Crypto companies in Canada are planning a rush of new offerings and hoping to boost their clientele as the blockchain network behind the world’s second-largest cryptocurrency, ethereum, switches to a different, greener operating model this week.
The major update, dubbed “the Merge,” has been years in the making, but delayed several times because of its technical complexities. Developers of the ethereum network say the new model will reduce the amount of energy needed to run its open-source blockchain by up to 99.95 per cent. Blockchains are ledgers or databases used to maintain a record of ownership for digital assets, such as ether tokens, in this case.
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The overhaul will see ethereum drop its “proof-of-work” system, which relies on supercomputers to validate transactions by solving complex mathematical equations. The vast amounts of energy needed in order to add the next block on the blockchain is a process often referred to as crypto mining.
Recent estimates, such as those from Digiconomist, an industry resource and long-time crypto critic, suggest the amount of energy used annually to mine ether rose from just over 9 TWh (Terawatt hour) at the start of 2021 to over 81 TWh at the end of that year. That’s as much electrical energy as all of Chile or Finland consumes in a year, according to Digiconomist.
Under the Merge, a new “proof-of-stake” protocol will be introduced, for which individuals and companies will act as validators or miners of the blockchain by putting up a stake of their own. This stake would be collateral in the form of ether.
In this way, proof-of-stake protocols will use capital rather than energy to mine new ether tokens, said Brian Mosoff, chief executive officer of Toronto-based Ether Capital Corp. ETHC, which provides investors with direct access to ethereum, in an interview.
The exact timing for when the changeover would take place was unclear until early Thursday. The Ethereum Foundation, a governing body of developers that acts as the network’s spokespeople, had stated in blog posts over the past few weeks that it would take place some time between Sept. 15 and Sept. 20.
In a tweet on Thursday, Vitalik Buterin, the Canadian programmer who founded the ethereum network, confirmed that the Merge had been completed.
Because the new model will no longer require mining through supercomputers, it will be much friendlier for the environment, Mr. Mosoff explained.
“This big shift is going to address ethereum’s environmental impacts and also its scalability in a way we haven’t seen before,” said Mr. Mosoff, who is also a founding member of the Canadian Web3 council, a crypto industry group. “You’re going to see a lot of crypto-curious people finally getting on board, but you’re also going to see giant companies start supremely upping their many offerings, such as staking and so much more.”
Since launching in 2015, the ethereum network now has a market capitalization of around US$200-billion, second only to bitcoin, according to crypto data site CoinGecko.
In a research note last week, Goldman Sachs GS-N said the Merge will be a “near-term catalyst” for many crypto exchanges to adopt staking, which allows crypto holders to earn passive income through their digital assets, much like a high-yield savings account.
Goldman Sachs estimated that Coinbase Global Inc. COIN-Q, one of the world’s largest crypto exchanges, alone will generate between US$250-million to US$600-million in revenue from ether staking in the coming few quarters.
At Wealthsimple Technologies Inc., a Canadian online investment management service that launched its crypto offerings last year and has quickly seen them boom, “staking is something we’ve been really looking forward to for a long time,” said Danish Ajmeri, head of crypto at Wealthsimple, in an interview.
Wealthsimple started beta-testing staking mechanisms for solana, another cryptocurrency, earlier this month; and ethereum is next after it completes the Merge. “The thing that makes proof-of-stake unique from proof-of-work is that it allows individual retail users to be able to participate in the validation processes. And so, the ability to democratize that type of offering is really consistent with how we think about the role it all plays in this ecosystem,” Mr. Ajmeri said.
For Toronto-based Bitbuy Technologies Inc., which is the first-ever regulated crypto marketplace in Canada and was recently acquired by Vancouver-based WonderFi Technologies Inc. WNDR-T, staking and other ethereum-related offerings are also on the table.
“While Bitbuy often trades the most volume of ethereum on any given day compared to any other platform in Canada, it still falls behind bitcoin by quite a bit,” said Dean Skurka, head of exchanges at WonderFi, in an interview. “What we’re noticing though is a significant upshot in interest recently, especially from people who are more interested in investing on the adoption side of crypto rather than it as a currency. So, the Merge will definitely make us want to expand our offerings based on what our clients want to see.”
But Mr. Ajmeri and Mr. Skurka warn of scams and fraudulent transactions that will be seen as a result of the new operating model. Even the Ethereum Foundation has stated: “As we approach The Merge of Ethereum Mainnet, you should be on high alert for scams trying to take advantage of users during this transition.”
Users are warned that they do not need to do anything with their funds or wallet before The Merge. It will be an automatic process that should not affect them directly.
Crypto prices plunged earlier this year as a broad market downturn prompted investors to ditch those riskier assets. Ether has risen around 65 per cent since June, in anticipation of the Merge, while bitcoin has seen little change.
On Wednesday, ether was trading for around US$2,080, while bitcoin was trading for roughly US$19,750.
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Temur Durrani