For our Thursday episode focused on major news topics this week, Anita and Lucas unpacked the good, the bad and the downright confusing as they relate to the long-awaited Ethereum network upgrade -- The Merge -- starting this month. Jacquie has been out on vacation, so we're sure she'll be returning with lots to say next week.
Welcome to Chain Reaction, where we unpack and explain the latest in crypto news, drama and trends, breaking things down block by block for the crypto curious.
For our Thursday episode focused on major news topics this week, Anita and Lucas unpacked the good, the bad and the downright confusing as they relate to the long-awaited Ethereum network upgrade -- The Merge -- starting this month. Jacquie has been out on vacation, so we're sure she'll be returning with lots to say next week.
We also covered:
Tune in on Tuesday for an interview with James Zhang, founder and CEO of Concept Art House, an NFT and web3 gaming-focused art and design studio.
Join us at TechCrunch Disrupt this October to hear from speakers including a16z’s Chris Dixon and Solana Labs’ Anatoly Yakovenko — use the promo code REACT for 15% off, excluding online and expo.
We’ll also be hosting our first crypto event in Miami this November with plenty of web3 experts — you can get 2 passes for the price of 1 if you buy them before September 7th at techcrunch.com/tccrypto.
And even if you can’t join us in person, you can use the promo code REACT for 25% on an annual pass for our TechCrunch+ membership service.
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Anita Ramaswamy 0:03
Hey everyone, it's Anita and Lucas. Welcome to chain reaction where we unpack and explain the latest in crypto news drama and trends breaking things down block by block for the crypto curious.
Lucas Matney 0:16
It is very busy times for the TechCrunch crypto team. We're gearing up for a lot of fun events, but we've got TechCrunch Disrupt coming up. We're back in person in San Francisco and we've got a great lineup of crypto personalities and powerhouses. I'm going to be talking to Andreessen Horowitz, crypto fund manager, Chris Dixon, and Anita has a cool chat coming up with Anatoliy of Solana. So we've got a lot of cool stuff going on. For our listeners, we have a special discount code, the promo code react, all caps will get you 15% off a pass, excluding the Online Passes and the expo passes. So that's my little pre roll ad for Disrupt. And then we've got our sessions event coming up later, but we'll get you some more details on that later. I need to this was a busy week for all of us in terms of crypto news, but I heard you had an interesting chat with someone from block Damon about some big news coming up. What was that?
Anita Ramaswamy 1:06
Yeah, this is like the biggest news on everyone's minds in crypto right now, at least based on what I've been hearing. So I had a chance to chat about the merge the upcoming Ethereum network, upgrade the merge. Yeah, it sounds very ominous. I've seen some funny tweets comparing it to like an astrological event like an eclipse, but it's on the horizon. It's supposed to start in September, and I had a chance to talk with the Ethereum ecosystem leader block Damon Freddy's whisker, and he kind of walked me through some of the misconceptions surrounding the merge. But I think before we get into that, we should just chat about what it is like what's going on here. Right? So yeah, the merge basically, is this big network upgrade, where Ethereum, the network is changing its network transaction validation system. So they used to use a system called proof of work. And they're switching to proof of steak. And this is supposed to go in phases. But the first step is supposed to kick off around September 6, and then the upgrades are going to continue for a few months thereafter. And the difference between the two, right so proof of work is the system that Bitcoin uses. Right now, it's the system that Aetherium has used since it was founded. And it basically involves computers solving these really complicated math problems in order to validate a transaction. And that uses a ton of computing power. So it's super energy intensive, and the computers solving those problems are run by miners. So if you hear about like Bitcoin miners or theory miners, they're under the proof of work system. And so because of a lot of the criticism around like the environmental impact, and everything at cerium, has decided finally, that they are going to switch from proof of work to the proof of stake system, which is a lot more eco friendly. And the way that that works is that investors in the network will just deposit their coins, which is called staking so they'll stake their coins, and they will essentially participate in this digital lottery system. So this algorithm picks who's the winner who gets to actually validate the transaction. And if you win, and you validate transactions successfully, then you get rewarded by the network and tokens. So you know, a lot of people within the Ethereum ecosystem are pretty excited about this. And the Ethereum price has also been going up, right, like I know we were talking about that earlier, Lucas.
