Key Consideration for Post Merge ETH
We are all no doubt pretty excited about the upcoming ETH merge. The move to proof-of-stake is being heralded as one of the most monumental moves of 2022 - a massive moment for crypto.
However, there is one really important question that needs to be answered here: is proof of stake really the superior consensus mechanism?
This is something that I have attempted to answer in the past when I have compared some of the consensus mechanisms out there. However, Kraken recently released a report that did an in-depth comparison of proof of work and proof of stake.
Given that we love breaking down reports, I thought it was important to read through it and see what arguments the folks at Kraken were making. It’s never too late to have your mind changed if the argument is compelling enough!
Today, I am going to break down that report for you and give some of my own thoughts on it. I will also be analysing whether PoS could pose any risks to the Ethereum network post merge.
You can watch that over here.
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ETH 41.35% | BTC 32.10% | USDC 4.83% | SOL 4.67% | DOT 4.01% | ATOM 3.57% | RUNE 1.57% | NEAR 1.33% | ADA 1.32% | MATIC 1.27% | STETH 1.23% | HNT 0.88% | FTM 0.75% | LINK 0.56% | INJ 0.55%
📈 Thoughts on Market 📈
Let me guess, you’ve read all about that rising wedge pattern on various crypto sites, and now that we’ve broken out of it, you’re convinced that the new lows are coming. Well, let me show you something. Pull up the BTC and ETH prices on their weekly charts. See that zone of support? Now, pull up the BTC and ETH prices on their daily charts and slap on the Bollinger Bands and RSI. Incredibly oversold, almost as if it’s the perfect time to buy the dip.
It’s not just the technicals either. This week we are in for three announcements that could send the crypto markets flying. The first is the PCE figures for July which will be released on Friday. If you’ve watched any of our recent videos about the Federal Reserve, you’ll know that the PCE is their favourite inflation gauge. If it comes in lower than it is now, it will be a very bullish sign, as it means the Fed will be less likely to hike rates as aggressively in September.
The second announcement to be on the lookout for will come out of the Jackson Hole Symposium, which will be held from Thursday to Saturday. For context, the Jackson Hole Symposium features central bankers and academics from around the world. It should come as no surprise then that investors will be watching very closely. Any positive comments from Fed chairman Jerome Powell on Friday will most certainly lift the markets.
The third announcement to be aware of is the release of the first revision of the GDP figures for Q2 in the United States, which will be revealed this Thursday. Some of you might recall that Q2 figures were negative for the second consecutive quarter, which is the definition of a recession. On the off chance that these revised figures come in higher, it could give the markets a massive boost. Conversely, a revision lower could cause a huge crash.
This relates to something else I’ve been watching closely, and that’s the general weakness in the economy. Even though these official statistics suggest the economy is strong, it nevertheless seems to be slowing down significantly. This is starting to become evident in the housing market, which has apparently entered a recession. Big Five accounting firm PwC also did a survey which found that half of companies are planning on firing people.
At the same time, Russia has completely shut off its Nord Stream 1 pipeline for three days. There are obviously concerns that the gas won’t be coming back online, but at this point it’s of no consequence because a recession in Europe is basically guaranteed. In case you missed the memo, we live in a globalised world, and that means that a recession is likely to have global ramifications, especially if energy rationing is introduced.
Meanwhile, inflation in developing countries like Turkey and Argentina continues to increase, and social unrest continues to rise. I hate to say it, but it seems this latter fate could be in store for select European countries as winter approaches. The question is how the people in power will respond. Will they attempt to crack down on the dissidents? Or will they pretend to accept “reform” and sneak in someone from the WEF, as was the case with Sri Lanka?
In sum, I expect the recovery rally to resume for the next week or two before peaking out sometime in September, when Ethereum transitions to proof of stake. After that, the macro factors will set in, and we will start to see the actual bear market lows.
As to what will cause the next crash for crypto, it’s really anyone’s guess, but a regulatory crackdown seems to be the most likely, especially as countries start to roll out their CBDCs to protect their power.
❌ A Merge Risk? ❌
As we covered in the video today, one of the risks that come from a proof of stake system for ETH is the potential for centralisation. While the risk of stake centralisation has long been known, it’s become increasingly more relevant in the past few weeks. This is for a number of reasons.
Firstly, there were the challenges that came from those miners who wanted to preserve the proof-of-work chain. At first, this appeared to be a legitimate challenge and people feared Ethereum could have another fork. However, there was one action that appeared to have completely slashed those hopes and it took the form of a decision by Circle.
More specifically, the stablecoin issuer came out and said that it would be supporting the merge. This was hugely significant, as it effectively determined which chain would have the bulk of the Defi activity. Quite simply, stablecoin support is essential for Defi activity to continue on any chain and, without that support, any forks are dead. This is something that Vitalik himself also admitted to a few days before Circle made the decision.
And, a few days after Circle made that decision, Tether came out and said that it would also be supporting the merge.
What’s effectively happening here is that large, centralised entities look like becoming the determining factor in the future when it comes to contentious hard forks. Companies like Circle hold enormous sway over the progression of the network. While the decision in this case was a favourable one, there is no reason to assume that they will always vote in the way that the community wants them to.
Moreover, even if these centralised players wanted to go with the status quo for future forks, they may be inhibited by the jurisdictions in which they operate. Let us not forget that Circle is a US-based and regulated company. Should there be any laws in place that limit its ability to support a contentious fork, then it could be forced to support one that the community doesn’t approve of.
