What the Ethereum Merger Means for Crypto Institutions

The merger was a long-awaited upgrade to the Ethereum network, which sought to make it more scalable and energy efficient. Now that it has been completed, Ethereum’s proof-of-work consensus mechanism has been replaced with a proof-of-stake. PoS consensus uses significantly fewer resources than PoW, making it more sustainable, as well as providing several other benefits.

To combat scalability issues, the upgrade integrates the two previously separate chains: the execution layer and the consensus layer. Ethereum’s mainnet (PoW chain) and beacon chain (PoS chain) used to operate in parallel. The first part of the merge, the Bellatrix update for the beacon chain, completed on September 6, ensured that validators produce updated beacon chain blocks ahead of the merge.

The second and final phase of the update, the execution layer’s Paris update, was completed early on September 15. Although the merge has had a bumpy rollout, extensive testing on public sandboxes and bug bounties helped ensure a safe transition to proof-of-stake.

Foremost among the questions that concern institutional users is how the merger will affect prices and volatility. This is a major concern. Based on possible outcomes of the Ethereum 2.0 rollout, there could be crucial price implications for Ether, the network’s native cryptocurrency, and the entire market. However, institutions wishing to participate in the market now that Paris has been implemented will do well to prepare for other roadblocks. As was seen with the Luna crash and subsequent hard fork, significant events in the crypto space can introduce enormous challenges to trading activities, data operations, reporting and compliance.

The impact on trading is not limited to price actions around Ether, for example. As in 2016, when Ethereum and Ethereum Classic split, the market could potentially see the launch of a new asset. If a segment of the market supports a “new” PoW asset, trading exchanges will try to determine whether to list it. Some have already announced their support for such a resource; others will perform due diligence when it launches.

If it appears, traders must quickly integrate information for the new asset into data stacks. Consumers, like index providers, must decide how it will fit into their compliance framework. In addition, tokenized assets in the Ethereum ecosystem (of which there are tens of thousands) can choose to move operations to both chains in the event of a split. The need for data standardization and reliable information about asset properties will be critical in this case.

The confusion doesn’t end with a potential new Ether competitor. Many venues have already listed new financial instruments related to the event, such as “potentially forked” Ether tokens listed on Poloniex, which allow traders to exchange their existing Ether for I-owe-you assets. As Poloniex announced, ‘ETHS (ETH2, Ethereum PoS) represents the token for the new PoS chain, and ETHW (ETH1, Ethereum PoW) represents the token for the PoW chain that will potentially continue to exist’ in the event of a contested hard fork.

However, none of these assets are a consistent representation of the Ether currently known to the market – the ticker conventions presented by Poloniex may change based on the event. ETHW is more of a placeholder, it does not carry the characteristics of potential new proof-of-work Ether assets, which will have to be evaluated by market participants if the new asset enters the market. Poloniex is also just one venue – Lukka has identified over 50 other trading venues that have announced operational changes related to the event.

For traders looking to quickly navigate new tokens, advanced futures instruments and ticker updates, the release of Ethereum 2.0 introduces the potential for errors and lost opportunities due to downtime. Institutions wishing to integrate new asset information introduced by the arrangement or handle reporting on financial activities post-merger will require significant resources and expertise to standardize all the data changes presented by the market.

There are also new research factors to consider for participants interested in environmental, social and governance criteria in the crypto space, such as how the shift to PoS affects the environmental footprint of Ethereum and how it compares to a forked PoW version. To address these challenges and questions, institutions should partner with a trusted data provider to timeline events, standardize historical data, and streamline operations.

The benefits of this upgrade are extensive and many institutions, including Lukka, support it. However, all organizations must have an understanding of some of the resulting complications when dealing with the risks associated with the merger.

Adam Katt is a data product manager and Chris Muoghalo is a data product specialist at Lukka.