Lucas Matney 3:02
Yeah, it's an interesting thing, because like, at the end of the day, Bitcoin and Aetherium are really the two pillars of the crypto token markets and Aetherium is kind of swelling as time goes on. So basically, we've been in this kind of crypto downturn, Bitcoin popped up a little bit, but now it's back to trading around $20,000 per coin. In the meantime, Aetherium has also been kind of sinking lower, but it's trading at a higher percentage. So right now, the entire theory of market cap is about half of what bitcoins is, which is pretty high relative to its historic metrics. So it's a big moment. And I think it's unique, especially because this is a transition that Bitcoin really will probably never make. There's no conversations internally for this to happen. A lot of the kind of stakeholders, so to say, stakeholders are, that was a good one, that a lot of the stakeholders, so to say, are really fundamentally against this happening on Bitcoin. They're like, this doesn't need to happen. A cerium can do whatever it wants. So this is a big transition. And I know we're only talking about an industry that's 10 or 15 years old. But this is pretty historic, in a lot of ways.
Anita Ramaswamy 4:06
Yeah. And it's kind of wild, because I know that this has been a point of conversation that Vitalik the Ethereum founder has brought up as early as 2014. So this has been a long time coming. It's been in the works for a while. But what's kind of wild about it is I've heard some people including Freddy, who I chatted with a block Damon compare this to like changing the engine of an airplane while it's mid flight. So they've done a ton of testing like they've been prepping for this for years. Like, I think the merge was supposed to happen earlier this year. It was supposed to happen last year, like they kept pushing down the date that it's actually going to happen. And finally in September, I think we're going to see the network will actually get upgraded. But part of the reason it's taken so long is just because the network has wanted to be prepared because it's such a massive change. But I guess like why are people in Ethereum, so excited about this?
Lucas Matney 4:45
I think that people think that this is a kind of a push towards the mainstream for like the theory and network. Maybe it's easy to forget now because just generally less people are talking about crypto networks in the mainstream, but obviously one of the big points of contention on Mostly mainstream has been just the negative environmental effects of proof of work consensus blockchains. So they'll kind of point to things like different medium sized countries that like the entire Bitcoin network uses the same energy as or
Anita Ramaswamy 5:13
I think I read that Ethereum network right now, like use as much energy as Finland. So that's where we're at today.
Lucas Matney 5:19
Right. And that's like a, you know, that's, that's a high key energy output country. So I think that there's a lot of criticism about that, that people are kind of excited that Aetherium is gonna be able to sidestep and they think that this is going to be something that allows big brands who have avoided embracing NF T's or any of these things on the Ethereum network to kind of embrace it, because now they don't have to worry as much about the environmental effects. So this can be a big moment for them. Aside from the environmental stuff, there have been a lot of conversation about how this has a lot of scalability benefits for the network. And it's going to enable some things that really allow the number of transactions to increase and allow the network to just be healthier, generally, I think that like tied up in the environmental side, there's a lot of reputational and regulatory strength that come along with it, too. Some of the legislation that's been passed federally and at the local levels has been around energy usage of these blockchains and kind of like maybe outlawing mining in a certain jurisdiction or something like that. So this just allows them to sidestep some of those little battles and focus on the big stuff ahead, right.
