Three reasons the Ethereum Merge matters for Web3

Transcript

what's up friends welcome to web3 Academy a place for entrepreneurs creators and marketers to explore and learn how to use web3 to transform business models and create thriving communities enjoy this next episode hey friends and welcome back to another episode of The web3 Academy podcast today is a deep dive with myself Kyle reedhead and we are talking about why the ethereum merge is so important for web 3. I've been talking about this merge for a long time and if you've been in this space you've been hearing about the merge for a long time and it looks like it is finally here and I'm going to dive into some of those details and explain what this really means for the web3 ecosystem because it's bigger than

just the ethereum merge happening and getting off of proof of work there's a lot of things that will reverberate throughout the web 3 ecosystem and I just want to explain that so you are aware now before I do if you want to learn more about web 3 and more about just blockchain in general I know this stuff can be somewhat challenging and difficult to understand that's why I created the web 3 Rabbit Hole course so I highly recommend you check that out because it it goes into detail of you know what web3 is goes into detail of the underlying technology like blockchain and how this all kind of works and functions and what's present in the ecosystem and sort of where it's

going and it looks at the application layer and kind of how that's going to emerge in the future so if you're looking to build in the space invest in the space use the space or just playing around or trying to learn the web 3 Rabbit Hole course is great tool for you to learn and understand at the end when you complete it you also get to Mint yourself an nft which proves that you have completed the course so that is really really cool and then finally before I get into this if you're not signed up for our newsletter just check out the show notes below and you can do so all you gotta do is throw in your email and we will email you all of the podcasts um that we do in our deep Dives our Spotlight interviews

and our news uh roll up uh every single week so that you have it in your inbox and can get it immediately uh but otherwise let's dive into the theater merge because friends this is a big deal so we're gonna read uh the article that I just wrote the ethereum merge is happening and seriously it's actually happening this time the date is September 15th or 16th depending on the block of 2022 um this is now the consensus date amongst the ethereum core developers working on the ethereum merge we just had the final test net um Gorly merge on August the 10th I believe it was so it seems that eth 2.0

is finally here barring of course no heavy technical issues um that may arise over the coming weeks um so the ethereum emerge from proof of work to proof of stake is really a technological feat a very large proportion it will have significant impacts across crypto and the web 3 ecosystem at large and so in this episode here I'm going to explain what ethereum merge is and break down the three reasons why it will have such a massive impact on web3 real quick the tldr is that one web3 goes green and becomes available to businesses around the world two we have improved security and number go up technology talk a

little bit about what that means and three and many have not heard this one but the internet bond is born okay we'll dive into what that is of course so all of this happens with the flip of a switch in about less than one month depending on when you're listening to this podcast um uh it's time to buckle up and get ready for the next phase of web 3. so what is the ethereum merge or eth 2.0 as it used to be called is no longer called that the ethereum merge is simply a transition of how the blockchain validates transactions okay so it's moving from proof of work over to proof of stake now the details on how all this works isn't really necessary to

understand the implications that this has on web3 but I'm going to give a quick summary anyway just so you're in the know so proof of work consensus is where large mining equipment around the world is used to solve mathematical equations and then compete to verify transactions so those who who solves those mathematical equations uh they're in a race and whoever does it is able to verify these transactions in my new Bitcoin now while this can be great for a form of consensus to ensure decentralization it does require a lot of electricity a lot of equipment and a lot of resources in order to to actually do this right whereas proof of State consensus is where participants stake a

certain amount of crypto in this case with ethereum it's eth and they are selected randomly to validate the transactions so there is no competition here now this mechanism as a result of they're not being competition or needing to solve any mathematical equations this mechanism requires basically no energy and can be performed on a regular laptop or are potentially even a phone okay so the move from proof of work to proof of stake has vast implications in terms of the following one lowering the expenses the blockchain incurs to pay for security okay we actually did a a podcast um with Sam uh about this uh all about

