In mere hours by the time you read this, the cryptocurrency sector may experience one of the biggest changes in its history, presenting significant market implications for individual cryptos. But should investors bank on the upcoming Merge event?
Let’s take a brief look at the undergirding of the blockchain’s hottest event this year. Currently, many first-generation chains feature a consensus validation mechanism called proof of work (PoW). To verify transactions in a blockchain — and thus receive rewards in cryptos — one must receive the privilege of doing so. Under PoW, the entity commanding the most computing power enjoys the highest probability of receiving said privilege.
However, proof of stake (PoS) flips this framework on its head. Rather than a consensus mechanism favoring computational power, it prioritizes stake (or “equity”) in the underlying network. Prior to the Merge, many advocates staked their coins in a separate account, keeping them frozen until the required time. The idea here is that those with the greatest stakes enjoy higher probabilities of verifying transactions and thus accruing rewards.
Still, the Merge isn’t without risks. Below are several cryptos to watch as the blockchain transition gets underway.
On the surface level, the Merge presents a competitive risk to Bitcoin (BTC-USD). Although BTC commands an incredible social cachet for being the pioneer of cryptos, it’s also showing its age. To use an automotive example, Bitcoin delivers a stick shift while everyone else is transitioning to electric vehicles. It’s cool but the broader ecosystem found a more efficient solution.
Fundamentally, Bitcoin consumes an estimated 150 terawatt-hours of electricity annually, per Columbia Climate School. It notes that this consumption represents more than the entire demand from Argentina. On the flip side, the PoS consensus mechanism is much more energy efficient. Therefore, BTC appears anachronistic against next-gen cryptos.
Even so, it’s important to realize that PoW represents arguably the fairest approach to decentralized distributed consensus. Rather than being forced to stake one’s coins/tokens in a separate account, crypto miners can acquire more computing power. Further, the energy source to mine cryptos can originate from renewable sources.
While unintuitive, Bitcoin could be the winner of the Merge. It just features fewer nuances and complexities that could go wrong.
Clearly, the spotlight among cryptos at the moment belongs to Ethereum (ETH-USD). The number two digital asset by market capitalization, Ethereum represents the foundational cornerstone of myriad blockchain projects. However, the one knock that it attracted over the years was the ETH network ran on a PoW consensus mechanism. With the Merge, Ethereum will transition to PoS.
Generally speaking, the broader consensus points to optimism for the groundbreaking event. Even mainstream institutions such as CBS News published reports about the Merge, explaining the potential benefits. They include a more efficient and quicker network, a lower environmental impact and possibly a more secure blockchain.
However, the news outlet also reported on the risks. In particular, Bryan Daugherty, the global public policy director for BSV Blockchain Association, explained that moving to a PoS system will create haves and have-nots among validators and users.
Put another way, Ethereum risks becoming elitist by effectively limiting validation participation to those with the most money. Therefore, the ultimate market outcome could be different from what developers initially intended.
Whether investors analyze the implications of the Merge or some other blockchain catalyst, it’s important to watch Tether (USDT-USD). A stablecoin is a crypto asset pegged to a currency (typically the U.S. dollar), Tether effectively acts as the currency of cryptos.
To explain, cryptos and fiat currencies operate in two separate paradigms. Wallet and exchange services such as Coinbase (NASDAQ:COIN) help ease this pain point, facilitating transactions between the two. However, delays often occur between converting fiat to virtual currencies. As well, a few financial institutions reject participation in cryptos.
Therefore, many investors keep a significant portion of their wealth in stablecoins like Tether. Should developments in cryptos occur that they want to respond to, they can do so immediately. Further, virtual currencies trade 24/7/365, making fiat-based conversions extremely cumbersome.
Nevertheless, the auditing of Tether and whether it maintains a true 1:1 ratio with the corresponding paper long clouds USDT. Personally, it may be wise for investors to return mostly back to fiat. Sure, it’s inconvenient but so is watching your funds potentially evaporate.
