Ethereum's switch to a Proof-of-Stake (PoS) system, known as the Merge, has made it more efficient and environmentally friendly, allowing holders to earn rewards by staking their Ether.
“The Merge has transformed Ethereum into a truly productive asset, enabling holders to earn monetary rewards simply by holding it, setting it apart from other major cryptocurrencies. This compelling narrative has resonated particularly well with institutions and investors of a more traditional mindset,” explains cryptocurrency expert Mads Eberhardt.
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However, it also introduces risks, such as the potential for large holders or entities to influence the network's operations or even attack it, although such actions are costly and unlikely due to built-in deterrents.
“Drawing a parallel to something I often compare to in the world of crypto, staking rewards can be seen as similar to dividends paid out by companies,” he says.
“However, there is an important difference to be aware of: staking comes with the risk of slashing. This is a measure designed to deter and punish validators for behavior that could threaten the network’s security or integrity, like supporting conflicting versions of the blockchain. Slashing can result in a validator losing part or all of their staked Ether, although this is quite rare.”
Ultimately, the involvement of large entities like Coinbase, and the potential for a significant portion of Ether to be staked through ETFs, raises concerns about centralization and the influence of traditional finance on Ethereum.
“Ethereum risks being merely dominated by financial institutions, moving away from its foundational principle of decentralization,” Eberhardt asserts. “In such a scenario, regardless of Ethereum’s status as a highly productive asset among cryptocurrencies, its core value proposition would be compromised.”