kind of blockchain revenues and expenses and profitability of blockchains so just talking about how security is an expense of a blockchain I'm not sure what number that is but if you just scroll down our list here in our podcast or on YouTube depending on where you're listening or watching you'll find that podcast and you can learn about about revenues and expenses of blockchains so the second thing that moving from proof of work to proof of stake does is it decreases the energy and resources required for someone to participate in validating transactions okay so if you want to validate transactions on proof of work you need to buy this big equipment you got to set up something where you're going to have all this energy oftentimes this is done somewhere remote whereas when you go to proof of stake you can

just stake it with a computer and you can do it from your home um and finally this will improve the security and prevention of Bad actors uh which may look to attack the blockchain now one thing that's important to note here uh the ethereum merge will have little to no impact on gas fees okay you frequently see this on Twitter and other areas that is not true this the purpose of ethereum emerges not to impact gas fees whatsoever but please understand there are alternative projects underway at the same time in the ethereum roadmap which are looking to lower gas fees in the future um I'm going to take this one step

further than what I've written in the article here since we're just listening on the podcast the ethereum layer one or mainnet will never have low gas fees that's not really the purpose of the layer one that is the purpose of all these layer twos that we talk about a lot on this podcast things like optimism arbitrim immutable and so on and so forth zk's the the purpose of the ethereum L1 is to be the consensus layer which is just to be as secure and decentralized as possible that's why we're moving to proof of stake because it allows us to be the most secure and the most decentralized um I guess also there's a lot of debate on what is more secure and more decentralized proof of work proof of stake if you are talking to ogs in the

space who have not kept up with the research they will tell you proof of work but basically all the research these days supports proof of stake so long as it's done properly and you give it enough time so hopefully all those things will get rid of some confusion of things you might see in the space so let's first discuss the implications of the merge in regards to the environment I talked a little bit uh about how it's going to reduce the energy so the ethereum energy requirements the theory emerged lowers the cryptos carbon footprint okay so in case you haven't heard crypto has a bad reputation when it comes to energy usage and carbon footprint now Bitcoin tends to be at the front and center of this

criticism as the leader of proof-of-work blockchains however ethereum and his current state also finds itself in the same or similar spotlight now before I go further I think it's also important to highlight that most of these criticisms are false and are significantly exaggerated especially when you compare the energy usage of crypto to other Industries so Bitcoin gets a lot of flack about this um and you know it does use a lot of energy but the one thing to understand is there are a lot of Industries and a lot of technologies that use a lot of energy and what you need to compare is not how much energy it's using it's what's the importance of this technology versus the energy that it's using and also is it using bad

energy or is it using renewable resources right um and so first of all I have this picture up on the screen here for those that are watching and it's basically comparing carbon emissions of Bitcoin compared to other Industries um the number here of Bitcoin is 41 metric tons of CO2 okay I'm not sure if that's per year or what that is exactly but it is a number that we can take a reference off of I believe it's all 2021 41 metric tons of CO2 if we look at the Gold industry another form of money or store of um um like Value Store value it is 122 metric tons of CO2 so almost triple what Bitcoin is

um actually more than triple then you have the entire global banking system 130 metric tons of CO2 the aviation industry uh 1982 metric tons of CO2 uh has air conditioners and electric fans 984 metric tons data centers 100 metric tons tumble dryers 53. so um there's so many industries that you know may not be even as important as what Bitcoin supports um or the web 3 overall industry supports and they have way they use way more Metro tons so like is it that bad I mean of course we still want to try to keep our carbon footprint is down as much as possible so again proof of stake does allow that I just

want to make sure people understand you know it's not as bad as the media will have you believe um now anyway um regardless of the numbers The Narrative and story will always outweigh the reality right so this is something that needs to be addressed regardless and as a smart contract platform ethereum's goal is to become a consensus layer for the internet enabling Global Finance business and commerce to be built on top of it and to integrate into it right but with a heavy carbon footprint many companies are unable to use the technology due to government mandates and restrictions especially in places like Europe and others that have these sort of more um strict uh mandates right so in addition there's also gaming in other

