From the rapid growth of crypto to the dramatic volatility of the asset class, governments around the world are responding through regulatory and legislative actions. Some jurisdictions have announced clear and accommodating frameworks in the hope to create the crypto hubs […]
“The reward for work well done is the opportunity to do more.”
— Jonas Salk
Thursday Merged Mailbag
Q: Wen Merge?
Ethereum’s proof-of-work Mainnet merged with its proof-of-stake Beacon Chain at 2:43 am ET this morning.
I don't blame you for not noticing: It was blissfully anti-climatic.
95% of validators are participating (more than expected); there was one missed block (less than expected); and nothing has blown up (kinda’ disappointing, to be honest).
Here’s a recording of the historic moment, if you want to watch some nerds get excited about code.
Q: Wen proof-of-work?
Proof-of-work is dead. Long live proof-of-work: ETH proof-of-work (ETHW) launched at 2 pm ET. (Or so it appears, it’s weirdly hard to tell.)
The semi-official Twitter account for ETHW had said the launch would happen within 24 hours of the Merge, “with a countdown timer and everything.”
(The “and everything” makes me think ETHW is being run by 14-year-olds, which is probably a good sign.)
The launch came sooner than expected, but I think they’ve missed a trick: If they had launched coincident with the Merge (or sometime in the 13 minutes it took for ETH proof-of-stake to validate its first block), ETHW would have looked like the continuation of the canonical Ethereum chain and ETH proof-of-stake would have looked like the fork.
Now that we had this half-day interregnum, however, ETHW feels like a fork of the new proof-of-stake chain. Which makes for a lesser marketing pitch.
As a reminder, there was a brief moment in 2016 where it looked like ETC would flippen ETH — Vitalik even spent a day or two contemplating what he might do with the rest of his life (he wasn’t going to hang around and work on ETC).
It was only social consensus that made ETH the “real” Ethereum and saved Vitalik from having to update his LinkedIn profile.
Social consensus is just the sum total of people’s opinions. So, marketing matters.
ETHW needed better marketing.
And better everything else, too — It’s felt like a half-hearted effort so far.
Q: So, we’re good now for ESG?
Canonical Ethereum is now ESG-approved with its hash rate (a proxy for power consumption) falling from a recent average of around 800 TH/s to a nice, green zero.
But there’s more than one Ethereum: ETH classic’s hash rate is up to 300 TH/s (terahash per second) this morning, from a recent average of just 50.
That means the combined energy consumption of Ethereum plus Ethereum Classic is down only about 65% (from 850 TH/s to 300) — not the much-cited 99.8%.
And that’s without accounting for ETHW.
I don’t have any guess as to what ETHW’s hash rate will be, but if, for argument’s sake, it’s the same as ETC’s (and why shouldn’t it be?), the combined hash rate for the three amigos of Ethereum would be 600 TH/s (300 + 300 + 0), for a total post-Merge energy savings of just 25%.
That’s likely too bearish: There’s every chance that ETHW flops and that miners get bored of ETH Classic and sell all their used GPUs to teenage gamers, instead.
In that case, the hash rate for the two “other” Ethereums would probably fall back to about 50 TH/s each.
Either way, though, the ESG storyline is maybe a little less unicorns and rainbows than it’s cracked up to be.
Q: What was the best trade over the Merge?
ETHW is trading down to about $20 this morning. That’s just 1.3% of ETH.
I’m not sure all the shenanigans of borrowing ETH or shorting perps or putting on options spreads was worth a 1.3% return.
In the end, I’m guessing the best trade was to lend your ETH to everyone doing the shenanigans. You probably got paid more than 1.3% and you don’t have to scramble to sell ETHW before everyone else does.
That scramble to sell should commence any time now.
If so, it seems reasonable that ETHW, a fork of 2022 Ethereum (with all the protocols and NFTs and things), would have more value than ETC, a fork of 2016 Ethereum (with pretty much nothing).
And yet, ETHW is already trading at just half of ETC.
But this is crypto, so there’s no expectation of reasonableness.
Q: What was the most bearish thing you heard at DAS NYC?
The macro talk at DAS was terrifyingly bearish — easily the most pessimistic takes I’ve heard since the Great Financial Crisis.
Mostly, people think the Fed is about to make a giant mistake:
Mike Green said they will keep hiking “until they break something”; Jurrien Timmer that they have no choice but to “beat everyone over the head with a bearish message”; Danielle diMartino Booth that they’ll keep raising “until people stop believing in the pivot”; and Alf Peccatiello that they will hike until “they break the most lagging indicators.”
What’s it mean for risk assets? All agreed that the Fed would hike us into a deep recession and that equities are not close to pricing that in.
Mike Green staked out the most bearish position, however, by suggesting that the S&P 500 should be valued on “trend earnings,” which he sees at $135.
A 15x multiple of $135 earnings would put the S&P 500 at 2,000.
Q: What was the most bullish thing you heard at DAS NYC?
The big-picture promise of DeFi remains as big as ever.
John Wu said Ava Labs intends to “tokenize the world’s assets.”
Anton Katz of Talos said DeFi tools will make credit markets “a lot safer and more efficient.”
Juan Villegas of Keyrock said “the amount of innovation at the moment is crazy,” citing “synthetic, smart-contract-based FX markets,” decentralized derivatives, perps, and cross-margin models, and tokenized volatility, debt and insurance.
And, to make all these things happen, Amy Wu, head of ventures at FTX said “there’s billions of dollars” of VC capital yet to be deployed.
DeFi can often seem like a hot mess, so, for me, DAS NYC was a welcome reminder of the unlimited upside.
Q: Is the institutional money coming now that the Merge is over?
I’m still not entirely sold on this narrative and the anecdotal evidence from DAS was mixed, I thought.
Matrixport’s Anthony DeMartino said the Merge “will lead to bigger institutional adoption” because it “demonstrates [Ethereum’s] ability to evolve.”
Alkesh Shah of BofA said family offices are coming into the space and that there’s a pipeline of hedge funds waiting to launch pending regulatory approval.
Robert Leshner said Compound’s treasury offering is attracting interest from traditional banks, but also that the “most stalwart” institutions are not yet evident in crypto.
A crypto custodian told me between sessions that they have a lot of hedge funds' customers incoming, but also that they are mostly testing the waters with small commitments of money.
I think Jenna Wright of LMAX Digital accurately summed things up: “Real money entering the space is slower than [people] would have liked.”
Q: What’s the best new use case you heard at DAS?
I unfortunately missed the panel on use cases, so I’ll have to wait for the videos to be posted on our events page to catch up (likely by the end of the week).
But I did hear Bank of America’s Alkesh Shah make a convincing case that tokenized assets are going to be a real thing.
He cited WisdomTree’s tokenized gold offering, which, once bought, can be transferred from one digital wallet to another without either sender or receiver having an account with WisdomTree.
He said the same could be done with fractionalized shares of real estate: Imagine being able to transfer partial ownership of a home without the intervention of any lawyers.
DeFi often gets credited for “democratizing finance,” usually without much supporting evidence. Shah’s two examples made it more real to me.
And also more imminent: “Three of the largest asset managers in the world are starting trading desks” for tokenized assets, he said.
Q: Any good hot takes from DAS that didn’t make the newsletter recap?