According to Bank of America researchers, the Merge will make Ethereum more energy efficient, which might increase institutional adoption. Per the Bank of America researchers, institutional adoption may be boosted by Ethereum’s long-awaited upgrade this week. The second-largest bank in the U.S. claimed in a research note that Ethereum users’ ability to stake (or pledge assets to the network) could attract more major investors.
Ethereum, the second-largest cryptocurrency by market cap, is anticipated to finish its upgrade this week. The upgrade, dubbed “the merge,” will convert Ethereum’s blockchain from a proof-of-work to a proof-of-stake one.
This will replace miners with validators, who “stake” Ethereum to maintain the network’s security and functionality. The Ethereum Foundation claims that the update will make Ethereum “99% more energy efficient.” Additionally, according to Bank of America researchers, this might spur institutions’ interest.
Alkesh Shah and Andrew Moss, analysts at Bank of America, penned a note on Friday:
“The significant reduction in energy consumption post-Merge may enable some institutional investors to purchase the tokens that were previously prohibited from purchasing tokens that run on blockchains leveraging proof of work (PoW) consensus mechanisms,”
According to the two, institutional adoption could also be boosted by staking Ethereum and generating “a higher-quality yield (lower credit and liquidity risk) as a validator” as opposed to “on black-box lending/borrowing applications.” To put it another way, institutional investors are much more likely to engage in Ethereum staking to generate yield than they are to seek returns through the lending and borrowing of Ethereum-based assets through risky DeFi apps.
With Ethereum’s transition to proof of stake, the blockchain is anticipated to be more environmentally friendly than proof-of-work cryptocurrencies like Bitcoin, which are frequently criticized for the amount of energy they consume.
Proof-of-work mining is currently used by Bitcoin (and Ethereum) to maintain network security. To process transactions in this system, miners with powerful computers must solve challenging mathematical puzzles. And because a lot of power is required, a lot of electricity is also required, making this a very energy-intensive activity.
The upgrade this week will make Ethereum more environmentally friendly, but it won’t make it instantly more efficient or less expensive to use. Instead, after the merge, network improvements should bring down its frequently exorbitant gas fees.
Bank of America acknowledged this and stated that it might have an impact on the price of cryptocurrencies this year.
Image Credit: Shutterstock
Keep in mind that we may receive commissions when you click our links and make purchases. However, this does not impact our reviews and comparisons. We try our best to keep things fair and balanced, in order to help you make the best choice for you.