communities have been vocally against the energy usage required to power nfts and other digital assets so it just doesn't look good regardless of what the facts are and so while there are many other smart contract Platforms in web3 which are already proof of stake and require little energy to use basically all the other ones other than ethereum in fact the fact is that ethereum remains the largest smart contract platform in crypto and web3 by a long shot okay so when you were looking at the number of developers the number of projects the number of um the number of transactions and volume that's on uh ethereum versus all these others the number of users ETC number of assets there's just nothing even

remotely close to ethereum and so this means that if ethereum is not a clean technology then ultimately web3 is not a clean technology either which stifles adoption in growth in web3 you got to understand that all the biggest companies in the world that are integrating into ethereum or sorry into web 3 are currently doing it on ethereum and there are many that are held out because they are worried about these the carbon footprint right so we need ethereum to go green if we we want web3 adoption so here's the good news ethereum's transition from proof of work to proof of stake will lower the energy consumption of ethereum and ultimately web 3 by 99.9 percent

so that is huge it basically makes it no longer a conversation right because once we go proof of stake it is all gone and so this is the end of nft's web through and crypto are bad for the environment story it stops it in its tracks and enables any business moving forward to participate in web 3. unfortunately the same cannot be said for Bitcoin however that is another topic for another day um the good news is however is that this squashes it for web3 and that my friends is very very exciting next up out of these top three things that ethereum merge will do for web3 the ethereum merge improves its tokenomics and

security so in this industry we all love number go up right well the ethereum core Dev team does too this is why a big part of the eth merge is to improve the tokenomics of eth the asset enabling its price to more easily rise doesn't mean it will rise and this is not Financial advice but you can alter tokenomics uh and make things happen in a certain way that will allow it to rise more easily and I'll explain what that is in just a second now the ethereum core Dev team isn't worried about the price of eth because they want their bags to grow okay they want this because it means more secure and anti-fragile blockchain okay you see the higher the price of eth the harder it is for Bad actors to perform a 51

attack on the blockchain the more control someone has over the total supply of the tokens if you're in proof of stake remote control they could have over the network itself thus the higher we can make the price of eth the more resources basically what I mean here is money someone would need to buy up control of the network okay so it's really important here now before I break down how the merge will impact the tokenomics of eth it's first important to understand that the price of any asset is determined by its Supply okay so how much many tokens or how much of that asset is available and its demand how many people actually want to buy that or give money for that thing right if you have more buyers than sellers of

any asset in the world this is true of stocks gold oil a burger like whatever it is if you have more buyers and sellers that price is going to go up if you have more sellers and buyers the price is going to go down it's very very simple right and so it gets more complicated when you look at well why are people wanting to buy this what is the demand is there real utility is it a speculative asset how much of that supplies that Supply growing shrinking all these kind of things really matter right and this is what makes the price of everything we have a market on gold equities crypto et cetera so here is how the merge will impact supply and demand of eth right so the merge will reduce the yearly eth issuance otherwise known as inflation

from 4.3 percent to 0.43 percent so basically what happens is there is inflation of eth just like there is of BTC in Bitcoin and that inflation is just creating new Bitcoins or new eth if we're talking ethereum to pay those who are validating the network right now that is miners right but with proof of stake it requires much less issuance of eth um than proof of work to pay for its security so much so the issuance is reduced by over 90 percent okay this is a massive Supply shock to the eth Token Supply it goes from growing its Supply 4.3 every year down to point four three percent

