The Breakdown - The Ethereum Merge Settles In as Next Crypto Narrative

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Monday, July 18th, and today we are discussing the timeline for the Ethereum merge. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also, a disclosure as always. In addition to them being a sponsor of the show,

Starting point is 00:00:51 I also work with FTX. Now, one quick note before we dive into the meat of the show, I am going to be doing some travel later this week. So from Wednesday through Sunday, I'm actually going to have an interview series, which will be a number of different people kind of checking in on where things are right now in markets and geopolitics. I think it's a great little set of conversations, and I'm excited to share them with you. And speaking of setting context, my general view of things right now is that crypto alongside basically every other asset class is more or less subject to the overall forces shaping markets in general, which is, of course, the feds fight against inflation. Now, this doesn't mean that there won't be countercyclical moves from time to time,

Starting point is 00:01:38 but it means that in general, I don't believe that crypto is immune to these larger forces, and I don't think that we're going to see a true return to a bull market until the macro side of things kind of bottoms out and we stop having the Fed pushing so hard on monetary tightening. That said, one of the very few narratives that some contend has the power to shift the crypto markets around is the Ethereum merge and its transition from proof of work to proof of stake. Now, at this point, when the merge is actually happening is something of a meme in the crypto community, but it appears more and more that the timeline is actually coming into view in a much more specific way. There have been a number of successful test merges, and while there are still

Starting point is 00:02:18 more tests to come, the official merge appears to be fairly on the horizon. On a public call on Thursday night, Tim Bako, who is an Ethereum protocol support engineer, gave a suggestion timeline for discussion. While the timeline isn't final, it suggests that the merge happened on September 19th. So far, two successful merged tests have been carried out using public test nets. The most recent test, which converted Ethereum Sopoila to proof of stake, was successfully completed two weeks ago, and the final test converting the Gourley Testnet is suggested for August 11th. Now, Ethereum's price has responded super well to this announcement, currently hovering just under $1,500 compared to lows of around $1,000 earlier last week.

Starting point is 00:03:01 So let's talk about the community discussion around this, and by and large, the most significant chatter is about price. At Seedphrase on Twitter writes, narratives can be the greatest driver of price action. On July 15th, at Seedphrase on Twitter said narratives can be the greatest driver of price action. We're yet to see the eth-merge catalyst come into play. Obviously, over the weekend, that changed. Ethereum Jesus wrote, there's going to be virtually no cell pressure.

Starting point is 00:03:26 when the merge happens. Everyone who's staking is locked up. Everyone remaining with their money in staked Eath is holding until re-pegs. Anyone who had their money on Voyager or Celsius is locked in bankruptcy proceedings for five to ten years. Everyone who thought they could easily make ridiculously high yield in Terra Luna without consequences, and anyone who doubted the super cycle is now officially washed out. Everyone who had a multi-billion dollar shit coin fund like 3AC is wiped out too. Moses parted the Red Sea. Is there such a thing as a perfect storm for the Ethereum merge? Maybe this is how it was supposed to happen. Bullish, A. F. Howell Press writes, I think most people misunderstand what the merge represents sometimes.

Starting point is 00:04:02 This is not a trade where you must time your entries and exits perfectly. This is a structural shift. It's an investment more than a trade. These flows are never reversing. The merge will create the first structural demand asset in the history of crypto. You just need to buy before and then hoddle. The structural flows will take care of the rest. Sure, there will be volatility and some short-term traders will try to sell the news at times. However, when you look back later and zoom out, I think that will all be noise. Not everyone agrees with Hal, though. D-Gen Spartan writes, I'm less optimistic than Hal here.

Starting point is 00:04:34 I think a big chunk of this trade will be short-term capital chasing momentum in the absence of other compelling, large enough capacity-wise narratives. The structural shift is there, but starts small and grows over time. Another crypto-trader Indy responded to D-Gen saying, largely agree with this. Some variants involved, I think, because of so many narratives at play, but ultimately, I think, rally into merge. Slump after, the degree of which catches people off guard, and eventually effects of new tokenomics begin to show. In the past, Bitcoin halvings have a fake-out rally into event, month plus slump immediately following, and then true rally after that.

Starting point is 00:05:08 Barring some narrative really taking off with the masses, I think the merge looks roughly similar. Light Crypto says if the last few days of price action didn't make it obvious, the merge has filled the narrative void. Macro-calming opens space for a return to asset-specific drivers. Now, as you can tell from the way that I opened this show, I think there are limits to how much asset-specific drivers can actually shake us out of this bare market. However, I agree entirely that the merge has filled this narrative void. It might be the first, but it certainly won't be the last narrative to attempt to do that in this crypto cycle either. Still, you are definitely seeing a return of optimism, with a number of people speculating seriously that we've seen a bottom.

