Over the past few weeks, the crypto community has been buzzing with excitement about the upcoming “Ethereum Merge” in mid-September. The long-awaited merger refers to a technical transition aimed at increasing the likelihood processing power of the Ethereum blockchain and improve its security in an energy efficient way. It also has great implications for investors. JPMorgan called the transition “one of the most significant events in the history of cryptography,” noting that the transition was “a transition on several levels.” Specifically, migrating from one protocol to another will allow investors to earn a “return” or reward on their ether holdings. That profit-making opportunity, known as staking, will help push the cryptocurrency further into the mainstream, according to JPMorgan. It also opens up huge opportunities for crypto stocks like Coinbase. “Ethereum consolidation is a pivotal event in the history of cryptography,” JPMorgan’s Kenneth Worthington said in a note this week. “We see Ethereum returns as potentially a big deal as it lowers the opportunity cost of investing in Ethereum and as such, we expect it to be able to attract more institutional and retail investors. more to Ethereum specifically and the crypto ecosystem in general.” The transition is currently scheduled to take place on September 15. Here’s what you need to know about it. Earth-friendly profit potential Many people expect that for cryptocurrencies to grow as an asset class, institutional money must grow on a massive scale. That is not likely until the cryptocurrency can get rid of the idea that its mining processes are bad for the environment. Consolidation is expected to cut Ethereum’s energy consumption by more than 99%. There are two main protocols used to secure the cryptocurrency network. The first, known as proof-of-work, requires specialized computing equipment, such as high-end graphics cards, to validate transactions by solving highly complex math problems. Any validator that does so, will receive a reward. This process takes a lot of energy to complete. The other model is called proof of stake. It allows proof-of-stake token holders – like ether will be after the conversion – to act as a network validator, but without the need for fancy computers. To do so, investors lock a portion of their funds for a period of time to earn their status as network validators. That means they do the work of verifying and processing the transactions, thus getting the rewards. The rewards vary by network but in general, the more you bet, the more money you make. The average return for staking ether currently can range from 1.5% to 4% depending on the platform investors are using. JPMorgan expects that number to grow to about 8%, Worthington said. “Ethereum could be a particularly high yielding asset after Ethereum Consolidation,” he said. “While returns will vary around levels of participation in staking, an initial return could be around 8%, although we anticipate that yields will decline as more bettors seek how to capture profits.” “If we’re right,” he added, “Coinbase will pick almost all of its retail Ethereum assets to stake, thereby increasing the amount of ether staked and thus decreasing its profits.” Opportunities for Exchanges The process of confirming network transactions is simply impractical for investors on both the retail and institutional side. That’s where Coinbase, Kraken, Gemini and other exchanges can come in. “Most retail holders of ether won’t bet themselves, they’ll give their stake to a staking service that will then do the staking on their behalf,” said Avichal Garg, a partner manager of venture capital firm Electric Capital, said. “This is going to be a big revenue-generating business for exchanges like Coinbase.” JPMorgan estimates Coinbase has around 15% market share of Ethereum assets and estimates the company will select its customers for staking and related services. That could drive a retail engagement rate of 95%, Worthington said, compared with the industry’s current 50% to 70% odds. The company also estimates Coinbase’s 70% payout for retail customers, as well as Coinbase’s 20% to 25% receipt rate for retail customers. That acceptance rate drops to 1.5% for institutional clients. Different Risks This year’s crypto contagion could be the death of easy money and 20% profit on lending, but smart contracts come with different risks. With lenders like Celsius and BlockFi, much of the profit comes from the need to borrow, which eventually translates into leverage. “The real problem is that companies have been providing loans under collateral without doing proper risk assessment and people have lost a lot of money as a result. As a result, people have lost a lot of money,” Garg said, likening the situation to the crisis. In the world of Ethereum, the source of profit is different.There is no human on the other side promising the profit, but the protocol itself that pays investors to run the computational network. There’s also a technical risk of bugs in the code. There’s also a market risk. Garg says: “You get your newly issued ether as a reward for processing these transactions. But if no one is using the applications built on the Ethereum network, there will be no need to buy ether.” “So you are basically… diluting your ownership through the tokenisation. More Volatility With the value of cryptocurrencies falling in the first half of the year, investors especially want to see a rally around the time of Consolidation.Ether has outperformed bitcoin for weeks. , up nearly 70% in July alone compared to bitcoin’s 27% gain. Garg said he expects more volatility after the Consolidation, comparing potential integration issues to system updates Y2K computer system more than two decades ago Everyone knew the code had to be fixed to prevent the computer from crashing on January 1, 2000, but the process to do so was complex, making it difficult to predict applications in advance. How will they interact with each other until the update is done, he explained, “There are DeFi and NFT apps and all of these apps are built on top of Ethereum — that’s the bow. I think there is potential for a large amount of risk,” he said. “We don’t really know how those apps will interact with each other on another proof-of-stake update, and since many of these apps are very interlinked, there could be integration issues.” desire.” He added: “Between the potential for base layer update challenges, potential integration issues, the threat of a proof-of-work fork, and broad macro market volatility. larger, I would expect significant volatility around Consolidation”.