Ethereum Classic (ETC-USD)
Before Ethereum burst onto the scene, Ethereum Classic (ETC-USD) emerged as the first ether-undergirded network. To use colloquial vernacular, Ethereum Classic is the real OG. So, why isn’t ETC generating all the buzz?
During the initial launching process of the original Ethereum, the network suffered a major hack. To remedy the impact of the cyberbreach, several developers wanted to implement a hard fork. However, many others disagreed, stating that arbitrarily hitting a reset button does away with the whole concept of decentralization.
However, the debate could not reach (ironically) a consensus solution. The hard-forked chain became Ethereum, the original chain became Ethereum Classic. Moving forward, though, the main distinguishing factor between the two Ethereums is that ETH will implement a PoS mechanism. On the other hand, the ETC network will remain committed to PoS.
Technically, some believe ETC will benefit from downwind bullish momentum. Fundamentally, Ethereum Classic could be one of the cryptos to watch because its PoW mechanism arguably features a more intuitive profile. That is, the person who has the most computing power wins — it’s fairly cut and dry.
One of the more intriguing names to watch among cryptos, Cardano (ADA-USD) represents a pioneer in the PoS innovation. According to the project’s website, Cardano’s PoS platform is the “first to be founded on peer-reviewed research and developed through evidence-based methods.” However, this narrative also presents risks.
On Monday shortly after the U.S. equities sector closed, ADA ranked as the number eight digital asset by market capitalization. The valuation stood at $17.4 billion, which while impressive pales to Ethereum’s $211 billion market value. Now, Cardano’s competitive factor is largely centered on its PoS mechanism. However, with the ETH network moving to a similar consensus protocol, users may deem ADA redundant.
Interestingly, though, the White House’s recent study on cryptos mentioned Cardano, specifically in the context of environmental impact. Therefore, ADA could rise on the Merge event as it may inspire other legacy chains to consider the PoS pivot.
Then again, Cardano may lose its distinctiveness if more of these well-known legacy chains transition to PoS. Ultimately, most investors will probably want to navigate ADA conservatively.
Often labeled an Ethereum killer, Solana (SOL-USD) made a remarkable debut. At its low point in the spring of 2020, SOL traded hands for around 50 cents a pop. At its peak, the same SOL units commanded a price tag of over $250. Plenty of folks wish that time travel was possible.
Still, forward-looking investors have some reason to buy into Solana now, even though it’s incredibly elevated from its 2020 lows. Primarily, the marketing pitch centered on the SOL network being a faster, cheaper Ethereum.
To borrow from How-To Geek’s description, “Solana is a high-speed and permissionless layer 1 public blockchain that is sometimes called an ‘Ethereum Killer’ because it features cheap fees and fast transactions compared to the often expensive ‘gas’ fees due to high traffic on Ethereum.”
Despite the enthusiasm over Solana, investors will want to adopt a cautionary approach. As with other PoS-based cryptos, Ethereum’s entry into the consensus mechanism may impose significant competition.
Famous (and perhaps notorious) for introducing the meme-coin phenomenon, the Shiba Inu-inspired Dogecoin (DOGE-USD) continues to fascinate market participants. While Dogecoin attracts significant attention from major influencers — most notably a particular entrepreneur of EVs — it’s best known for delivering a fun-loving community. Generally speaking, DOGE investors don’t take themselves too seriously.
In that respect, DOGE could be a hedge of sorts against the vagaries of the Merge. Unlike other cryptos, the Dogecoin community doesn’t have grandiose ambitions about eliminating global hunger. Rather, like most other meme trades, the emphasis centers on profitability and fellowship with like-minded traders.
Still, if there was a glaring risk regarding Dogecoin, it’s that the asset is energy intensive. According to Digiconomist, annualized Dogecoin energy consumption amounts to 3.15 terawatt hours (TWh). That’s equivalent to the power consumption of Montenegro.
Now, that’s lower than other cryptos but here’s the question: while the government of Montenegro powers a nation, what exactly does Dogecoin contribute to the world?
On the date of publication, Josh Enomoto held a LONG position in BTC, ETH, USDT, ETC, ADA and DOGE. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.