Anita Ramaswamy 6:17
I mean, on the environmental costs have been pretty much everyone's biggest beef with crypto, like if you talk to anyone who's outside of the industry, they're like, oh, like, Isn't that super environmentally unfriendly? So I think this will, like you said, Lucas, be a good way for Ethereum to potentially deflect some of that criticism. But one thing I want to talk about is like, there has been a lot of testing and people are feeling pretty good about the ability of the Ethereum network to actually pull off this transition. But that doesn't mean it's without its criticism, just like with everything in crypto, like super controversial, and people have pointed out, like some potential negatives, or potential downsides, and one of the biggest ones that I've heard people talk about is the potential for this to cause like, to lead to more centralization to the network. And the reason for that is it's very costly to become a solo validator under the proof of stake system. It's expensive, it's difficult logistically. And so a lot of people who have staked their Aetherium to this point have actually done it through like a staking pool. So like a larger entity where a bunch of different people come together under like one banner, and they stick their Aetherium in a pool light Oh, finance is one of the biggest ones, I think that they currently have like somewhere close to 40% of the overall staking market right now on Aetherium. And so the issue with this is like if there are a bunch of big staking pools that control the majority of transactions on the network, and are able to validate most of them and imagine that one of those staking pools is subject to a law or a legal change in a certain country, then that country could end up determining what kinds of transactions get validated. So the example here would be like tornado cash, which I know we talked about a couple of weeks ago, you know, if like, let's say like a US based staking pool owns a bunch of the Ethereum network, and then the US comes out and says, We're gonna ban this one protocol, or we're gonna ban all transactions going through this one protocol that could cause serious issues where, you know, then like, is the Ethereum network truly decentralized? Or are they really operating under the regulatory jurisdiction of another country? Yeah, and
Lucas Matney 8:03
I mean, this is a problem that like, has kind of reared its head and proof of work also, like their mining pools are the easiest way for people who are like individual miners to get a chance of getting access to mining rewards. But people who are fans of proof of stake would say that like, Okay, well, even if like having an individual machine and getting your individual miner up, and running is like non trivial for a technical person, it's still a lot easier for an individual to go to a validator pool and just stake their eath. That's like a very simple thing for somebody to do the centralization thing. I think there are a lot of different facets that take on when you do it like this, especially when all of a sudden seems like it's not going to be across geographies, and that there's going to be a lot of people in the US will be sticking to a coin base or something like that. Like that leads to some problems. Yeah,
Anita Ramaswamy 8:49
I mean, there's no simple answer here, right? With proof of work, the mining equipment is super expensive. So that's a big barrier to entry. And in this case, staking pools have formed because people have other barriers to entry if they want to be individual validators. But on the note of Coinbase, Vitalik, of Ethereum went on a podcast with Brian Armstrong of Coinbase, the CEO, and they were talking about the merge and what it would mean for Coinbase. I mean, Coinbase has been really doubling down on sticking lately, even in their earnings. They were kind of mentioning this is a big revenue stream for them. So Armstrong basically said that if they were required to censor transactions as Coinbase, like if they were subject to some US law or something like that, then they would actually rather just shut down their sticking operation altogether. He said, That would be the worst case scenario. Obviously, if there was some sort of legal decree then Coinbase said that they would first try to fight it in court and try to challenge it legally. But essentially the significance of him saying that they would rather shut down their operations and continue staking in a centralized way is that he was reaffirming coin bases commitment to helping the Ethereum network stay decentralized. It's a really big point of controversy. It's hard to determine whether there's a right or a wrong answer here or whether one versus the other system is really more centralized because there's so many different facets and aspects of it, but I did think it was interesting that Bryan Armstrong was sort of adamantly defending the fact that he would try to keep Aetherium decentralized.
