TBW Premium #24: The "Merge" is coming, Rated raises $2.5 million...

TBW Premium #24: The "Merge" is coming, Rated raises $2.5 million...

Read all about The Big Whale's 24th Premium newsletter.

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🖊️ Editor's editorial

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🇨🇦 The focus of the week


Back to reality 🇨🇭

What about Switzerland?! As you know, we've been reporting from Switzerland for the past four days to discover the country's crypto ecosystem. We've already met many of the players in Geneva, Lausanne and Neuchâtel...

We've still got more people to see, but one fairly clear impression is already emerging on the ground: while Switzerland is clearly at the cutting edge, it's not the 'little paradise' of Web3 that some people are desperate to sell.

Like just about everywhere else on the planet, Swiss crypto players are encountering difficulties of all kinds: opening a bank account, finding the necessary talent and facing the onset of a bear market!

Switzerland's great strength was, in fact, to offer a favourable framework for players in the sector very early on, with an almost unbeatable tax system, particularly in Zug (we'll tell you more about this next week). This is one of the reasons why the Ethereum Foundation set up in this small town near Zurich back in 2015.

Speaking of Ethereum, we have prepared a very big feature on The Merge, which will take place next week. Even though the year is far from over, this is undoubtedly the most important event of 2022 (apart from the creation of The Big Whale 😉 ).

Happy diving!



👉 Wigl arriving very soon

Last straight for Wigl. After a few months' delay, the French crypto payments company, steered by Feel Mining (a long-standing player in the French ecosystem), is about to launch. According to our information, it will be available in early November. The start-up, which has Payment Service Provider (PSP) status and 30 employees, will be offering a whole range of services via its app: Mastercard, buying, selling and storing cryptos itself. Customers of the company, financed in part by Bpifrance, Société Générale and Banque Populaire (loans), will also be able to invest their stablecoins and even obtain a French IBAN, i.e. a bank account identifier. An option that could, in time, enable Wigl to become a "real" crypto bank.

👉 Rated raises $2.5 million

With the "Merge", about which we explain everything below, Ethereum is about to undergo an unprecedented revolution: "miners" will be replaced by validators, who will be the guarantors of the protocol's security. While the vast majority of the community supports this change, some, such as Rated, want to make sure that the transition goes smoothly. The British start-up has developed a data explorer to analyse the performance of each of the validators. The aim? To find out which are the best performers and give them a reputation score. An idea that is clearly appealing to investors. According to our information, Rated has just completed a $2.5 million round of financing to continue its development. The start-up's first customers include Nexus Mutual, an insurance protocol that covers the risks associated with decentralised applications.

Do you have any news?



"The Merge": understanding everything about Ethereum 2.0


👉 News. Ethereum will move to Proof-of-Stake next week and become much less energy intensive.

👉 The background. The delay in its implementation has allowed competitors to emerge.

👉 Why it matters. With its carbon footprint reduced, Ethereum will be able to deploy much more widely.

This is it, we're there!

After years of development, Ethereum, which is the second largest blockchain on the planet, is about to change its consensus algorithm from Proof-of-Work to Proof-of-Stake.

This development, dubbed "The Merge", is a historic event for two reasons:

  • No blockchain (at least of this size) has ever changed its consensus algorithm.
  • Ethereum has not undergone such a radical change since its creation in 2015.

The "Merge", which is expected to take place around 14 September, is highly anticipated because it will allow Ethereum to significantly reduce its carbon footprint.

How? By switching to Proof-of-Stake, which does not require cryptos to be mined (we explain everything below). Instead of miners, there will be validators whose activity is much less energy-intensive.

The switch to PoS is not, however, without raising certain questions, particularly about security and decentralisation... To help you understand everything about Merge and its potential consequences, we've prepared a special report just for you.

Please note:as you know, The Big Whale accepts payments in cryptos, which means that we have ethers (which we don't touch) in our treasury.

That's it for transparency, now it's time for explanations!

14 questions about The Merge

What is Proof-of-Stake?

There are currently two main consensus algorithms for cryptocurrencies. There is Proof-of-Work (PoW) and Proof-of-Stake (PoS).

Used by Bitcoin, and Ethereum for a few more days, PoW is based on a fairly simple system: mining. To produce a block and record transactions on the blockchain, miners, who use computers, will carry out complex calculations and be rewarded in bitcoins according to the power they make available to the network (energy is proof that they are working). The more participants there are in the network, the more complex the calculations, and the more energy is needed!

The Proof-of-Stake works differently and consumes much less energy because there is no need to "mine". To take part in the network, you need to "validate" the blocks by proving that you own the network's cryptocurrency. In this case, ether.

To guarantee the security of the network, validators must "staker", i.e. immobilise cryptos. Those who try to cheat lose their immobilised capital. Those who play the game and secure the network are rewarded with newly created cryptos.

