It’s been more than a month since Ethereum switched to Proof of Stake (PoS) and many investors are questioning why it hasn’t impacted their portfolio yet. It’s the market, not the mechanism. Unfortunately, the Fed still has significant influence over US financial markets, so the “merge effect” on investor returns will unfold over time, not overnight.
What we can do at this point is break down exactly what happened on September 6th and whether it was good for crypto investors or not. From an environmental perspective, Proof of Stake (PoS) is more energy efficient than Proof of Work (PoW), so it’s better for the planet. For that reason alone, you can now add Ethereum to your ESG watchlists. (Gauntlet thrown)
Remember where you were on September 6, 2022
Proponents of a decentralized financial (DeFi) system stood up and cheered when “The Merge” became official last month. It was called a merge because Ethereum had been running a Proof of Stake parallel blockchain (The Beacon Chain) since December 1, 2020. The original chain hit Total Terminal Difficulty (TTD) and a new, more efficient blockchain was born.
Ignore the complex terminology if you’re not a techie. Think of it as two streams running side by side until they merge into a river. The river is more powerful, carries a larger volume of water, and becomes a force of nature. That’s the direction the Ethereum platform is heading in. September 6th could be remembered as the date business and finance changed forever.
Does that sound too dramatic? Ethereum isn’t a cryptocurrency. It’s a platform where you can create crypto, smart contracts, and decentralized applications (Dapps). The real value in implementing Proof of Stake is the upgrade to the blockchain. Ethereum can now run leaner and faster. That affects business applications, financial transactions, and lending.
The “Stake” in Proof of Stake is a Finance Concept
Most of the world hears the word “crypto” and they think “Bitcoin.” That’s okay. Satoshi Nakamoto’s creation has been around since 2008. He (or she) isn’t a real person, but the whitepaper introducing Bitcoin certainly was. The idea shook up financial markets. Expect the concept of “staking,” once it goes mainstream, to do the same.
You don’t need to be a PoS validator to make money on staking. Crypto owners can stake their coins to facilitate lending to other crypto owners. Stakers can earn “rewards” for doing this, much like they do when they validate new blockchain transactions in the Ethereum blockchain. It’s not a new practice. Expect to hear a lot about it in the upcoming months.
Another benefit to DeFi staking is that you can collateralize a loan with it. More specifically, anyone can collateralize a loan by staking their crypto. No credit score needed. No lengthy bank approval process. No origination fees or exorbitant interest rates. Ethereum charges a “gas” fee, but it’s a lot cheaper than what you’ll pay for a bank loan.
Blockchain Investing Just Got More Interesting
Please note that we did not say “crypto investing.” Cryptocurrency is a valid asset class that should be part of any active investment strategy. The Ethereum merge didn’t change that. It just made crypto more energy efficient. The real value in what they did was the improvement to the Ethereum blockchain. That will have a cascading effect in multiple sectors.
Blockchain eliminates middlemen. It allows users to interact directly with one another without the burden of extra fees and time delays on transactions. Smart contracts can be structured so receiving parties get paid only when certain conditions are met. Dapps can handle complex business functions that would crash the average laptop or office server.
Proof of Stake is good for crypto investors because it eliminates the power consumption argument that lawmakers have been presenting as a reason to regulate or ban digital assets. It’s beneficial to business owners because it gives them a new way to do business, one where traditional banks can be bypassed. That could break the Fed’s hold on the US economy.