LONDON (Bywire News) - Ethereum insists that its long awaited ‘merge’ is definitely on the way. However, volatility in the market and a history of delays are making investors nervous.
Ethereum has been planning its merge for years as it migrates from the energy-intensive proof of work model to the much faster and sustainable proof of stake favoured by next-generation blockchains such as EOS. Once completed, Ethereum hopes it will address long-standing questions over its scalability and sustainability which have become a growing problem.
However, deployment has been delayed time and time again. After the recent decision to push back a planned launch date of June, investors could be forgiven for wondering if it would ever happen. Its website currently claims the merge is coming in Q3 or Q4 of this year. Even so, the market remains sceptical.
Polymarket, a crypto site in which users place bets using stablecoins on the likelihood of future events places the chances of the merger occurring by October at around 67%, with a 13% chance of it happening by September.
However, others doubt it can meet that deadline. Brent Xu, Founder and CEO of base-layer blockchain borrowing and lending platform Umee said the scale of Ethereum created problems. “It's just the sheer mass of the protocol. Ethereum is just so huge that I don't think they're going to reach their deadline in time," he said. "People are just scared that their stETH is not going to be worth anything because the Merge is probably going to take longer than expected."
One thing’s for sure. The merger will be a pivotal moment for Ethereum – one which it needs to get right. The Ethereum Foundation has likened it to changing the engine of a spaceship mid-flight. Accuracy will be vital to ensure activity continues uninterrupted.
The stakes couldn’t be much higher. As with other cryptocurrencies, Ethereum has suffered in recent times.
Ether is currently trading at around $1,200 down from $3,500 in April. The bear market has exacerbated ongoing concerns about the repeated delays to the merger.
The merge could also see the end of investors holding a derivative token called ‘staked ether’ or stETH which represents Ethereum staked in a testing environment for Ethereum 2.0. This would be difficult to redeem at scale until at least six months after the major network upgrade.
Why stETH is such a concern
The arrival of Ethereum 2.0 will mark the network’s transition from its existing proof of work mechanism to the much more energy-efficient proof of stake consensus system. It will see Ethereum address scalability and sustainability concerns allowing it to dramatically increase transaction speeds and reduce its growing carbon footprint.
However, the delays have dented investor confidence and any further issues could be bad news for stETH holders as the token created by Lido can be converted into $ETH on a 1:1 basis between six and twelve months after the network upgrade.
With most stETH trades occurring on the trading platform Curve, the price will trade at one set by the market.
According to CoinGeko, stETH reached a market cap of $11 billion in May until it traded last month on step with Ethereum.
However, when the crypto markets underwent a sell-off last month, stETH was trading at an 8% discount to ETH. The difference can be accounted for by major investors Celsius and Three Arrows Capital deciding to sell.
Whilst the price has recovered slightly, stETH still trades at a 4% discount to ether. Its continuing struggles to regain parity are partly attributed to delays with the merge.
stETH gained its popularity due to the interest that can be earned by holders ‘staking’ their tokens elsewhere by locking up a minimum of 32 ether (estimated $38,000) until the network upgrades its mechanisms.
Lido allowed them to stake as little ether as investors wished in return for a yield in order to receive stETH. However repeated delays, coupled with the wider problems in the market, will have been testing stETH investors’ nerves to the limit.
Ryan Shea, a crypto economist at global fintech company Trakx.io, claims that the concern is that liquidity is quickly drying up at Curve. According to the platform's data, stETH liquidity has more than halved since May.
“You're going to have to find alternative sources if you want to sell a huge amount of stETH," Shea added suggesting putting stETH as collateral in another lending protocol. “But in this type of environment where people are looking closely at crypto lending companies whether anyone will be prepared to take that trade, I don't know.”
One thing’s for sure. Crypto investing is a white-knuckle ride at the moment. Any further delay in the merge will make the ride even bumpier.
(Writing by Samba Jallow, editing by Klaudia Fior and Tom Cropper)