Most economic progress can be attributed to technological advancements like the printing press, steam engines, computers and the internet. Blockchain technology—a profound network that can improve value transfer and human productivity—may be the next driver of business innovation and financial evolution. Ethereum—one of the most actively used blockchain networks with the second biggest cryptocurrency (ETH) by market cap and average daily volume—will undergo its first major update since The Merge in September 2022. The upcoming Shanghai upgrade will introduce highly anticipated improvements that could yield more investment flexibility.
Ethereum is an interesting blockchain for developers, users and investors. The network provides a foundation for developing innovative applications and services while ensuring high security, flexibility and scalability. It was one of the first mainstream blockchains to incorporate smart contracts, and as a host to dApps, it enabled DeFi, Web3 and decentralized autonomous organizations (DAOs). In addition, developers flocked to the chain because of efficient, secure hosting capabilities.
Ethereum’s large and active community is one of the most significant factors driving the development and adoption of blockchain technology. Ethereum boasts the most developers of all blockchains—over 2,000 weekly active developers—which is often a reliable proxy for the long-term success of a chain. It is a vibrant ecosystem of individuals and organizations working toward a common goal of building decentralized, open-source applications.
As network activity increased, it boosted the value of ETH, making it more lucrative to mine. This increased mining activity manifested as increased energy consumption, and as innovation continued in the space, it became clear there were more environmentally and economically efficient ways to secure the blockchain.
The Merge was the culmination of several years of work by the Ethereum development team to join the “original proof-of-work (PoW) execution layer of Ethereum with its new proof-of-stake (PoS) consensus layer.” The PoW system was Ethereum’s longstanding method of verifying transactions and generating new coins, but it was expensive and energy-intensive. Conversely, the PoS system is much more efficient, eliminating “the need for energy-intensive mining and instead [enabling] the network to be secured using staked ETH.” As a result, The Merge decreased Ethereum’s energy usage by 99.9%. PoS became its method of verifying transactions via staking—a process whereby users stake, or put tokens into a contract to qualify for validation privileges. Users could then earn rewards while helping to secure the network.
Ethereum as an Internet Bond
Currently, staking is more comparable to a one-way street. When users staked their ETH, their capital was locked up for an indeterminate period to earn yield. In doing so, they demonstrated their trust in Ethereum. The Shanghai upgrade is expected to be a game changer because it will enable users to access their staked ETH and rewards at any time. There are more than 16.9 million staked ETH (over $27.5 billion at current prices), representing about 14% of the total supply. The ability to withdraw these funds will provide more investment flexibility and ultimately improve liquidity.
Staked ETH’s access to newfound liquidity reduces capital risk, making it more enticing for institutional investors. Further, staking resembles fixed financial instruments like bonds in capital markets. ETH, as a currency, needs to finance itself and pay for its security. Similar to how the U.S. government might issue a bond to pay for its military budget, Ethereum does so by issuing financial rewards to validators who secure the network. Staking in Ethereum provides a yield akin to the yield offered by bonds. The ability for institutional investors to participate in staking, earn yield and withdraw staked ETH has the potential to attract even more investors and drive growth in the cryptocurrency industry.
Ethereum's Continued Innovation
Ethereum's periodic upgrades represent steps toward the ecosystem’s vision of greater sustainability, security, and scalability—essential components for healthy growth. The future potential is vast for a network built and maintained on solid footing. Moreover, the network’s concerted effort to continuously improve functionality of its cornerstone features exhibits a powerful catalyst for innovation. Knowledgeable institutions are watching closely and planning accordingly.
Ethereum is now where the internet was in 1995, or the iPhone was in 2007—new technology with powerful capabilities and uncharted possibilities at the juncture of mainstream adoption. The Merge substantiated the blockchain’s foundational strength, scalability and sophistication, showing a broader view of a promising avenue to modernize aging financial infrastructure. The upcoming Shanghai upgrade represents another valuable development for the network and is likely to drive additional development, contribution and growth in the industry.
Peter Hans is managing director of IR and business development at Arca.