Crypto markets associated with
are facing disruption as the blockchain network behind the world’s second largest cryptocurrency nears the end of a critical upgrade.
The final phase of Ethereum’s “merge” is now about a week away. Expected to be completed around September 15, it will switch the mechanics of transaction processing from the current “Proof of Work” system to a method based on “Proof of Stake” that is said to be far less power intensive. Among other changes, the process of “mining” Ether tokens will be eliminated.
But the next week could be particularly rocky for Ethereum’s native token, ether, and related cryptos. Some decentralized finance (DeFi) trading and lending platforms have placed limits on borrowing Ether amid a flurry of activity.
(Ticker: COIN) have warned users about delays. Coinbase informed users on Wednesday that Ether deposits and withdrawals would be briefly suspended during the merger. Also affected are ERC-20 tokens, which are used on the Ethereum network as a basis for trading and lending “smart contracts” and for creating non-fungible tokens, or NFTS.
This pause will also affect transfers on the Optimism and Polygon networks, according to Coinbase, and could take 24 hours to resolve after the merge.
Given the extent of the merger’s impact on crypto, expect a bit of a disruption. Ethereum is the largest crypto network after Bitcoin and is used extensively for trading, lending, NFTs and all types of DeFi apps. It also plays a fundamental or layer 1 role in other blockchain projects and networks, including Polygon and Uniswap.
Interest in ether and related products has surged in the months leading up to the merger. The token is up about 50% from the June lows, while its larger competitor
has remained largely unchanged.
But traders looking to jump on the Ether bandwagon may find it difficult to do so while the network is undergoing a sea change.
In fact, Coinbase is not alone in warning of disruptions.
(HOOD) announced last week that it would pause the payouts of Ether as well as six other tokens, including the “Memecoin”.
during the merger. Bitfinex, another crypto exchange, said it will similarly halt deposits and withdrawals of ether and linked tokens.
“Concerns about trading instability are certainly warranted given that the forthcoming merger is a technical overhaul of a live global network that stores, trades, borrows and lends hundreds of billions of dollars a month,” said Sadie Raney, CEO of crypto hedge fund Strix Leviathan.
“Beyond the technical risks, the event also creates multiple adversarial opportunities,” Raney added. This includes aggressive trading strategies that could increase volatility on DeFi lending and lending apps.
Crypto miners will be left behind in the merger. But they’re not going down quietly — they’re planning rival Ethreum networks that could compete with their own related tokens. Their networks would still use the old “proof of work” system, which required computers to solve complex puzzles to validate transactions.
This is causing more uncertainty about Ether and has prompted several exchanges to say whether they would support the competing tokens. Coinbase, Binance, FTX and Bitfinex say they will use their normal standards to decide whether to list competing ether tokens based on competing blockchains. Trading platform Uniswap and stablecoin USDC backers have pledged to exclusively support the Ethereum blockchain and its token.
However, some crypto traders see opportunities in the emerging forked ether tokens. The competing tokens are trading for around $18 each, according to an analysis of futures contracts by crypto investment firm Paradigm. The competitors might prove worthless, but there is a chance that once the merger is complete, Ether holders will receive a matching amount of the rival token – an incredible payout if it turns out.
This is partly why ether lending has surged on some DeFi platforms. However, if everything fizzles out, platforms could face a liquidity crisis, says Strix Leviathan’s Raney, adding that the risks are for the larger ecosystem.
Some DeFi platforms are now taking action to try to maintain stability. Lending platform Aave temporarily suspended ether lending on Wednesday. Another platform, Compound, has capped the amount of ether traders and adjusted interest rates on the token.
Perhaps the only certainty: volatility will continue to hit crypto until The Merge is complete.
Write to Jack Denton at firstname.lastname@example.org