Why didn't Ethereum opt for Proof-of-Stake from the outset?

Ethereum was dreamed up in 2014 and launched in 2015. At the time, there was only one other major cryptocurrency, bitcoin, and it worked with Proof-of-Work. So it was a no-brainer for Ethereum's designers to rely on a technology that was already proven.

"In the early days, there was a lack of hindsight on Proof-of-Stake consensus. The first ones like Tendermint and Tezos had barely been documented, so it was complicated to start with this consensus," rewinds Jérôme de Tychey, chairman of the Ethereum France association and organiser of the EthCC, one of the world's biggest ecosystem events.

But from the outset, Vitalik Buterin and the Ethereum team had explained that the PoW was just one step before the transition to the PoS. "It was obvious that the Proof-of-Work would one day be discarded because of its energy consumption," adds Jérôme de Jérôme de Tychey. And that day has now arrived.

To what can we attribute The Merge's repeated delays?

According to the initial roadmap, the switch to Proof-of-Stake was due to take place in 2017, in other words... five years ago! What has happened to explain this delay? Quite simply because making such an update is anything but straightforward. "Designing a good proof of stake is a real challenge", explains Jérôme de Tychey. "Not all of them are equal, and we had to guarantee Ethereum's decentralisation over the long term," he adds.

Failing to reach a consensus among Ethereum developers, Merge has been postponed several times. The paradox is that many less energy-intensive "competitors" such as Tron, BNB Chain, Avalanche, Solana and others have taken advantage of this to launch and take a share of the market.

According to analytics site DeFi Llama, Ethereum and its ecosystem account for 64% of decentralised finance activity; by early 2021, it was 97% 🤔.

Will the network be paused for The Merge?

This is one of the points that fuels the most fantasy, so let's be clear! NO, the network will not stop spinning. And for a simple reason: Ethereum's Proof-of-Stake has been running in parallel with Proof-of-Work since December 2020. So there will be no need to "install" it on D-Day.

Ethereum is like a plane that wants to change engines mid-flight. To ensure there are no accidents, Ethereum has been flying for almost two years with two engines switched on - one running on PoW and the other on PoS. The Merge consists of disconnecting the PoW engine and replacing it with the one running on PoS.

Is there no risk at the time of the merge?

While there is no absolute guarantee, the latest tests have in any case been conclusive. "But it is possible that some validators will fail to connect to the new chain depending on the software they are using," concedes Barnabé Monnot, a researcher with the Ethereum Foundation. The real risk is that a third of validators will fail to connect, which could limit the security of the blocks...

Is Proof-of-Stake as secure as Proof-of-Work?

This is undoubtedly the question that divides the industry the most.

While PoW seems to be the most secure system today - Bitcoin has never been hacked in 13 years - PoS does have some interesting features.

First on "financial" security:

To take control of a blockchain, whether Bitcoin or Ethereum, attackers need to master the network.

  • For Proof-of-Work, you need to control the majority of the computing power produced by miners.
  • For Proof-of-Stake, you need to control 66% of the ethers tied up in the protocol.

Based on this system, an attack on the new Ethereum network would be at least as expensive as Bitcoin's ($14 billion).

It would be even more expensive as the price of the ether rises. In November 2021, when the ether cost more than $4,000, it would thus be necessary to raise more than $40 billion to take control of Ethereum... "From an economic point of view, Ethereum is the most secure network," believes Abdelhamid Bakhta, an Ethereum developer who also claims to be a supporter of Bitcoin and Proof-of-Work.

Following this logic, however, Ethereum's security is less important if the ether price starts to fall... "The advantage of PoW is that the source that secures the network (the mining machines) is not directly linked to the price of the asset", concedes Abdelhamid Bakhta.

Then there is the ability to identify attackers:

One of the big advantages of Proof-of-Stake is that you can easily "detect aggressive behaviour by validators", explains Abdelhamid Bakhta. How can we do this? By spotting upstream those who are staking more and more ethers and getting closer to a controlling minority, or even majority.

The Proof-of-Stake - but this is also what has earned it fierce criticism - would potentially make it possible to exclude certain validators, and even those who have control of the network!

Does Proof-of-Stake threaten Ethereum's decentralisation?

Here too the debate is not clear-cut. What is decentralisation? "If this defines the number of individuals who will occupy the role of validators, we can anticipate that the new Ethereum will certainly be more decentralised with Merge," explains Jérôme de Tychey.

Since being a validator does not imply owning mining equipment - which can be very expensive - there should be more and more validators. The fact that, unlike mining, all validators benefit from the same return should also encourage more and more people to contribute to the network.

Big downside though: becoming a validator requires having a lot of ethers. A validator must immobilise 32 ethers in the protocol, which currently corresponds to $50,000. When the price peaked at the end of 2021, this represented 150,000 dollars... Being a validator is therefore not for everyone!

