Ethereum 2.0 Merge Could Drive Up Institutional Investment

Ethereum completes the much-awaited Merge, now using proof-of-stake, which opens a new era for the second-largest blockchain. ETH had postponed the network transformation several times before getting to this point, giving the competition time to catch up. The update’s complexity was augmented by the fact that it was one of the most significant open-source software endeavors of all time, demanding coordination across various teams. What is done is done. Ethereum will now consume 99.9% less energy, accommodate increasing usage, and increase the security of transactions. Of course, the changes will not be visible right away, but many see the benefits down the road. 

Ethereum Is Less Energy-Intensive Than Bitcoin and Its Former Pow Self

Ethereum 2.0, the new version, could be highly attractive to institutional investors, driving engagement within the cryptocurrency sector as a whole, as reported by the researchers for Bank of America. After the Merge, ETH will be more environmentally-friendly, and this significant reduction in energy consumption could encourage some institutional investors to acquire tokens that run on the blockchain. Ethereum mining has become obsolete with the transition from the proof-of-work model to the proof-of-stake one, so the creation of Ether will no longer require a massive amount of computing power or electricity. Key players in institutional finance can, therefore, meet their environmental, social, and corporate governance obligations.

Not only does Ethereum process transactions a lot faster than Bitcoin, but it is also less energy-intensive. PoS networks are assembled around 20 machines, meaning that proof-of-stake reduces network congestion while being more affordable for users. Several networks, including Cardano, already take advantage of the PoS consensus mechanism to verify and add new blocks to the network. ETH2 is currently implementing sharding, which will work synergistically with layer 2 rollups, scaling Ethereum to support more users and lowering transaction fees. Each node in the network only needs to process a tiny portion of the total data. 

Institutional Investors Will Probably Participate in Ethereum Staking 

Holders of the native cryptocurrency, Ether, will be free to earn interest from passive rewards for helping secure the network. If the number of investors increases, the supply of Ether will decrease as well, which will result in competition among buyers, leading to an increase in price results. This is good news for investors. A staking model will replace mining, so anyone with a small number of coins can become part of the process and earn tokens in proportion to their staked amount. Those taking into account solo home staking need to have at least 32 ETH and a dedicated computer connected to the Internet all the time. 

Staking requires technical knowledge and being informed about the Ethereum price. To stake Ether and earn interest in the form of a new ETH, it is indispensable to deposit some coins into a wallet or pool linked to a smart contract. Users can delegate their stakes to others, who take on the duty of the validator on their behalf. It is estimated that investors can make as much as 10.1% in annualized yields by staking digital tokens. Binance will offer passive earnings with an APY of 6% as part of its Ethereum staking service. Users can start staking Ether with a minimum of 0.001 ETH. 

It is likely that institutional investors will favor staking Ethereum to the detriment of lending and borrowing digital assets on DeFi apps. There are certain risks associated with lending/borrowing via decentralized finance, such as impermanent loss, DeFi rug pull schemes, and flash loan attacks, so knowing how to manage and address these risks is key to success. It is hard, but not impossible, to convince institutional investors to give DeFi apps another chance. After all, there are tools to help them navigate the complexity of decentralized finance, which are focused on aspects such as minor price changes in the short term. 

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It Is Enormously Difficult to Tamper with The History of Transactions 

Corporations and banks have a duty to prevent fraud and ensure compliance in B2B transactions, and Ethereum 2.0 is more secure than it seems at first glance. Transactions are irreversible, and it is highly complicated to modify transaction data on the blockchain, so ETH achieves security and reliability. Information is reported back to the main chain at all times, which translates into the fact that the main chain is not overcrowded by transactions while still keeping the history. Ethereum is more decentralized as opposed to Solana, making available a much more mature network. The blockchain makes transactions more transparent and secure as compared to private systems that centralized finance relies on. 

According to the experts, Ethereum’s PoS system should maintain the network’s security at a lower cost. Validators will be assigned arbitrarily to produce blocks equal to the number of tokens they hold to check transactions on the blockchain, so there will be a safe environment for consumers. Since ETH2 requires more validators, it is less prone to manipulation. The number of validators has surpassed 300.000 since the beginning of the year, and mining pools are operating at the highest levels during the course of the platform’s lifetime. Let us not forget that the network is powered by the Ethereum Virtual Machine, which protects against fraud and cyber-attacks.  

Closing Thoughts 

All in all, there is a good chance that institutional investors will switch from Bitcoin to Ethereum in the time to come, longing to achieve ESG performance, receive staking rewards, and protect their accounts. Though this scenario has yet to materialize, we are looking forward to seeing the outcome. ETH2 is already in operation, by the way, but the effects will be felt later on. Those interested in trading, holding, and using their Ether on DApps do not have to do anything, as the Merge has a minimal impact on how Ethereum operates. 

If you are an asset manager, you should consider taking a look at crypto or at least have a small team working on it. For a long-term investor, some allocation to the crypto market makes sense. Ethereum can be adopted for real-life uses, so it is not merely an investment vehicle.

Disclaimer: This content does not necessarily represent the views of IWB.

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