Why institutions are eyeing blockchain’s biggest technological upgrade

Why institutions are eyeing blockchain’s biggest technological upgrade

Despite the current market trend, the interest surrounding Ethereum’s merge continues to peak. Developers, miners, investors and blockchain enthusiasts are all eagerly waiting for the long-anticipated transition of Ethereum’s proof-of-work model to proof-of-stake.

On Wednesday, the successful merge of Ropsten, the oldest proof-of-work testnet, marked a critical milestone for Ethereum as it looks to finalize two more public test networks (Goerlie and Sepolia) before determining an exact date for the merge. Not only does Ropsten provide valuable insights to developers, but it also provides investors with more confidence that Ethereum’s developments continue at full force. The last few months have shown strong interests coming from institutional investors as they look to participate in blockchain’s biggest technological upgrade – giving them access to ETH Staking, Ethereum derivatives, as well as access to DeFi.

Some key facts and milestones as to why the merge is receiving institutional attention:

  • Ropsten’s successful merge from proof-of-work to proof-of-stake
  • 12.81 million ETH is staked, which equates to 10.74% of the total circulating supply
  • Total staked ETH increased by 27.6% since Sygnum’s previous merge article on April 7th
  • There are now 400,000 unique validators and 74.1k depositors
  • Since April, a series of 6 shadow forks have been successfully tested

The biggest technological upgrade in blockchain

It is vital to note how important this technological upgrade is for Ethereum and for blockchain in general. Arguably the most used blockchain, the ecosystem is heavily reliant on its smart contract platform, network activity, and therefore its success. Pre-merge processes need to be examined and carefully executed which can justify delays on the grounds of securing long-term success.

Ropsten’s importance lies with the number of applications and services that are currently using it, providing a better testing environment and valuable feedback on how clients behave through the merge in a less controlled manner. This also means a lot of participants have been forced to upgrade before the actual merge happens. But more importantly, it is the closest the Ethereum developers have come to evaluating what may happen during the actual merge itself.

Why do institutional investors care?

Ethereum post-merge poses several benefits for institutional investors, namely a 99.95% reduction in energy consumption which would satisfy ESG obligations. Issuance will drop from 5 million ETH per year to 0.5 million per year, therefore becoming highly deflationary in the long term. Third, the successful merge will mark Ethereum as a top tier “blue chip” crypto providing more trust to new market entrants. Lastly, as staked ETH continues to rise pre-merge, so too does the interest come from institutional and professional investors, many of whom are waiting for the launch of ETH withdrawals.

The merge will also benefit the entire ecosystem, primarily scaling solutions (Layer 2s and sidechains), those of which will be the key to developing Ethereum’s post-merge infrastructure. Since the merge will not immediately fix Ethereum’s high gas fees, Layer 2s and sidechains will remain critical to cultivate mainstream adoption. Layer 2 total value locked (TVL) also continues to rise where 2.74 million ETH is currently locked across L2 networks, indicating that the demand towards rollup networks is also peaking. Lastly, some L2 platforms are also providing onboarding services for institutional clients to help bridge the gap between traditional players and DeFi.

ETH2 Deposit Contract: Total Value Staked, source: Nansen.

Institutional trust towards blockchain and ETH

For the merge to be a success, it is better to be meticulous than to rush things so that each phase in the transition process is executed with the highest precision. This will only benefit the blockchain community and build more trust amongst institutions – particularly upon the success of the upcoming deliverables. In addition to trust, there are other legal implications which act as entry barriers as many institutions must uphold their fiduciary duties. For example, whether the investments are environmentally sustainable, and the requirement to utilise licensed services (e.g. regulated custodians) to ensure compliance measures are taken and the safeguarding of client assets are secure.

The merge is expected to occur sometime between Q3/Q4 2022. Even though crypto markets exhibit many bearish indications, this has not stopped the number of deposits in the ETH2.0 contract from rising, arguing that long-term interest is at play. The successful completion of the merge has the potential to reboot the current market, stimulating new market entrants and liquidity from participants who are focused on long-term growth and future-driven prospects.

Learn more about Sygnum’s staking offering here.

About Sygnum
Sygnum is the world’s first digital asset bank, and a digital asset specialist with global reach. With Sygnum Bank AG’s Swiss banking licence, as well as Sygnum Pte Ltd’s capital markets services (CMS) licence in Singapore, Sygnum empowers institutional and private qualified investors, corporates, banks, and other financial institutions to invest in the digital asset economy with complete trust. Sygnum operates an independently controlled, scalable, and future-proof regulated banking platform. Our interdisciplinary team of banking, investment, and Distributed Ledger Technology (DLT) experts is shaping the development of a trusted digital asset ecosystem. The company is founded on Swiss and Singapore heritage and operates globally. To learn more about Sygnum, please visit www.sygnum.com.

This document is purely for educational purposes and has been issued by Sygnum Group. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication. It does not constitute an offer or a recommendation to subscribe, purchase, sell or hold any security or financial instrument. It contains the opinions of Sygnum Group, as at the date of issue. These opinions and the information contained herein do not take into account an individual‘s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes personalized investment advice to any investor. Therefore, you must verify the above and all other information provided in the document or otherwise review it with your external advisors. Some investment products and services, including custody, may be subject to legal restrictions or may not be available worldwide on an unrestricted basis. The information and analysis contained herein are based on sources considered as reliable. Sygnum Group uses its best efforts to ensure the timeliness, accuracy, and comprehensiveness of the information contained in this document. Nevertheless, all information indicated herein may change without notice.

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