18 Aug 22 – The ETH Merge = The Next Bull?
Will we see ETH soaring through the roof and lead to a bull market?
The crypto and NFT market moves so fast, it feels like a dozen things happened in the past two weeks. This update will cover three main areas:
ETH transitioning to POS and what it entails
The CC0 movement and the Moonbirds (MB) saga
Royalties-free NFT trading on Sudoswap
ETH Merge To Proof-Of-Stake
It's official. The final round on the test net has concluded successfully and ETH is expected to merge into the POS consensus mechanism around 15 to 16 September (defined by the block number). This has been in the work for years and many early adopters have locked up their ETH pledging their support for the transition to ETH2.0. But how exactly is this different from the current Proof-Of-Work setup?
POW versus POS
POW is when miners use computing power to resolve that "very complex math problem" to add blocks of transactions onto the chain (hence blockchain). For contributing their computing power i.e. hardware + electricity, miners get rewarded with crypto for successfully adding transactions, and helping to secure the blockchain. POW is a consensus mechanism.
POS is an alternative mechanism, but instead of miners proving their "work done", blocks are added by stakers with validating nodes. To be a node operator, one have to stake ETH to "testify" for the legitimacy of transactions and hence adding blocks of transactions that way. Unlike mining, stakers will share a pool of ETH, plus a portion of the transaction fees.
Besides the way that blocks are added, the key difference is that there will be a lot less ETH created per day. Add to that the current burning mechanism, ETH is deflationary. Should ETH prices shoot up very quickly, it will incentivise more HODLing as opposed to using, at least until Sharding comes about in the next part of ETH2.0.
The transition from ETH to ETH2.0 involves firstly the consensus mechanism. This is supposedly 99% more energy efficient. And the second part is Sharding, which is a way for parallel chain activities to run concurrently, and that is the upgrade that will greatly reduce gas fees. The upcoming merge is only for POS consensus.
What Happens To Miners?
Miners already have existing hardware, and if this switch happens, what would it mean for them and their mining rigs? Not only is it a sunk cost, but they will stop earning the roughly 13,000 ETH mined every day. They could technically switch to mine other types of cryptocurrencies but the economics may not make sense, especially in a bear market where altcoins are pretty much worthless.
This led to the next major happening, a fork – miners have already pledged to continue the ETH chain and it will be called ETHPoW. This means that when ETH moves to POS, it will split into two. The main ETH will be on POS while a "side chain", the legacy ETH will be continued to be serviced by the miners and be called ETHPoW.
For ETH holders, you'll receive the same amount of ETHPoW as the amount of ETH you hold at the time of the fork. For some, they see this as an opportunity to realise a dividend-like gain, as they'll be able to transfer their ETHPoW to exchanges to sell, or simply swap it back to ETH.
I'm net bullish on ETH, and think Arthur Hayes summed it up really well. As someone who's heavy into NFT and seeing all the development around the Web3 space, it's a good hold for the long horizon. I can't say for sure that ETH will pump following the merge (or if the merge will be successful), but I think it will happen and any dips will be quickly bought up.
Moonbirds And The CC0
Moonbirds, by Kevin Rose, once traded to 45ETH, and was still largely around 20ETH floor this bear market. However, they made a sudden announcement without consulting their holders and made all birds CC0.
This took the community back as it instituted top-down. Further, many holders bought in at a point when they were given exclusive IP rights to their birds, and this was definitely not what they signed up for. Hence, it felt like a turnaround in decision and a centralised one at that. Prices dropped to 12ETH in the following weeks.
What Is CC0?
Creative Commons is a type of licensing that came out during the early days of Web2.0 where people were debating about Intellectual Property Rights. Because of how easily things online, files, images, ideas, can be copied, many groups and companies were finding ways to protect their own rights. Along the way, came Creative Commons.
There are several types of licenses, including Share-Only, Derivatives-Allowance, Commercial-Allowance, and it's up to the creator to define what type of license he wants to hold or retain. In the case of CC0, the creator decides to give away all his licensing rights, i.e. anyone can do whatever they want with it.
The problem with Moonbirds going CC0 is not so much the idea and vision behind opening up their ecosystem, but rather the sudden change in license agreement. For example, there are holders who were closing paid licensing deals, but because of this announcement, lost those deals. The reason could be that anyone can use the same birds for whatever reasons – political, derogatory even – and this can affect how a brand appears especially after they decided to use MB for their IP
Is CC0 good or bad?
Most people in Web3 or buys into the Web3 vision will appreciate CC0. This is because it is this selfless notion and opening up of resources, which allows the industry to build on top of one another. It allows for virility, good or bad.
Having said that, the other argument would be to keep some control of licensing. You can open-source things, but you don't have to make it entirely CC0, so it really depends where you stand – true decentralisation or some form of authority?
The most recent update with the new Sudoswap marketplace is their decision to not enforce Creators' Royalties, and go with a 0.5% platform fee. This is in stark contrast with every existing marketplace.
Just to compare with OpenSea, OS takes a 2.5% platform fee while Sudo takes 0.5%. A typical collection takes between 5% to 10% royalties and on Sudo, this is 0%. For expensive collections like RTFKT's Clone X, which has a 5% royalty fee, this is huge. A 10E trade would mean 0.5E less for the seller, which is why he might prefer to use Sudoswap.
One main consideration is between large collections and 1/1 art. For large collections, this seems almost inevitable that people find the cheaper alternative to make their trades, hence Sudo might become a major competitor in future. For 1/1 art, most collectors are willing to pay royalties that goes directly to the artist.
Overall, it almost becomes a case of how can a creator – be it an artist or a brand – create enough value such that collectors will respect the royalties? Also, creators will now have to charge a reasonable % royalty versus an absurd one, a consideration that they probably didn't have to think much about in the past.
With all these development, it's hard for me not to be bullish about NFTs. This is not to say that prices will moon, but rather, I think it will become a very legitimate tool that will be part and parcel of our daily lives in future.
This is also not to say that you should buy any NFT you like, because most are still in an experimental phase, and there is so much speculative value involved you stand to lose a good amount of it. How will the ETH PoS affect the markets? I'm excited to see the outcome regardless if it's up or down.