"Let's not kid ourselves: as the price of ether rises, becoming a validator will become increasingly expensive", concedes Jérôme de Tychey. For Barnabé Monnot, a researcher at the Ethereum Foundation, the 32-ether threshold "is not set in stone and could be revised downwards".

In the meantime, players such as Lido, which play the role of "super validator", allow anyone to place small quantities of ethers. As a sign of the vitality of this system, Lido is currently the biggest validator with 31% of Ethereum staking, followed by Coinbase (15%) and Kraken (8%), according to data from Dune Analytics. The top individual validator is Ethereum creator Vitalik Buterin (0.05%).

What will Ethereum 2.0's carbon footprint be?

When miners are disconnected from the network, only the small computers of validators will count towards Ethereum's carbon footprint. And when we say "small", we really mean "small": you'll even be able to use a Raspberry Pi, a computer the size of a credit card that sells for less than €100.

Remember, however, that validators will still have to use cloud services, such as Amazon Web Services or Infura. Even if it's not obvious at first glance, data centres have a significant environmental impact.

In recent years, many large companies have shunned the crypto sector (and Ethereum in particular) because the way it operates was not compatible with their commitments to sustainable development (CSR). "The energy dimension has always been a real issue for businesses," says Jérôme de Tychey. But will all businesses be interested in Ethereum overnight? We'll see in the coming months.

Will transaction fees fall?

The other point that has earned Ethereum a fair amount of criticism concerns transaction fees.

It's no secret that at every peak in Ethereum usage, transaction fees tend to explode. In 2021, they may have exceeded €50 per transaction...

The reason we bring this up is that some may have explained that The Merge would make transactions cheaper. However, and at the risk of disappointing some, this will not be the case!

Ethereum is increasingly a protocol reserved for very large transactions (layer 1), similar to interbank flows in traditional finance.

Small day-to-day transactions, on the other hand, will increasingly be handled by the secondary layers (layer 2) that connect to the main network.

At present, a transaction on a layer 2 such as Arbitrum and Optimism (there are also sidechains such as Polygon) rarely exceeds a few cents. "They cost between 5 and 40 times less than the main chain", notes Jérôme de Tychey. And these should continue to improve over the next few years (see box below).

When can "staked" ethers be withdrawn?

Since December 2020, 420.000 addresses have deposited more than 14 million ethers, representing more than 20 billion euros.

From the outset, it was planned that the funds would be frozen until a date after the Merge. Their release could take place in early 2023 "in the most optimistic scenario", says Barnabé Monnot.

This delay is explained by the desire to avoid a possible flight of validators on the day of the Merge. "We need a few months to see how the network behaves," says Jérôme de Tychey. A "release" date for staked ethers will then be set by the community.

How much will validators be paid?

Since December 2020, validators, who secure the network, have received staking revenue. These are currently 4.2% over one year. From next week, validators will also receive part of the transaction fees paid by network users 💰.

"Validators will therefore be able to earn between 8% and 9% a year, but this return will fall mechanically as the number of validators increases," explains Jérôme de Tychey. The possible rise in the price of ether could, however, compensate for this loss of return.

What consequence for the price of ether?

One of the main consequences of the Merge could be to drive up the price of ether. Why? Because staking involves immobilising ethers, unlike those available on exchange platforms, which can find takers at any time.

In addition, the Merge plans to considerably reduce Ethereum's money creation.

Currently, 5 million ethers are created each year. According to Vitalik Buterin, if 1 million ethers are locked into the new Ethereum, money creation will be 166,000 new tokens per year. And if 100 million are locked in, creation will "only" reach 1.66 million ethers.

It should also be borne in mind that the EIP 1559 implemented in August 2021 burns through some of the transaction fees, which also helps to limit the supply in circulation, even making ether deflationary at times.

Finally, validators have no fixed costs. "There is nothing to force them to sell their ethers, whereas in Proof-of-Work miners have recurring costs (such as their electricity bills) that prevent them from keeping all their earnings," Abdelhamid Bakhta points out.

What impact on decentralised finance (DeFi)?

The return offered to validators could gradually establish itself as a benchmark rate for ether. Every DeFi service or application that offers to place ethers will have to offer at least an equivalent yield to continue to be attractive.

This reference rate should also upset the balance in force on decentralised exchanges such as Uniswap. "After The Merge, liquidity pools containing ethers should move strongly, in one direction or the other," Jérôme de Tychey anticipates. "This could also have an influence on the price of governance tokens for protocols specialising in outsourced staking, such as Lido, Stakewise or Rocket Pool", he murmurs.

What will become of Ethereum miners?

