The last few weeks have been some of the most turbulent in cryptocurrency history. While the broader cryptocurrency and equity markets have plunged into a bear market, the price of Ether (ETH) has plummeted to levels we haven't seen since 2021. Meanwhile, Terra's wildly popular stablecoin ecosystem collapsed in spectacular fashion, wiping out over $40 billion in value and causing ripple effects throughout the decentralized finance (DeFi) ecosystem.
And if all of this wasn't enough, one of the largest collections of non-fungible tokens (NFTs) was recently embroiled in a controversy that places its creator at the center of a racist online cult.
This article originally appeared in Valid Points, CoinDesk's weekly newsletter that focuses on Ethereum 2.0 and its far-reaching impact on crypto markets. Subscribe to Valid Points here.
But hey, it's not all doom and gloom in crypto land. As markets fall and reputations take a hit, the Ethereum community is still hard at work preparing for the Merge - the long-awaited transition to a proof-of-stake (PoS) network. After signs that the network upgrade would be delayed - yet again - beyond the summer, Ethereum co-founder Vitalik Buterin said last week at an event in Shanghai that the merge could finally be ready in August.
The PoS Merge is intended to improve Ethereum's security and reduce energy consumption, while setting the stage for broader improvements in network capacity and fees. But with the recent market downturn, an important question arises: will a bear market merge mitigate the impact of the upgrade?
A bear market merge and investor sentiment
First, a quick caveat: I am not a stock market reporter. While there are some great journalists at CoinDesk and elsewhere who analyze prices and report on market trends, this newsletter will not contain any in-depth insights on how the ether price might move as a result of the merger.
But I'll hazard a guess anyway. For years, speculators have pointed to the merger as an event that will drive up the price of Ethereum tokens, perhaps even surpassing Bitcoin (BTC). Why this would be the case has always been vague: it's difficult to cite many "fundamentals" for the ether price. While PoS will change some of Ethereum's tokenomics, the price of Ether - like that of most other cryptocurrencies - is mainly a reflection of overall market sentiment. With this bear market seemingly set to last until August, market sentiment post-merge is likely to be a resounding "meh."
Even though the core of the merger has not changed, the new context in which it will take place is still relevant. The fact that Ethereum has entered a down market will have important implications for how the upcoming merge is received by the community and investors.
Crypto in a bear market
Price shouldn't be the only focus of the recent downturn in the crypto market, and it's not too hard to predict what the poor market conditions could mean for the crypto industry in general.
With less money flowing into cryptocurrencies (and other speculative asset classes), fewer people will be investing in cryptocurrencies in search of short-term gains. In addition, we can expect many of the investors and developers who entered the industry at the height of the crypto bull market to leave in search of greener, more stable pastures.
I imagine that many of those who find jobs in the crypto industry in the coming months (or years) will go to larger companies like Coinbase (COIN) rather than comparatively risky DeFi bets and newer blockchains. As VC funding dries up, the emerging projects that survive will do so because of their talent and technology, rather than their ability to attract crypto-crazy valuations and short-term money.
Of course, there is also a possible scenario in which fraudulent NFT projects and Ponzi-like DeFi protocols continue to attract the interest of retail investors looking to make a quick buck - especially if the stock market cannot be relied upon to deliver high returns. While I'm sure there will be a few degeneracies mixed in with all of this, it's hard to imagine big-name investors going back to investing hundreds of millions of dollars in unproven experiments like Terra anytime soon.
Case Study Dot-Com
Amidst all the bad news, the last few years have been extremely positive for the cryptocurrency space in many ways. With VCs looking to fund anything and everything "crypto," we've likely seen some solid, if risky, bets get funded that would have been rejected in more conservative times.
And even as the NFT market and many DeFi protocols have collapsed under the weight of the general market downturn, the boom in these sectors has introduced a much larger audience to cryptocurrency.
A meaningful, if unoriginal, comparison for this crypto period could be drawn with the dot-com boom and bust of the early millennium. Although many of the companies funded before the bubble burst were ultimately unsuccessful, the initial boom paved the way for much of what emerged in the years that followed.
As Silicon Valley maven Ben Thompson put it in one of his 2021 newsletters:
In the early days of the Internet, "websites proliferated at breakneck speed, as did dreams of what this new technology could make possible. This mania led to the dot-com bubble, which in turn triggered massive investment in telecommunications infrastructure. Although the companies that made these investments, such as Worldcom, NorthPoint and Global Crossing, went bankrupt, the foundation for widespread high-speed connectivity was laid."
