While the Ethereum merger (Merge) was an undeniable technical success and was widely welcomed by the crypto community, some believe that this fundamental change in the functioning of the ETH network also brings its share of disadvantages and risks.
This is particularly the case of the bank JP Morgan, which shared in a recent report some concerns about the Ethereum blockchain which has just changed from a functioning based on proof of work (PoW) to a network based on the proof-of-stake (PoS), which notably reduced the energy consumption of ETH by more than 99%.
Risk of dividing the Ethereum community
The bank has indeed recalled that this merger which took place at the beginning of the month was carried out via a hard fork that split the Ethereum blockchain in two, giving birth to the “new” Ethereum based on a PoS system, and on the other hand to a new blockchain called Ethereum PoW, which brings together people who frowned upon the Ethereum merger and want to keep an ETH PoW alive.
However, JP Morgan points out that some cryptocurrency exchange platforms have shown their support for Ethereum PoW. She also noted that at least 19 former Ethereum mining pools are active on the PoW blockchain. According to JP Morgan, this, therefore, implies a risk of the division of the Ethereum community, if the ETH PoW continues to gain momentum.
Ethereum staking brings the decentralization of the ETH network into play
Another concern raised by JP Morgan is that the price of a “greener” Ethereum through PoS has the downside that it’s Ethereum blockchain is becoming less and less decentralized. Indeed, the validation of transactions and the securing of the network are now based on Ethereum staking.
Staking your ETH allows you to become a validator on the Ethereum PoS network. Thus, those who have the largest amount of Ethereum staked will have the greatest power on the network, “because only a few entities hold the majority of the ETH put into play”, underlines JP Morgan.
Watch out for a bigger drop in ETH
Regarding Ethereum’s fall following the switch to PoS, JP Morgan like many questioned the “rumor buying and news selling streams specific to the Ethereum merger event. ”.
In other words, Ethereum had already advanced in anticipation of the event and investors took their profits when it happened, causing a correction.
Finally, in its report, the investment bank also addressed the subject of backwardation in the futures market. Note that backwardation refers to a situation where the spot price of an asset is higher than its price on the futures contracts.
According to JP Morgan, this is a “manifestation of the move towards more bearish sentiment in the crypto markets in recent weeks”, which is an additional bearish indication for Ethereum as for other cryptocurrencies.
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