A large proportion of these miners should allocate their computing power to other protocols that continue to use Proof-of-Work (Ethereum Classic, for example). They will also be able to rent out their power on the iExec blockchain network (developed on Ethereum) to projects that need it.

"The metaverse sector should also need significant capacity, so there is no shortage of outlets," insists Jérôme de Tychey, who is also co-founder of Cometh, a blockchain-based video game studio.

After The Merge?

The Merge is just one stage in the development of Ethereum. At the EthCC conference in Paris at the end of July, where The Big Whale was obviously present, Vitalik Buterin explained that the protocol will only have completed 55% of its roadmap once the Merge has been completed.

The next workstreams look to be just as important 👀.

The EIP 4844 should improve the integration of layers 2 (second layer) in order to increase their processing capabilities. "These are already very powerful, but they will become even more so," assures Jérôme de Tychey. "After EIP 4844, rollups (Arbitrum, Optimism, etc.) will have between 10 and 100 times more capacity than today," adds Barnabé Monnot.

According to Ethereum Foundation projections, rollups will not even have enough transactions to process to fully utilise this new space. In the most optimistic scenarios, EIP 4844 could be implemented in early 2023.

Research is also underway to reduce the weight of the blockchain, which currently weighs in at 880 gigabytes (it would currently take 4 standard MacBooks to store the entire blockchain).

This is problematic, as everyone who hosts a node must be able to support it. "Even if storage tools are getting cheaper, increasing the size of the blockchain cannot go on indefinitely," warns Jérôme de Tychey. "Reducing the weight of the blockchain is essential to maintain the decentralisation of the network", notes Barnabé Monnot. According to him, however, this update should not see the light of day "for another two years".

But while these projects are important, none of them carry with them the upheaval of The Merge. "The next steps will be in the area of optimisation. We shouldn't expect anything as fundamental as The Merge," concludes Jérôme de Tychey.

What the "competitors"

"Faster", "more efficient"... Many protocols claim to be "better" than Ethereum. While this argument makes sense from an energy point of view, it could disappear fairly quickly in favour of Merge.

"It's true that it will now be difficult to mention Ethereum's energy cost to differentiate oneself," testifies Hadrien Zerah, managing director of Nomadic Labs, a development studio heavily involved in the development of the protocol of French origin Tezos, which has been working with Proof-of-Stake since its inception. "We're losing a competitive advantage," he continues.

Now, the teams working on the development of Tezos  aim to capitalise on other features. "The Merge has led us to accelerate our roadmap, we will soon present a new type of optimistic rollups, without permission, which will allow any project to develop its own scalability solution (development at scale, editor's note) adapted to its use," he announces.

Thus, Ubisoft (which is currently working on Tezos) or any other company will be able to develop their rollup. This advance should be available in early 2023. "This should enable us to regain a technological advantage", Hadrien Zerah hopes. "We can't stay with the same value proposition if we want to gain market share," he assures.

At Avalanche, we prefer to stress that Merge changes absolutely nothing in terms of processing capabilities. "There  s no more transactions per second, no concrete improvement, it's just a move to a greener source," moderates Nicolas Lemaître, general manager at Ava Labs, the main structure behind Avalanche's development. "However, I think that Merge should encourage decentralisation in the longer term, because it will be easier for an individual to manage their own node", he concedes.

Avalanche intends to build on its strengths: "Decentralisation, security, finality in the second and blockchains that can be configured from A to Z", Nicolas Lemaître argues. "But Ethereum's move to Proof-of-Stake is good news for the ecosystem, it's going in the right direction", he concludes.

🎧 REPLAY Monday's Big Interview 🎧

MDP: TBW2022


Arnaud Salomon: "Switzerland has a DNA that fits well with cryptos"


For the boss of Mt Pelerin, whom The Big Whale met in Geneva, the strong Swiss decentralisation largely explains the success of cryptos in the country.

The Big Whale: Switzerland has established itself as one of the most "crypto-friendly" countries. How do you explain this?

Arnaud Salomon: It's almost a story of philosphy. Switzerland is a very decentralised country. It's part of the identity and culture of this nation, and it fits in well with the DNA of the crypto universe, which has made decentralisation an essential objective. There are several advantages to this system: it's more democratic, the Swiss vote a lot, and it's also more efficient, especially in economic terms.

What does this mean in concrete terms?

The 'concrete' consequence of this decentralisation is that things move fast. Power does not belong to a centralised player. You don't need ten authorisations or green lights to move forward. Take the case of Neuchâtel, but the same applies to other cantons: they have been free to do a lot of things. Today, the Cantonal Bank of Neuchâtel is working with crypto projects and all this has been done at local level.

Does this mean that everything is perfect in Switzerland?

No, nothing is perfect (laughs). There is still a lot of room for improvement, particularly on the banking front. While some institutions are willing to work with crypto players, a large proportion of them are still rather skittish.

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