After the dot-com bubble burst, subsequent big-tech titans like Google (GOOG), Amazon (AMZN) and eBay (EBAY), which were funded alongside shallower bets like Pets.com, went into downward mode. These companies would not have been successful if they did not have the infrastructure that was funded during the first, ill-fated funding frenzy of the Internet era.
Looking at the Ethereum merger.
In my eyes, this is where the work on the Ethereum Merge should start. Rain or shine, the Merge is probably coming. Even if it doesn't prove to be a huge boon for the Ether price, if the developers are to be believed, it will have a lasting impact on the future of the network.
The news that the merge could be coming in August came shortly after two more successful Ethereum Mainnet Shadow Forks, one on May 12 and another on May 20. If you've read previous issues of this newsletter, you may recall that a shadow fork is something of a test run for Ethereum's transition to proof-of-stake. Mainnet shadow forks - which simulate the PoS transition under the most intense, real-world conditions - are one of the final testing steps developers must perform before deeming the network ready for an upgrade. Aside from a few minor issues, the two recent forks seemed to go well.
Twitter discourse in the Ethereum developer community has been quite cheerful in recent weeks, as news that the merge is nearing completion certainly takes market conditions into account. The price of Ether may not reflect the same enthusiasm, but the last few weeks have been a constant reminder that prices are among the least interesting aspects in this space.
Pulse Check
Below is an overview of the network activity on the Ethereum Beacon Chain over the past week. For more information on the metrics presented in this section, see our 101 Explanations of Eth 2.0 Metrics.
Disclaimer: All profits from CoinDesk's Eth 2.0 staking venture will be donated to a charity of the company's choice once transfers are possible on the network.
Validated Stakes
There was a lot of talk about digital money at the World Economic Forum's annual meeting in Davos, Switzerland.
- WHY IT MATTERS: Although the forum's leaders have not yet embraced cryptocurrencies, they are listening closely as the WEF holds serious discussions about cryptocurrencies with key industry players. Jeremy Allaire, chairman and CEO of Circle Pay, said cryptocurrencies have taken on a new prominence at the WEF and hopes are already high for next year. Read more here.
Coinbase (COIN) is now included in the Fortune 500.
- WHY IT MATTERS: With revenues of $7.8 billion in 2021, the global crypto exchange platform is listed as the 437th largest U.S. company by revenue. COIN is the first crypto company to make the Fortune 500 list. The news follows the launch of the Coinbase Institute, a cryptocurrency think tank that will publish research on Web 3 and hold discussions with policymakers and industry thought leaders. Read more here.
The Filecoin Foundation and Lockheed Martin (LMT) are exploring hosting blockchain nodes in space.
- WHY IT MATTERS: On May 23 in Davos, the two organizations announced their collaboration to bring the Interplanetary File System (IPFS) to space. Marta Belcher, general counsel and head of policy at the Filecoin Foundation, said the idea is to reduce the latency of downloading data from remote locations like the moon. The current plan is to designate a test mission by August of this year. Read more here.
Data shows some bitcoin mining activity has resumed in China.
- WHY IT MATTERS: The Cambridge Bitcoin Electricity Consumption Index, which breaks down the geographic location of Bitcoin miners worldwide, shows that China's share of mining has increased from 0.0% in August 2021 to 22.3% in September 2021. The Cambridge Centre for Alternative Finance said that "the reported hash rate suddenly rebounded to 30.47 EH/s in September 202, instantly catapulting China to second place in terms of installed mining capacity globally." Read more here.
GameStop (GME) has made a beta version of its self-managed Ethereum wallet available for download.
- WHY IT'S IMPORTANT: The video game retailer is solidifying its presence in the crypto space by unveiling a digital asset wallet ahead of the launch of its NFT marketplace later this year. Players can use it to send and receive in-game assets like cryptocurrencies and non-fungible tokens without leaving their web browsers. GameStop shares rose 2.67% to $98.21 in pre-market trading. Read more here.
Factoid of the week
Open communication
Valid Points incorporates information and data about CoinDesk's proprietary Ethereum validator into its weekly analysis. All profits from this staking project will be donated to a charity of our choice once transfers are activated on the network. For a full overview of the project, please see our announcement post.
You can check the CoinDesk Eth 2.0 validator activity in real time via our public validator key, which is:
0xad7fef3b2350d220de3ae360c70d7f488926b6117e5f785a8995487c46d323ddad0f574fdcc50eeefec34ed9d2039ecb.
Search for it on any Eth 2.0 block explorer page.