Lucas Matney 10:05
Yeah. And I mean, looking at just how proof of work looked like, I guess, back when China had more of a higher percentage of thinking about Bitcoin, specifically, when a huge percentage of the entire, like hash rate was coming from China, you know, some of these conversations weren't happening as much where you're just like, well, is that like a security risk to the network that, like, so much of this is coming from a single geography? And I know, there's something like kind of like, differences in how that all works. But yeah, I mean, there's so many like, idealistic issues here. But I think that they've been planning for this so carefully over so many years, and there's $200 billion in this network at this. Yeah. Hopefully. Hopefully, that's enough of a an
Anita Ramaswamy 10:44
incentive to get it. Right. Exactly. Yeah. Well, I think that the wildest part of all of this is like ideology aside, and like the pro con debate kind of aside, even though this has been in the works for a really long time, there are still a lot of misconceptions floating around about the merge. And that's what I chatted with Freddie block, Damon about mostly was some of the big misconceptions that are still out there that are just not true, you would think that everyone would know what was going on at this point. But there's still some education that needs to be done here. And one of the big misconceptions he mentioned was that people think that you'll be able to withdraw your state Ethereum once the merge actually occurs. And that's not true, because this is going to happen in phases. So you've got the first phases kind of starting up in September this year. And then there's another upgrade called the Shanghai upgrade, which is supposed to happen in early 2023. And people who have already staked their eath will only be able to withdraw that after the Shanghai upgrade occurs. And you know, another misconception is like people think everyone's going to kind of withdraw their eat the second they get the chance to, but the way the system has been designed is so that you can't have everyone withdrawing all at the same time. Like there are some guardrails that have been put on liquidation at the end of the day. Another big misconception that Freddy mentioned was that people think the merch is going to reduce gas fees on the Ethereum network. And that's just not necessarily true gas fees are determined by the capacity of the network and the demand. And those are things that like, honestly, we don't know how the merger is going to affect them. We don't know if people are going to be trying to use the Ethereum network more like if they are if it does really become more popular, like gas fees might go up. I don't know if there's going to be some scalability benefit on the other side that would balance that out. But all this is to really say there's a still a lot of confusion as to what exactly the merger is going to entail. And I think companies and individuals are just sort of waiting and seeing almost like it is a lunar eclipse or something like we're all gonna get out there with our goggles and hope everything goes for the best, right?
Lucas Matney 12:26
Yes, yeah. It's it's funny to see something that's been taking place in plain sight for years, all of a sudden be like a source of speculation, which like, it's crypto. So of course, that's gonna everything's a chance for speculation. Right, exactly. But it's like whatever buy the rumor sell the news is like, I think a big comment in crypto, but it's just like, this has played out over so many years. And it's just like, so many different steps. So I don't know how this is gonna affect the price. And I don't think anyone else does either.
Anita Ramaswamy 12:52
Yeah. If we knew that we'd be not sitting here and we'd have a lot of money. So yeah, I guess. If I could predict the future, no. But on that note, I think probably a good time for us to talk about some other big news from the NFT world specifically,
Lucas Matney 13:07
right? Well, we talked all about like the technical big shifts to the underlying blockchains when we're looking at NF T's and some of the things that are just happening from integrations from platforms. This week, a big thing happened where meta is officially recognizing NF T's across Instagram and Facebook, meaning that users will be able to post them and it'll say, this is a digital collectible. So kind of an interesting thing, just in terms of people seeing NF T's in their daily lives a little bit more. This is something that other social platforms like Reddit and Twitter have already begun to integrate on Twitter, you can have your little hexagon NFT icon and everyone will know that you pay big flex five bucks to use Twitter blue every month, which is kind of hilarious. Not to mention whatever you paid for the NFT. But exactly, and then read it, you know is doing stuff with digital collectibles also, but they're not even calling what they're working with NF Ts. So they're trying to kind of like sidestep that side of the thing because obviously their user base is a little skeptical of crypto I would say by and large, but with meta NF Ts, they're just kind of putting them in posts for now. So people will be able to connect their crypto wallets and they can do them across a few different blockchains which is kind of unique. So on Twitter, you can only do Ethereum and FTS on Instagram and Facebook. You'll be able to use a theory of NF T's but also NF t's on polygon and flow which is dapper labs products so people will be able to showcase their NBA, Topshop cards or any of the other things in that ecosystem. And you can connect it through using wallets like rainbow meta mask, trust wallet, coin base wallet, dapper wallet, and a bunch of others probably. So it's a unique moment for meta because they've talked about NF T's quite a bit and this probably plays into their Metaverse dreams a little bit. It's kind of a dinky rollout. I have to say like, it's just, you know, it's not like they're doing it across like a broad spectrum like this is gonna like change everything. Somebody may have expected them to do like a big Bitmoji esque avatar rollout and then like be able to buy accessories or something right now all you can do is post them Show him you can't trade them. You can't buy him. You can't sell them. It's all you can do. You can just
Anita Ramaswamy 15:03
flex them. That's what Instagram is for us for flexing anyway, I guess
Lucas Matney 15:07
exactly at this point, you know, they usually some of these like bigger features, they usually kind of bring them to the US after they've tested them in other geographies. In this case, by last month, this functionality was already live in 100 countries. So now it's coming stateside kind of signals that they're interested in doing more of this stuff down the road. But again, this is pretty lightweight rollout, but it's a harbinger of things to come.
