Ethereum Merge: a net positive for 2023?

Metaverse potential

The Metaverse is a polarising investment concept, but one with huge potential despite the current downturn. Citi research indicates it could be a $13 trillion opportunity by 2030, and Ethereum could be a primary beneficiary.

Meta Platforms, owner of Facebook, Instagram, and WhatsApp, is investing circa $1 billion a month into its Reality Labs division, including nearly $4 billion in the last quarter alone. And the embattled company thinks that Reality Labs losses in 2023 will grow significantly year-over-year.

Despite a depressed share price and considerable investor unrest, CEO Mark Zuckerberg maintains control of the company through class B voting power. With the data of billions in his hands, the investment could benefit Ethereum without costing the altcoin anything.

While the different Metaverses utilise their own native tokens, whats little understood is that these usually operate on the Ethereum blockchain, including those inside the Sandbox, Decentraland, and Axie Infinity.

In total, over 40% of the top 100 cryptocurrencies are built on the Ether blockchain, attracted by its first-mover advantage, smart contract functionality, and falling transaction fees as the result of the Merge.

Staking and the SEC

The Merge has brought in significant upgrades to the Ethereum network. Transactions are significantly sped up, while transaction fees have sunk dramatically. This makes the use case of Ethereum as a currency rather than just as an investment vehicle more promising.

More importantly, some investors are now being invited to stake a minimum of 32 Ethereum to activate validator software to get a return on the blockchain (staking reward). Yields are likely to be generous, as the amount of ETHER being issued has been slashed by more than 90% on an annual basis, hugely reducing the available supply.

In fact, Ethereum is now deflationary. This could help with price support, even as the Federal Reserve presses ahead with monetary tightening. Citi analyst Joseph Ayoub notes that Ether looks like it could be moving towards a deflationary future as it exhibits periods of deflation amidst low network activity. As activity rises it could maintain a deflationary supply having already shown deflationary tendencies post-Merge in a low-burn environment.

Of course, staking for returns sounds fairly similar to receiving dividends on an equity, a fact not lost on SEC chair Gary Gensler. Bitbank analyst Yuya Hasegawa has already warned that all PoS crypto may fall under SECs scrutiny.

The regulator was already moving to regulate the crypto sector, with Gensler noting that investors should enjoy similar protections afforded to equity investors.

Of course, the Merge feeds into the wider debate over whether all crypto, or just some altcoins, function as securities or commodities. Interestingly, the SEC indicated through a comment in a recent lawsuit that Ether transactions relevant to the case were validated by a network of nodes on the Ethereum blockchain which are clustered more densely in the US than in any other country. As a result, those transactions took place in the US.

The implications for what is supposed to be a decentralised currency could be significant.

However, Finbold data from March 2021 shows there were only 2,559 Ether nodes in the US out of the 6,806 globally. The country only possesses a plurality, not a majority, weakening the regulatory case, and all that may entail.

This leaves Ethereum investing a complicated venture for 2023.