CRYPTO MOVERS AND PRICES
Crypto was mixed this morning for the second day in a row. Spot volumes are considerably below the 30-day average.
CRYPTO STORY OF THE DAY
Ether (ETH) has seen outperformance over the last month, coinciding with attention around decentralized finance (DeFi.) We believe this narrative is distracting from more important issues for the Ethereum protocol surrounding their proof-of-stake (PoS) transition
In a period that has coincided with near-unprecedented attention in DeFi, ETH has seen its best period of performance since 2017. The token is up 2.4x since the lows in March and +65% since mid-July. The move has seen ETH breakout to its highest levels since August 2018, with next visible resistance only appearing in the range of USD 470. At the same time, ETH is moving towards one of the most important development decisions in its history. Due to issues that essentially add up to network clogging, high gas cost and generally scalability questions, core Ethereum developers are moving the protocol from a proof-of-work consensus algorithm to PoS. The transition is supposedly occurring late this year or early next year.
We have written previously on how underplayed the risks have been for ETH to move to PoS. The primary issues are 3-fold: First, the move to PoS remains a divisive decision. We find it hard to believe that in such a centralized shift of the protocol with a strategy that’s far from consensus, that ETH stakeholders will universally follow this move. That dynamic seems to present the strong possibility of another hard fork of ETH. Historically, in otherwise stable market conditions, hard forks have been destructive for the price of a coin. Second, Ethereum has a history of having issues on upgrades far less complex than this transition. In early 2019, a minor upgrade meant to address an issue with gas costs, was canceled at the last minute as a 3rd-party highlighted a vulnerability it was creating. These risks have lead to certain protocols proactively trying to attract Ethereum-based applications to their chains. Chains such as Bitcoin SV, for example, have their entire value proposition focused around the scaling issues that the Ethereum PoS upgrade is attempting to resolve. Ultimately, while the market focuses on the DeFi story there are serious risks of a hard fork, a development hiccup and from competition around the corner for ETH.