Aug 18, 2022 - Economy & Business

Exchanges chart path to Ethereum merge

Illustration of a pixelated dollar sign popping up on a radar.

Illustration: Lindsey Bailey/Axios

As the Ethereum blockchain moves closer to its switch to a proof-of-stake validation model, crypto exchange operators are charting their own parallel paths in anticipation.

Why it matters: The Merge, as the event is called, is due in roughly a month's time, and will have ripple effects across crypto. One is that it stands to be lucrative for exchanges that offer associated services.

Driving the news: Coinbase Global can generate an estimated incremental revenue of $650 million annually via ether staking services, according to JPMorgan stock analyst Ken Worthington.

  • That's a 20% jump in annualized total revenue for the largest U.S. crypto exchange.

Be smart: Staking is a crypto holder's way of earning passive income by pledging their digital assets to the network to help validate transactions in a proof-of-stake system.

  • For Coinbase, it's a way to diversify its revenue stream and retain clients by offering additional services on its platform.

Between the lines: JPMorgan expects a 95% participation rate for Coinbase's retail customers in ether staking.

  • "The key here for retail is that Coinbase is opting people into staking," Worthington said in a report. Previously, Coinbase customers have been required to sign up for Eth 2.0 staking due to extended lockups.

Meanwhile, market share is a huge advantage for exchanges.

  • The bigger the market share in ether trading, the bigger the staking business and the more competitive a platform can be with rates. And the better the rates, the more customers.

What they're saying: Exchanges have diverged a bit in terms of what they are telling customers about staking potential.

  • Coinbase in late February told clients ether staking yields could double, according to a Twitter user who took a screenshot of the missive.
  • Binance in its several-page rundown on The Merge says APR post-Merge is more like +50% rather than triple.

State of play: Many exchange operators rolled out ether staking services prior to the anticipated upgrade.

  • That meant that customers who staked ether when the services started rolling out, around December 2020, have been waiting almost two years to withdraw their staked ether.

Of note: There is broad support for Ethereum 2.0, but there is also an emerging faction who want to fork the blockchain and maintain "ETHPoW (the proof-of-work validation system, which the blockchain is changing from).

  • Binance said it would consider a PoW fork or forks as needed. FTX and OKX said similar things.
  • Coinbase in its blog post about The Merge did not mention it; a Coinbase spokesperson declined to say more.

Readers who absolutely want to claim ETH PoW in the event of a fork or forks should take their respective ether off the exchange otherwise be held at the mercy of what the respective ether trading venue leaders decide.

Crystal's thought bubble: One of the most important things to keep in mind about investment risk from legendary investor Howard Marks: "There's a big difference between probability and outcome. Probable things fail to happen and improbable things happen all the time."

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