Starting point is 00:05:50 Eric O'Connor writes, we probably bottomed and we'll see $10,000 ETH within the next 24 months. D. Jen Spartan again looked at this as well. He wrote, ETH bottom case. Lots of people blew up, a.k.a. the four sellers have sold. The merge. ETH funding was kind of negative for a while. Tradify people I knew in real life tapping out. ETH not bottom case. Macro. Social activity and sentiment surprisingly healthy. Was just overall too easy. Now, he's not wrong that if we have seen the bottom, this bear market was very unlike what we had previously seen. However, I tend not to ascribe too much to the people aren't depressed enough so it can't be a bottom. If we're just looking at patterns of history, we would need to see some serious long-term apathy to really

Starting point is 00:06:33 pattern match previous bottoms. But factors change. And crypto was not a macro asset back in 2018 and 2019 the way that it became in 2020 and 2021. As I said before, I don't believe any catalyst within crypto can snap us out of being subject to the Fed tightening faster than it has since the 1980s. Plus, there's definitely a feeling of grasping with some of these narratives. YV. Tweets writes, Ethereum merge is an operational risk, not a bullish catalyst. And this is something that you don't see that much chatter about, but I think bear some truth. Indeed, one way to look at previous price pops of ETH after successful test chain merges is that they're actually derisking events.

Starting point is 00:07:12 Still, by and large, I think you can get a sense of the role the merge is playing with, within the crypto industry right now by looking at what the conversation is focused on, which is entirely about price. It's all markets focused because our heads are all twisted by six months of down prices culminating in the worst market month for Bitcoin ever in June. Well, it's that and your standard set of Bitcoin or critiques of proof of stake. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still stay in crypto, you need a trusted partner by your side. Nexo is a security-first company that manages risk by relying on mechanisms

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Starting point is 00:09:14 One discussion that I do think is interesting and worth having is the possibility that Ethereum's conversion to proof of stake creates political risk. We'll call this the why can't Bitcoin just go to proof of stake as well argument. On July 12th, Patrick Hansen wrote about a new European Central Bank research article on the climate risk of crypto. He pulled this quote. Public authorities have the choice of incentivizing the crypto version of the electric vehicle, proof of stake in its various blockchain consensus mechanisms, or to restrict or ban the crypto version of the fossil fuel car, proof-of-work blockchain consensus mechanisms.

Starting point is 00:09:50 So while a hands-off approach by public authorities is possible, it is highly unlikely, and policy action by authorities, e.g. disclosure requirements, carbon tax on crypto transactions or holdings, or outright bans on mining, is probable. This analogy of proof of work as a fossil fuel-burning car and proof-of-stake as the electric vehicle got a lot of pickup. Patrick Hanson followed up.

Starting point is 00:10:11 The analogy POS equals electric car and P-O-W. equals fossil fuel car is bad. Neither proof of stake nor proof of work directly emit CO2. They are just different forms of computation that can be powered by all kinds of more or less carbon-intensive energy sources. And I think this is really key. If the merge does create this new type of risk for Bitcoin, should Bitcoiners be angry about the fuel that it gives to policymakers who are already concerned about Bitcoin's energy footprint? My general feeling is that the energy battle is one that Bitcoin is going to have to fight no matter what. Climate issues are too front and center on the policy agenda for that not to be the case, no matter what Ethereum does or doesn't do.

Starting point is 00:10:48 And I'll go even further. I think that while there is absolutely risk that people will say, hey, if Ethereum can switch, why can't Bitcoin? I believe there's another possibility that, for some, Bitcoin being the only major proof-of-work network actually makes it more politically palatable. It reinforces potentially the difference between these different types of technologies and what they're good for. It also means a smaller percentage of the overall industry, running on proof of work, which means less of the scary prognostications about how if the industry grows, it just eats everything. David Marcus, formerly of Libra slash Novi, who is now working, by the way, on Bitcoin payments via lightning, tweeted, I never understood the Schadenfreude between the Ethereum

Starting point is 00:11:27 and Bitcoin communities. These two will end up being complementary. One is a protocol for the decentralized web, the other for the most secure and trusted form of decentralized or value and settlement. Now, lots of Bitcoiners jumped in to argue various parts of this, starting from the very standpoint of Ethereum being decentralized at all. But I think his separation as a possible heuristic or clarifying path, for example, for lawmakers to have a quick way to distinguish things in their mind is potentially politically beneficial. The big problem with energy debates isn't what Ethereum does. It's that the debaters on one side simply don't like Bitcoin, so don't want any energy to be used for it. Senator Dick Durbin tweeted this weekend, it's time to learn

