Crypto markets related to
are facing disruption as the blockchain network behind the world’s second-largest cryptocurrency nears the end of a critical upgrade.
The final stage of the Ethereum “merger” is now about a week away. Scheduled to end around September 15, it will change transaction processing mechanisms from the current “proof-of-work” system to a “proof-of-stake” based method, designed to be much less power-intensive. Among other changes, this will eliminate the process of “mining” Ether tokens.
But next week could be particularly eventful for Ethereum’s native token, Ether, and associated cryptos. Some decentralized finance (DeFi) trading and lending platforms have imposed limits on Ether borrowing amid a flurry of activity.
Exchanges of which
(ticker: COIN) warned users of the delays. Coinbase told users on Wednesday that during the merger, it will briefly suspend Ether deposits and withdrawals. ERC-20 tokens, which are used on the Ethereum network as the basis for trading and lending in “smart contracts” and to create non-fungible tokens, or NFTS, will also be affected.
This pause will also affect transfers on the Optimism and Polygon networks, according to Coinbase, and could take 24 hours to resolve after the merger.
A small disruption is to be expected, given the magnitude of the impact of the merger on crypto. Ethereum is the largest cryptonet after Bitcoin, and it’s widely used for trading, lending, NFTs, and all sorts of DeFi applications. 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 skyrocketed in the months leading up to the merger. The token is up around 50% from June lows while its biggest peer,
remained largely unchanged.
But traders who want to jump on the Ether bandwagon may find it difficult to do so as the network undergoes drastic change.
Indeed, Coinbase is not alone in warning of the disruptions.
(HOOD) announced last week that it would pause withdrawals of Ether as well as six other tokens, including the “memecoin”
during the merger. Bitfinex, another crypto exchange, said it would similarly stop deposits and withdrawals of Ether and related tokens.
“Concerns about commercial instability are certainly reasonable given that the upcoming merger is a technical overhaul of a live global network in which hundreds of billions of dollars are held, traded, borrowed and lent monthly,” says Sadie. Raney, Crypto CEO. hedge fund Strix Leviathan.
“Beyond the technical risks, there are also several conflicting opportunities arising from the event,” Raney added. This includes aggressive trading strategies that could increase the volatility of DeFi borrowing and lending applications.
Crypto miners will be left behind in the merger. But they are not collapsing quietly – planning rival Ethreum networks that could compete with their own associated tokens. Their networks would still use the old “proof of work” system where computers must solve complex puzzles to validate transactions.
This is causing more uncertainty in Ether, and it has prompted several exchanges to say whether they would back rival tokens. Coinbase, Binance, FTX and Bitfinex say they will apply their normal standards when deciding whether to list rival Ether tokens, based on competing blockchains. Trading platform Uniswap and stablecoin backers USDC have pledged to exclusively support the Ethereum blockchain and its token.
However, some crypto traders see an opportunity in emerging “forked” Ether tokens. The rival tokens are expected to trade at around $18 each, based on futures analysis by crypto investment firm Paradigm. The rivals could prove worthless, but it’s possible Ether holders will receive an equivalent amount of the rival token once the merger is complete – an incredible payoff if that goes through.
This is partly why Ether borrowing has exploded on some DeFi platforms. If it all falls apart, however, the platforms could face a liquidity crunch, says Raney of Strix Leviathan, who added that the risks apply to the broader ecosystem.
Some DeFi platforms are now taking action to try to maintain stability. Lending platform Aave temporarily suspended Ether borrowing on Wednesday. Another platform, Compound, capped the amount Ether traders can borrow and adjusted rates on the token.
Perhaps the only certainty: volatility will continue to hit the crypto until the merger is complete.
Write to Jack Denton at email@example.com
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