Framework Ventures Co-Founder Michael Anderson joins Yahoo Finance Live to discuss the ethereum merge and what it means for the crypto space as well as Coinbase's decision to pause ethereum transactions during the event.
- We've been seeing a lot of price movement over the last month. Bitcoin up roughly 12%. But it's actually Ethereum that's been the bigger winner, up almost 40% over the one-month period, all of this ahead of a big change to the Ethereum network, shifting away from its proof of work system and towards a proof of stake system.
Here to explain what that means for those that maybe don't know what that means is Michael Anderson, Framework Ventures co-founder, as well as Yahoo Finance's David Hollerith. It's great to have you on the program, Michael. It's called the Merge. It's supposed to be happening in September. Explain to us exactly what's happening for the uninclined here.
MICHAEL ANDERSON: Yeah. And, Brian, thanks for having me on. And it's great to talk about this. Really, what's happening behind the scenes is, as you mentioned, the proof of work algorithm that is the bedrock of the consensus layer for Ethereum is getting shifted over to a proof of stake mechanism. Maybe some of your listeners or viewers have seen the warehouses of computers that go on to proliferate the Bitcoin network. That level of interaction and that level of computational power is just not going to be needed anymore for Ethereum.
Some of the benefits of this include, according to the Ethereum Foundation, a 99-plus percent decrease in the energy consumption. And what this really represents for the longer term prognosis of Ethereum is this is a major milestone on the roadmap to scaling for Ethereum. This doesn't have any direct implications for scaling immediately. But there are a number of other parallel protocol upgrades that we're tracking and are excited about that the Merge would enable to be able to actually be added in at a later date.
DAVID HOLLERITH: Michael, we saw this morning that Coinbase announced that they would pause transitions for Ethereum during the period of this final Merge transition in the middle of September. And I was just curious. Could you sort of explain how the Merge might impact other companies and sort of the market at large?
MICHAEL ANDERSON: Yeah. And I think the reasoning-- and I'm not exactly sure why, per se. But I think the reasoning for a number of protocols or companies pausing interactions on the chain during this period of time is more recently there's been discussion around what happens if there's a fork of the proof of work chain away from the proof of stake chain.
And a fork is something that happens pretty-- it's happened a number of times before in the Bitcoin ecosystem. And, really, what this means is that the miners or the validators who are proliferating these networks decide to go off in a different direction from the core direction of where the core protocol is going. In this case, there's discussion around the proof of work miners, the existing miners, maybe going off and creating their own Ethereum proof of work version.
And just to be clear, what would happen if you're a developer building an application on Ethereum or if you're a user of Ethereum and you are going to continue on-- want to continue on the proof of state version, you have to do nothing to do so. It would actually take action to move over into the proof of work version. And so as things kind of net settle and we see what happens post Merge, I would imagine that's when things would open up again. And so in that respect, it probably makes sense to pause things just to see where things shake out.
- Michael, this of course comes at a time when we have seen more institutional money move into crypto, despite the declines we've seen in prices over the last few months. What do you think this Merge specifically means for institutional money in this space? Is this likely to accelerate that?
MICHAEL ANDERSON: Well, I think one of the things that we've seen from an institutional basis is that there's an interest around staking as an economic tool and, frankly, a new category of crypto assets. What staking enables is a really fundamentals analysis of different assets that are derived from cash flows. And these cash flows are based around the amount of activity and engagement from the users that are using them and therefore paying transaction fees for using these networks. Staking has become attractive for a number of proof of stake networks previously.
But Ethereum being the second largest crypto asset, the most widely used base layer blockchain, and with the most proliferation of engagement and activity from users, having it shift to a proof of stake ecosystem I would imagine represents a really huge opportunity for the staking asset class itself. So I wouldn't be surprised if there's more engagement and excitement from institutions around that fact.
DAVID HOLLERITH: And, Michael, this is obviously something that's gotten the crypto market pretty excited. I mean, it's the sort of investment or event to look at for the second half of the year. But that being said, what are the potential things that could go wrong during this final Merge process?
MICHAEL ANDERSON: You're exactly right. We're an industry that loves to jump from narrative to narrative. And this just is the narrative du jour right now. And exciting because we've only had negative sentiment over the last couple of months. And this is a huge milestone for the industry. Like I mentioned with the fork, I think, frankly, that's the biggest potential risk here.
This is nascent technology, early-stage technology. There's always going to be inherent risks in any major transition or upgrade. But what the Ethereum core devs and the Ethereum Foundation have been working on doing over the last couple of months and, frankly, also a couple of years, is just de-risking the process from an upgrade path perspective. The technology has been implemented. The technology is finished at this point.
Over the last few months, we've seen three test nets behind the mainnet version of Ethereum go through the Merge process itself, which are sort of dress rehearsals for what's going to happen in mid-September. But, really, right now, it's a human coordination issue, less a technology one. And so going back to it, I think it's an interesting kind of philosophical question about the proof of work fork. But that is something that we don't really have as a huge risk in our minds. But that's probably the biggest thing.
- Well, Michael, we appreciate you making sense of all of this for us. Michael Anderson, Framework Ventures co-founder. And our thanks to David Hollerith as well.