Starting point is 00:12:06 the truth about crypto. Let's start with the obscene amounts of electricity needed to mine Bitcoin and other cryptocurrencies. Families and businesses in America will pay the price for crypto's mining ventures. Neil Jacobs, summing up my feelings exactly, said, stop wasting time and energy on Senator Dick Durbin. There are other much more winnable Democratic senators than him. Nima Cheaps was even more positive, saying today regulators want to curtail Bitcoin mining. In less than 10 years, they will flip 180 degrees and regulate that every power station must have an integrated Bitcoin mining load bank, making the generator extremely flexible and able to respond rapidly to grid price and reliability signals. Still, even if Nima's right, that did not stop six senators led by

Starting point is 00:12:45 Jared Huffman and Elizabeth Warren, sending yet another letter to the EPA in the Department of Energy requesting more significant disclosure of energy usage from the crypto mining industry. A statement from Huffman's office read, the results of our investigation are disturbing, revealing that crypto miners are large energy users that account for a significant and rapidly growing amount of carbon emissions. Our investigation suggests that the overall U.S. crypto mining industry is likely to be problematic for energy and emissions. The lawmakers said that the top seven mining companies have presently developed over 1,045 megawatts of energy capacity for their mining operations, enough they say to power all of the residents in Houston. The group requested that the EPA and the Department of Energy work together

Starting point is 00:13:25 to require reporting of energy use and emissions from crypto miners asking for a report by August 15th. Now, if the rhetoric from the senators is escalating, which it is, in April, the group of lawmakers that sent a letter to the EPA just expressed their, quote, serious concerns. It's not clear that it's picking up much political traction. The letter in April was signed by 22 Democrat lawmakers as co-signatories, with this letter only containing six. It appears to me, at least in the U.S., the discussion of Bitcoin mining is going to be more nuanced. Even if you look at the New York moratorium, it was a moratorium on new mining operations or expansions that use non-renewable sources. That sucks, obviously, and has problems, but it's way different than just a straight ban.

Starting point is 00:14:07 There's also a whole additional dimension of this story that I don't think we talk about enough yet that I think will have dramatic impacts on how Bitcoin mining is or isn't regulated. In short, I think that the energy discussion is in the very beginnings of a radical shift, with Bitcoin pretty far down the totem pole in the priorities of the conversation. We are returning to the idea of energy as a national security concern. This has, of course, been prompted by watching the European reliance on Russia for its energy, and what it means for their politics, for their economies, for their borders. But even though Europe is at the center of this storm, it's going to be a massive debate here in the U.S. as well.

Starting point is 00:14:47 There are going to be a louder and louder chorus of folks arguing that green goals are getting in the way of national security. GOP leader Kevin McCarthy shared a video of Republican August Flueger saying, quote, there's no reason why we would hamstring ourselves on the most basic and foundational piece of security, which is energy. But then on the other side, there will people who come at the same question, but say that it means that we, of course, have to go renewable. Daniel Schumann, the policy director at Demand Progress, says, I'm surprised by the lack of loud voices arguing that moving to green energy now is essential to our national security. Russia and Iran and Saudi Arabia thrive because of the world's oil addiction. Lowering oil prices weakens those regimes. The U.S. government must accelerate that shift.

Starting point is 00:15:30 For example, mansions opposition to green incentives, carbon tax, clean energy subsidies, is tantamount to subsidizing Russian arms purchases and Iranian belligerents. And where are the Republicans? Can't they see that they're propping up Putin? There's little doubt that Going Green will provide jobs to millions of Americans and address lethal climate change. But for those who don't care about that, Going Green also helps keep the U.S. strong and weakens our adversaries.

Starting point is 00:15:52 It's a tremendous military advantage. So whichever side of this argument you find yourself on, this is where the energy debate is going to be, I think, in the next couple of years, and frankly where it should be. Is there a risk that shitty Bitcoin-focused legislation sneaks through? Absolutely, and we should be vigilant about that. But I'd be very surprised if it's the full-on aggressive style Bitcoin ban type of conversation that it seemed like it might be headed towards a couple of years ago. Anyways, we're getting along today, so I'm going to wrap it there. For folks who are interested in learning more about the merge and for actually getting into it in technical terms or in terms of security or what it means for Ethereum, this show was obviously not that. It was really looking at the narrative side of things and what it means for prices and how it fits

Starting point is 00:16:36 with the Bitcoin mining conversation. If you're interested in that stuff, let me know so I can make sure to cover it and also come chat on the Breakers Discord. They are valiantly attempting to have a proof of work versus proof of state conversation that doesn't just denigrate into name calling instantly. For now, I want to say thanks again to my sponsors, nexo.io, chain aliasis and FTCS. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - The Ethereum Merge Settles In as Next Crypto Narrative

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