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The Ethereum Merge will make obsolete the need for “mining” Ether tokens.
Mark Felix/AFP via Getty Images
A long-awaited upgrade to the Ethereum blockchain network should be complete within days. Investors who have ignored crypto tokens should take note, because its impact is likely to be felt across some widely held stocks, according to a new analysis.
Ethereum’s “Merge” is set to transform the network underpinning the world’s second-largest cryptocurrency—
Ether
—by making it more climate-friendly and giving token holders new ways to earn yield on their investments.
The Merge matters because the digital asset ecosystem linked to Ethereum represents about 40% of the total market capitalization of crypto—about $1.1 trillion—analysts led by Stephen Glagola at investment bank
Cowen
wrote in a report Monday.
At the heart of the upgrade is a change in the mechanics of processing transactions from the current “proof of work” system to a method based on “proof of stake,” which is designed to be far less energy intensive. This could boost adoption of the crypto by investors concerned about environmental, social, and governance (ESG) factors, the team at Cowen said. It also lowers the environmental regulatory risk for Ether. This risk still hangs over
Bitcoin,
which uses the proof of work system, relying on computers solving complex puzzles to validate transactions, expending vast amounts of energy in the process.
Beyond crypto, the Merge is likely to impact companies ranging from trading platforms such as
Coinbase Global
(ticker: COIN) to chip makers
Nvidia
(NVDA) and
Advanced Micro Devices
(AMD), Glagola and his team said.
The team at Cowen agree that the Merge is likely to boost revenue at
Coinbase
,
which has moved to establish itself as a key platform for “staking,” where users lock up Ether as part of the transaction validation process, earning yield on their collateral in return.
Coinbase—which takes 25% of the yield—is the second-largest platform for staking, and the team at Cowen estimate that the company could generate $250 million in revenue from the business annually and $60 million in profit. John Todaro, an analyst at Needham, has estimated annual revenue from staking at $570 million for Coinbase in the most bullish of scenarios.
“We believe Coinbase’s ability to establish a strong delegated proof of stake business on [Ethereum’s proof of stake] Beacon Chain vs. other centralized competitors reinforces the view that the company is building subscription & services revenue outside of just the transaction revenue on the exchange/retail brokerage business,” the Cowen analysts said.
They added that there remained uncertainty from the success of the Merge itself—and whether Coinbase may risk quitting the business or risking its reputation if faced with having to censor the network to comply with sanctions.
Since Ethereum’s transition from proof of work to proof of stake will eliminate the need for “crypto mining” of Ether, the Merge will also impact the chip makers whose graphics processing units (GPUs) have been used in the process. But a drop-off in mining isn’t bad news at all, according to Cowen—in fact, it should add clarity to the businesses and remove the risk of whipsawing demand driven by volatile crypto prices.
“For GPU suppliers
Nvidia
(NVDA) and to a lesser extent AMD (AMD), we view the upcoming Merge as a long-term positive for sentiment as it likely removes the risk of another painful crypto bang/bust cycle in the future,” said the Cowen team.
And while the Merge will do little to impact the major listed crypto miners, like
Marathon Digital
(MARA) and
Stronghold Digital Mining
(SDIG)—which strictly mine Bitcoin—the upgrade could refocus attention on how energy intensive proof of work is.
“Indirectly, we believe a successful Merge could increase scrutiny on energy-intensive proof of work mining, potentially serving to increase U.S. jurisdiction risk,” said the team at Cowen.
The Merge is expected to complete by Sept. 20, with analysts eyeing Sept. 15 as the likely day for the upgrade to finish.
Write to Jack Denton at jack.denton@dowjones.com