Anita Ramaswamy 15:27
Yeah. I mean, if you're listening to this podcast, you probably aren't rolling your eyes at this, but I know a lot of my friends probably would be so well, we'll see how it goes when everyone's like posting their NF T's all over Instagram.
Lucas Matney 15:36
You know, the fact is, I'll still roll my eyes at the individual people doing this. I'll be like, I'll be like good on Facebook and Instagram for doing this. But if I have friends who are like spamming my feed with NF T's they bought, I'm going to be rolling my eyes. Yeah, fair enough. So Jackie has been out on vacation this week. But Anita, what have you been working on?
Anita Ramaswamy 15:57
Yes. So I've been trying to hold down the fort while Jackie was out, wrote a couple of NFT related stories this past week. One of them was about the digital avatar company genies which has a lot of big celebrity backing and some buzz there. And I also wrote another one on a startup that's using NFT membership passes for audience engagement. So it's really digging into the NFT space this week, which is a little unusual for me and it was it's been fun,
Lucas Matney 16:20
some nice diversity within the crypto sector. What about you? Yeah, this week, been focusing a lot on our big event in Miami November 17 Crypto sessions. So we've announced a few of our speakers so far. We've got Eva labs, John Woo coming phantoms, Brandon Millman FTX ventures, Amy Wu, and we just announced bid wise as Kathryn Dell and coming so we've got a great lineup of guests. It's gonna be a really awesome event. I'm excited for it. It's actually our first event that we've TechCrunch has ever held in Miami, which is kind of crazy, but excited to go, all of our listeners can get 15% off with our discount code exclusive for Chain Reaction listeners, it is react 2022 And you can enter that at checkout for 15% off your ticket price. So come hang with us come pay to be our friends.
Anita Ramaswamy 17:01
Yeah, you're getting a 15% discount from what I normally charge my friends to hang out with me so consider yourselves lucky. I'll see you all in Miami. Also, make sure to tune in on Tuesday next week. For our interview episode we're going to be chatting with James Zeng who is the founder and CEO of concept art house, which is a web three Art and Design Studio for NF T's and video games.
Lucas Matney 17:22
We'll be back every week with interviews with the experts in the web three space catch Nita, Jackie and myself every Thursday for the latest in crypto news. You can keep up with us on Spotify, Apple Music or your favorite pod platform and subscribe to our companion newsletter also called chain reaction. Links to the newsletter and more from our guests can be found in our show notes and be sure to follow us on Twitter at chain underscore reaction. Chain Reaction
Anita Ramaswamy 17:45
is hosted by myself Bonita Ramaswamy along with my co hosts Lucas Matney and Jackie melanic. We are produced by Yashad Kulkarni on our associate producer as Maggie Stamets with editing by Cal Keller Bryce Durbin is our Illustrator Alyssa Springer leads audience development and Henry pick up at manages TechCrunch is audio products. Thanks for listening and see you next week.