While Ethereum’s switch to a proof-of-stake (PoS) consensus mechanism from proof-of-work (PoW), a transition known as the Merge, doesn't address concerns about the blockchain’s scalability or high transaction fees, it has implications that reach beyond simply acting as a precursor for the next stage in the process, the Surge, Bank of America (BAC) said in a research report Friday.
The Merge is the first of five upgrades planned for the Ethereum blockchain, and lays the path for the Surge.
The notable reduction in energy consumption after the Merge may allow some institutional investors to purchase ether (ETH) for the first time – those who were barred from buying tokens that run on blockchains that use the PoW consensus mechanism, the report said.
“The ability to stake ETH and generate a higher-quality yield (lower credit and liquidity risk) as a validator or through a staking service rather than on black-box lending/borrowing applications may also drive institutional adoption,” analysts Alkesh Shah and Andrew Moss wrote.
Bank of America says that a higher-quality yield also has ramifications for the Web3 ecosystem of decentralized applications (dapps). A dapp is an application that uses blockchain technology to keep users’ data out of the hands of the organizations behind it.
A decentralized insurance protocol such as Nexus Mutual needs to generate a return on its reserves to allow it to become a feasible alternative to traditional insurance companies, the bank said. Insurance companies normally invest their reserves in corporate and government debt, but instruments with similar risk and reward characteristics are difficult to find in the digital asset ecosystem. Staking on Ethereum may be the closest alternative, it added.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.