This will eliminate crypto’s biggest criticism. But will it matter?

This week’s newsletter covers the bull & bear case for one of the most anticipated events in cryptocurrency history.

“Bitcoin uses more energy than the entire country of Argentina - population 45 million.”

Bitcoin and other Proof of Work crypto blockchains use an extraordinary amount of power to secure the network through mining activities.

Is using all that power worth it? Will this ongoing energy requirement doom Bitcoin and other cryptos like it?

The Ethereum merge

Sometime this month, one popular blockchain will remedy this complaint.

The second largest crypto by market capitalization, Ethereum, will migrate from a Proof of Work (PoW) model to one called Proof of Stake (PoS).

This will reduce the energy consumption by an estimated 99.95%.?

Instead of high-powered computers securing the network (PoW), PoS uses a “staking” system to validate blockchain transactions.

If you own Ether (ETH) - the cryptocurrency of the Ethereum blockchain - you can pledge your ETH and get rewarded for doing so.

Proof of Stake uses existing holders of a crypto to ensure transactions are valid. With any blockchains, bad actors can attempt to force mischievous transactions, and those pledging their ETH are paid to tell the truth.

Effectively, this will create a yield on those staking their ETH.

Said another way, if you own/pledge a minimum of 32 ETH (a little under $25,000, as of the writing of this piece), you’ll receive a dividend for securing the network.

The bull case

Ethereum moving to Proof of Stake fixes not one, but two criticisms:

1. The energy used to secure the blockchain will be minimal. Negative environmental impacts will be eliminated, and Ether as a crypto can fit within ESG (Environmental, Social, and Governance) mandates.

2. A yield for those staking their ETH adds a cash flow component to the investment. Instead of an asset priced purely as a speculative bet, Ether will pay you to own it. Pension plans and other funds looking for yield could consider allocating to ETH to diversify their portfolio.

The Ethereum migration from Proof of Work to Proof of Stake will occur imminently. This update to the blockchain has been delayed multiple times over several years, but this time, it looks like it will occur.?

Pending a successful migration, this could be a major turning point in crypto. An Ethereum Proof of Stake blockchain will add both an ESG element and a yield-bearing feature we haven’t had before.

The bear case?

The move to Proof of Stake from Proof of Work could fail. Ethereum has been running a test environment (referred to as the Beacon Chain) since December 1, 2020, and has undergone rigorous testing. Like any software updates, though, bugs or other unforeseen issues could arise.

If Ether, as the second-largest cryptocurrency, has a catastrophic failure, this could cast doubt over the entire crypto environment. The blockchain's successful update is paramount for its continued success.

What will this mean for crypto?

Bitcoin has no intention of moving away from Proof of Work, and this move by Ethereum will position it in an altogether new category.?

The cryptos have different applications - Bitcoin is analogous to digital gold, while Ethereum powers smart contracts. Both will continue to occupy their respective niches, and Ethereum’s update will give additional reasons for institutional investors to weigh its benefits.

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Next week's newsletter preview

NFTs (non-fungible tokens) are one of the most misunderstood technologies I've ever seen.

Are NFTs something you should care about? Is it a fad or the future?

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Thanks for reading! - Spence

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