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Ethereum merge: There’s not ‘much that could go wrong,’ expert says

Katie Talati, head of research at Arca, joins Yahoo Finance Live to explain the ethereum merge and what it will accomplish, potential challenges, and the outlook for crypto.

Video Transcript

- We are seeing Bitcoin continuing to surge higher, jumping on that relief rally bandwagon and now topping $22,000 for the first time in nearly a month. This could all of course change course, after key inflation data tomorrow. The big event isn't about Bitcoin at all, but Ethereum. That is trading a little lower right now ahead of its long-awaited upgrade known as the merge. It is expected to pave the way for the wider use of Ether. But it's also considered one of the most difficult technical upgrades to date.

Let's bring in Katie Talati, Arca director of research. We've also got Yahoo Finance's David Hollerith joining in on the conversation. Katie, it's great to talk to you. This has been so highly anticipated. We've been talking about it for weeks. But walk us through, for those who haven't been following, what exactly the merge is.

KATIE TALATI: Sure. So Ethereum was launched as a proof of work blockchain, which is what's considered the consensus algorithm that's used to kind of secure the network. Bitcoin has a proof of work consensus mechanism. So does Ethereum. There's been a lot of criticisms of proof of work, mainly environmental concerns.

There's also speed concerns. And so several years ago, the Ethereum Foundation decided that on its roadmap they really needed to pivot and Institute a proof of stake consensus mechanism. So they basically started out on a multi-year roadmap where they would slowly upgrade the Ethereum blockchain very carefully so as not to break anything and get to that proof of stake state. So the merge basically represents Ethereum going completely from proof of work to proof of stake. And that is set to happen this Wednesday.

DAVID HOLLERITH: Hey, Katie. Yeah. We have the CPI coming out tomorrow. And given that the merge is sort of crypto's biggest event this week and perhaps this quarter, I was sort of curious if you could sort of explain how the US CPI and the merge together might sort of play into investing decision making this week around cryptocurrencies. Obviously, the macro environment has kind of driven cryptocurrencies for most of this year. So I was curious what you think of that.

KATIE TALATI: Definitely, David. I mean, the macro environment is driven most of risk assets this year, not just crypto. But crypto definitely has been trading very closely with kind of some of that macro data. The CPI can't really make a very educated comment on. I will say that I know expectations are that it's going to be a bit more favorable this time. And that could contribute to positive price action across all digital assets. I will say specifically for Ethereum, we definitely want to see-- or expecting to see some positive price action this week. But the real positive kind of price appreciation in Ethereum is probably going to be felt months following the event this week.

- What implications does this merge have? I mean, you've already talked about what it could mean for the price action. But beyond that, we've heard so much about wider adoption coming out of this, potential usage, new use cases. How should we be looking at that?

KATIE TALATI: Definitely. So like I said, this is kind of one piece in this multi-step roadmap. Although Ethereum is going to proof of stake from proof of work and the energy consumption on the Ethereum blockchain is going to drop dramatically, there are still some steps that need to be taken. Transaction fees are likely going to be about the same. Speeds are also going to be about the same for the meantime.

The next several steps in the Ethereum roadmap over the next couple of years is called the scaling piece. And so, basically, the Ethereum developers are looking at instituting new technologies such as sharding, rollups, which are all considered layer 2 scaling solutions, which basically would allow for higher throughput or far more transactions to happen on the blockchain and have Ethereum be able to be used at scale, which is kind of the issue right now is that we have so many people wanting to use the blockchain that every time a lot of people try to use it, it gets clogged, fees skyrocket, processing times take far longer than people are used to. And that's kind of what the long-term goal for Ethereum is, to get it into a mature state. That, however, is still anywhere from two to four years off just based on the current roadmap and the research that needs to be done on some of these technologies.

DAVID HOLLERITH: And, Katie, at this point, it's sort of a moving target. But it looks like the merge will be completed in less than three days at this point. And on the technical side, what sort of hiccups are you anticipating could realistically happen at this stage? I mean, I know developers have been working on this effort for months, obviously. But it's such a big project. And there's billions of dollars on the line so.

KATIE TALATI: Yeah. David, this is definitely a misconception. At this point, there's definitely not much that can kind of go wrong from a technological standpoint. The Ethereum developers have done several test nets, which are basically like pretesting done on shadow networks that aren't on the real full network. Those have gone off completely smoothly. They've had maybe some issues with kind of node syncing here and there. But that was quickly corrected within a few minutes.

In addition, they did the first part, actually, of the merge hard fork last Monday. And that went through fine without a hitch. So, no, we're not actually expecting any issues around the merge. The last estimate that I read was that it was going to happen at about maybe 5 o'clock Pacific on Wednesday. So all eyes are on that date and time.

- We'll all be counting down there.

DAVID HOLLERITH: Sorry. Just to follow up there-- there are businesses, of course, that have to be synced to that. So there is an element to the merge that doesn't really have to do with the technological side of what the developers have done. So would you just sort of add is there anything else that businesses should be mindful of? Anything that can be expected there?

KATIE TALATI: Definitely. There are definitely concerns around some of the applications that are built on top of Ethereum and how those are going to behave during the merge. Most businesses and projects have kind of commented on what they consider best practices.

Centralized exchanges, for example, have said, we're not going to be allowing withdrawals and deposits during this time period. A lot of decentralized exchanges, we're watching liquidity actually pull away from those exchanges as people either withdraw assets just to keep them safe or to gain the airdrop that's expected from the Ethereum hard fork. So that's kind of I guess really high level. I can go into more detail, though, if you'd like.

- Katie, unfortunately, we're out of time. But appreciate your time today. Katie Talati, Arca director of research joining us there.