “It’s a very good dose, and it has a relatively low risk associated with it.”

Staking can be costly. In a September 15 article titled “Ether’s New ‘Staking’ Model May Get SEC’s Attention,” the Wall Street Journal reported that US SEC chief Gary Gensler recently suggested that Ethereum’s generous new staking options could trigger a Hawaii challenge — and that US courts would consider Ether as a security. You can declare.

“Now that Ethereum closely resembles traditional financial instruments, regulators may view it as such,” Arjoon told Cointelegraph. In other words, Ethereum’s new stock opportunities may bring in more traditional investors but also SEC oversight in the United States.

Is ETH Depreciating?

As a result of the merger, the total supply of Ether may decrease, which institutional investors may also view favorably. Pre-merger Ethereum was paying, creating around 13,000 ETH per day to reward PoW miners. After the merger, the network will pay out rewards of about 1,600 ETH per day, a 90% discount on the newly released amount, according to the Ethereum Foundation. Meanwhile, as of August 2021, a portion of Ethereum gas payments will continue to be burned or canceled.

“On average, at least 16 gigabytes worth of gas will burn at least 1,600 ETH daily, bringing net ETH inflation to zero or less post-merger.”

“Many people believe that ETH is in decline and now it is depreciating by a “very large amount” against the US dollar,” Perifoy said.

Writing on LinkedIn, consultant Markus Hamer said: “Supply will not only be blocked, but will also decrease, meaning that the price reduction will reduce the supply of ETH and increase the burn rate.”

Is dizziness more likely?

Bitcoin, the first and largest blockchain network, of course, still uses the PoW consensus method. Could post-merger institutional investors now prefer ETH to Bitcoin (BTC)?

“PoS and lower power consumption make Ethereum’s ETH a more attractive investment than Bitcoin (BTC) from an ESG perspective, but it is too early to tell if a ‘reversal’ will happen,” Liew said.

“I suspect that diehard bitcoin fanatics will not sell their positions to get into ETH because of the merger.”

The new Ethereum software is still not well-tested, and registered rewards come with some strings attached. When institutional investors share their ETH, it is locked in a contract. “You cannot withdraw your accumulated Ether or rewards. […] At least 6–12 months until the merger is complete,” said Arjun. “This inability to scale still leaves many institutions unwilling to get on board and the logistics to navigate and manage these risks, as well as create barriers to further adoption.”

“Institutional investors will probably wait and see the approach,” Liu said, adding that “if the overall stock market crashes due to inflation, institutional investors will wait a long time to come to the rescue of the crypto industry.” time”

“The merger was successful, but it doesn’t mean that institutional crypto adoption is on the fast track,” said Edward Moya, senior market analyst at Onda, Cointelegraph. “The key to widespread adoption is future improvements.”

Perifoy, for his part, sees last week’s events as a pivotal moment, especially if “we go another week and don’t see any massive Ethereum forks or technical glitches,” he told Cointelegraph.

“How often do you see the release of something decentralized that works completely live for millions of users? […] It’s a watershed because of human collaboration, and because we’ve raised this sort of thing a little bit with little bugs.