This article was first published on The Straits Times.
SINGAPORE - The value of popular cryptocurrency Ether (ETH) is expected to rise as its blockchain becomes more sustainable and gains traction as a platform for coders to innovate, following a hotly anticipated upgrade set to take place on Thursday.
The Merge, as the upgrade is known, will see the Ethereum blockchain transition from the energy-intensive proof-of-work (POW) validation method to the proof-of-stake (POS) method, which consumes virtually no energy at all.
If successful, the Merge will enable more applications to run on Ethereum by reducing costs for developers. This, in turn, is expected to trigger more interest from institutional investors, which should pave the way for blockchain to become more useful in the real world.
Crypto initiatives like non-fungible tokens, or NFTs, are executed on programs enabled on Ethereum.
"Becoming more affordable and sustainable is the only way Ethereum can support more transactions and use cases in the future. This shift is a huge revamp to Ethereum's value proposition and economic model," said Mr Chen Zhuling, chief executive and founder of crypto staking firm RockX.
It will also allow crypto valuations, including ETH, Bitcoin (BTC) and other tokens, to stabilise. ETH surged fivefold last year and reached a record high of about US$4,866 in November. It has dropped about 50 per cent this year.
Mr Chen said the new POS system is already drawing the interest of institutional investors and could give ETH holders more reason to hold on to their tokens. This is because they will be able to stake their ETH and earn yields of between 8 per cent and 10 per cent on their holdings.
POS blockchains stake, or lock up, their coins to ensure that all transactions are verified and secured. This is in contrast to POW chains, which require huge amounts of computing power, a process called mining, to verify transactions. Under the POW system, miners earn rewards, or tokens, that can be traded to cover costs.
Mr Delroy Fong, head of flow trading at digital asset firm Amber Group, said: "After the POS transition, 90 per cent of the ETH issued as rewards disappear as there is no longer the need to reward miners.
"With fewer ETH in supply, the price should go up over the longer term."
It will take some time before prices rise and valuations stabilise, however.
Mr Darius Sit, founder and chief investment officer of crypto trading firm QCP Capital, said low network usage following a crash in crypto prices earlier this year is one reason.
Mr Fong said there is less available capital for risky ventures with inflation still on the rise and the Federal Reserve guiding for more rate hikes to come.
Mr Adrian Chng, founder of BTC fund manager Fintonia Group, said some volatility in the broader crypto market should be expected in the short term.
"Many hedge funds and traders have taken positions on ETH as well as in the crypto derivatives market and when the Merge happens, these bets will be unwound. If it does not go well, there would be a drop in sentiment and volatility for sure. This may also impact other tokens like BTC," he added.
Mr Chen said there will also be some confusion immediately after the Merge as users familiarise themselves with the new blockchain. "There could be room for duplicated transactions that result in the theft of some tokens, for example."
On the whole, Mr Sit expects the transition to be "smooth and seamless".
"There is a small risk that things get delayed, but the Ethereum developers and crypto service providers like the exchanges are committed to making this happen," he said.