This question around legality is also particularly relevant right now, given recent events around Tornado Cash. There have been renewed concerns that US-based validators could be at risk of sanctions violation should they propagate any blocks that contain transactions from Tornado Cash. This is something that I alluded to in my recent video on Tornado Cash.
The problem is that validator centralisation is a real concern on the Ethereum blockchain. Currently, it seems that a large proportion of Beacon Chain validators will adhere to OFAC sanctions. Does this therefore mean that they will censor those transactions? This will of course kill the idea that Ethereum is “censorship resistant.” It’s good to see that large providers like Coinbase have said that they would rather exit staking than censor. But, we have yet to hear from some of the other staking providers.
One of the wild cards there is of course Lido Finance, which is currently the largest validator on the Beacon chain (31% of total). While it is true that decisions like censoring would come down to a governance vote of the Lido DAO, it’s worth appreciating how centralised the LDO token distribution is. Lido is backed by a number of US-based VCs and they probably have large stakes of LDO. Could they vote to censor transactions? Would they be forced to?
Food for thought…
Now, while this is indeed a risk, another alternative could be to implement an EIP of sorts that would slash any validator that censored transactions. This would disincentivize any validators from continuing to stake should it require censorship.
So far, there don’t appear to be any concrete proposals as yet, but it will be interesting to see what the Ethereum community can come up with. The merge is, after all, less than a month away…
🤔 Optimism vs. Pessimism 🤔
Last week I was doing research for our upcoming video about how to resist the World Economic Forum’s ‘Great Reset’, and I came across an interesting video. This was a speech by former US president Donald Trump at the WEF’s annual Davos meeting in 2020. I was taken aback by what he said, and though I’m sure that the speech was actually written by someone else (because hey, it’s Trump), it still doesn’t make its contents any less true.
Here are the parts that stuck out to me: “This is not a time for pessimism, this is a time for optimism. To embrace the possibilities of tomorrow, we must reject the perennial prophets of doom and their predictions of the apocalypse. They predicted an overpopulation crisis in the 60s, mass starvation in the 70s, and the end of oil in the 90s. These alarmists always demand the same thing: absolute power to control every aspect of our lives.”
And of course: “In America we understand what the pessimists refuse to see; that a growing and vibrant market economy focused on the future lifts the human spirit and excites human creativity, strong enough to overcome any challenge - any challenge by far. The wonders of the last century will pale in comparison to what today’s young innovators will achieve because they are doing things that nobody thought were even possible to begin with.”
This immediately reminded me of something else I noticed when I was doing research for our video about Tesla CEO Elon Musk’s Twitter takeover, and that’s Elon’s unbelievable hope for humanity, or more specifically, the future of humanity. This got me wondering whether it’s that hope for humanity that makes some of these controversial figures so popular, and then I realised that this hope for humanity lies at the core of cryptocurrency.
After all, what is cryptocurrency but a means of making things better for everyone? Bitcoin was built to fix the money. Ethereum was arguably built to fix financial services and services in general through the use of automatically executing smart contracts. Crypto projects like Chainlink were explicitly designed to fix data issues, and crypto niches like NFTs are designed to ensure provable ownership of digital and physical assets on a blockchain.
Heck, almost every single crypto project’s purpose is to achieve something that nobody thought was even possible to begin, all through creativity and free market competition. This is in stark contrast to technologies like central bank digital currencies or CBDCs which are designed to “fix” the “evils” of humanity through total control. What’s crazy is that this is the very technology that’s being pushed by technocrats around the world, but it’s not surprising.
Some people look at the world and think “all humans do is consume, create waste, reproduce, and destroy the planet” and to be fair, there’s a lot of truth to this perspective. The only problem is that it fails to understand why - why are people consuming, creating waste, reproducing unsustainably (in some places) and destroying the planet? Believe it or not, but the answer is an inflationary monetary system that incentivizes them to do so!
That’s why some people look at the world and instead think “look at all this human potential that is waiting to be tapped. What can I do to unlock this potential?” It’s this optimism that lies at the core of cryptocurrency, because almost everyone in the industry is building technology to unlock this potential - to say that yes, every challenge can be overcome through human creativity and innovation, because previous ones had to be just to get here.
I really think this inherent optimism lies at the core of why I love cryptocurrency so much. Can’t really say the same for Elon and Trump, though!
🔥 Deal of The Week 🔥
One thing that most crypto traders tend to neglect doing is keeping track of their taxes. This can be a massive pain and may require spending weeks playing around with excel sheets and reading up on capital gains tax rules.
But there is another way…
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If you want to learn more about the best crypto tax tools on the markets then you can watch my handy video
If you don’t have time to watch the whole video, then I will cut to the chase and say that Koinly is the most used crypto tax solution at Coin Bureau HQ.
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🔮 Video Pipeline 🔮
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- Top 10 Crypto Tools for 2022
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That’s all for this week folks. The whole Coin Bureau team wanted to give you a big thank you for your continued support.
Till next week!
Guy your crypto guy
Guy is one of the founding members and face of the Coin Bureau. Like many of us, he is just an average joe who became “crypto curious” back in 2013. After recognising the potential of blockchain technology, Guy set off on a mission to create crypto educational content, working with others to start the Coin Bureau website and released our first video on YouTube in 2019. You can learn more about him in his Who is Guy? blogpost.