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JPMorgan analyst Kenneth Worthington says digital currency exchanges like Coinbase will end up being a meaningful “beneficiary” of Ethereum’s long-awaited transition from proof-of-work (PoW) to proof-of-stake (PoW). Based on $2K ethereum prices and a 5% ethereum yield, Worthington explained that The Merge could increase Coinbase’s annual revenue by $80 to $100 million from staking services.
In 29 days, the Ethereum network is expected to implement The Merge on or around September 15, 2022. It will be a very big deal for the chain that has operated as a PoW blockchain for seven years. That’s because the network will fully transition to a PoS distributed ledger system. Four days ago, Bitcoin.com News reported on JPMorgan (NYSE: JPM), strategists saying Ethereum Classic (ETC) could benefit from The Merge, as ether miners will be forced to mine another Ethash-based cryptocurrency.
This week, JPMorgan analyst Kenneth Worthington explained in a note to investors that crypto exchange Coinbase Global (Nasdaq: COIN ) could be a “meaningful recipient” of The Merge. The investment bank’s analyst also noted that staking revenue could boost exchanges like FTX, Binance and Gemini as well.
“We see the opportunity for wagering income greater (proportionally) than the income opportunity given that we expect institutional wagering clients to contribute meaningfully to [ether] stake for revenue, but much less for institutional clients,” Worthington said. “The vast majority of the economy remains with retail,” the JPMorgan analyst added. Being a validator requires 32 ether to stake on its own, but a number exchanges offer ethereum staking services with negligible threshold requirements to earn from staked assets.
At the time of writing, Coinbase is one of the largest ETH holders in terms of validators, according to the ETH Staking dashboard hosted on Dune Analytics. Of the 13,326,533 Ether deposited into the Ethereum 2.0 contract, Coinbase holds 14.7% or 1,966,080 ETH. Crypto firms such as Kraken, Binance, Bitcoin Suisse and Bitstamp also have significant staking positions, but Coinbase and the liquid staking service Lido have the largest. JPMorgan’s Worthington expects Coinbase to benefit significantly from the stake rewards.
“We estimate Coinbase incremental annual stake revenue from the Ethereum merger of $650 million based on $2,000 [ether] and 5% [ethereum] dividend. We see [an] incremental annual revenue of $80-$100 million of wagering revenue,” Worthington’s memo detailed.
Year to date, COIN is down 65.04% with a high of $357 per share this year, but the current $85.44 is up from the June 30 share low of $47. Furthermore, on August 16, Coinbase summarized in a blog post what customers “need to know” about the upcoming transition from PoW to PoS. During the merger, Coinbase will “briefly” pause ethereum transactions, and it will not process withdrawals and deposits during the change. The Coinbase pause rule further applies to ERC20-based tokens built on top of the Ethereum network.
On August 14, Coinbase and a number of exchanges were asked: “If regulators ask you to censor on ethereum protocol level with your validators you will: (A) Follow and censor at [the] protocol level (B) Turn off the stake service and preserve network integrity.” Coinbase co-founder and CEO Brian Armstrong answered the question on Twitter three days later, on August 17.
“It’s a hypothetical we hopefully won’t face,” Armstrong wrote on Thursday. “But if we did, we’d go with (B), I think. Gotta focus on the bigger picture. There might be a better option (C) or a legal challenge as well that might contribute to a better outcome.”
What do you think of the comment from JPMorgan analyst Kenneth Worthington? Let us know what you think about this topic in the comments section below.
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