okay that is a huge supply shock now that's only one aspect there's much more the overhead costs of validating ethereum falls close to zero okay so to validate ethereum in proof of work it requires significant energy costs and expensive mining rigs this means that the validators or the miners are selling a large share of their eth that they earn by securing the network so that 4.3 percent that is being put out to minors uh it's an estimate that at least 70 percent of that is being sold to pay for energy costs and to update their mining rigs Etc now because proof of stake requires basically no energy and no expensive equipment none of the eth issuance is

considered to be a forced seller to pay for expenses okay so this is also considered a supply shock as we remove a significant amount of forced Sellers from the market so the amount of eth doesn't necessarily change but when you know that you know x amount of eth is automatically being sold every single month to pay for cost well that's a a big deal right in terms of demand and supply and so now that's basically just been removed so now these people who the the stakers who will be earning this Ethan much less of that but they don't have to sell it they can just continue to stake it okay now some might still sell it but what we're saying here is

that there is a a large amount of forced sellers which is now being removed from the market okay then we have the staking yield um the apy to valid ethereum will increase from about four percent is what it is right now to 9 to 12 percent now the staking yield is anyone who is staking their eth um they earn four percent right now which is basically just the inflation and then also some from fees from those who use the network well that's going to go up to nine to twelve percent because we can pay the miners uh or we don't have to pay the miners anymore R we can move some of these transaction fees to go to increase the amount of yield you get when you stake your eat

um so this is a coinbase estimate that it's going to jump from four percent up to nine to twelve percent understand that this is a um this is a moving Target so the more people who stake the lower the apy percent goes the less people who stake the more that goes up okay so um this creates a massive demand shock to eth because as yield Chasers will need to buy eth in order to stake and receive the apy so if someone can get nine or twelve percent essentially risk free on their on their eth that is going to attract a lot of people to stake and when you stake it removes eth off the market um but not just removes off the market it means there are other people who want to buy eth who get a 12 apy so that

creates more demand for eth okay and finally and this one has already happened so this is not necessarily part of the merge but something which happened in 2021 and that is eip1559 it has burned over five billion dollars worth of eth since its launch in 2021. um so while this is already live so it's already the impact is already being seen it adds to this sort of supply and demand story for eth um the asset by burning a percent of each with every transaction that occurs in the blockchain so what does all this mean okay let's break this down the 90 reduction in eth issuance combined with the eth burn from ip1559 will turn eth into a deflationary asset okay so every

year there will be less eth than there was the previous year there is no other asset in the world that does that everything else is growing including gold even Bitcoin there's only 21 million um but there is inflation right now and there will be for the next like 100 years until that algorithm changes or not changes but finishes um so in addition to this deflationary asset there's more demand will be created via increasing the apy or the yield to stake eth as well as significantly lowering the barrier of Entry to participate in validating ethereum you don't need to buy any equipment and finally a large percent of four sellers which exist from mining costs will be removed from the market so what this means is that post merge the

ethereum core developers will have created one of the greatest tokenomic structures that we have ever seen in crypto and web 3 and honestly this could be true for any asset we have ever seen okay the most likely result from this is a sustainable increase in the price and market cap of eth and thus a more secure network for web 3 to reside on top of so when I say sustainable increase it does not mean that this will just go up only okay that's not how this works there's definitely chances that ethereum can still go down it may go down before the merge or after the merge I don't know what I'm saying though is that they have set up eth for it to have the best success possible and for it to go up as easy as possible because the the

tokenomic structures in its favor the people that are selling are now reduced the people that would want to buy there's more incentive to buy and hold so it's basically just kind of changing the um the economics of it and that allows for um it to go up easier there's less purchasing that is needed of eth to make the price go up than there is right now when we have um the proof of work okay so that is really good news in terms of the security the underlying technology of all basically all of web 3. finally the ethereum merge births the internet Bond and so you're probably going WTF what is an internet Bond Kyle what are

you talking about um and we don't talk a lot about like Financial stuff on this podcast um so just bear with me for a second I know this sounds a bit ridiculous and complicated I'm going to keep it simple and hopefully you'll be able to understand why this may be such a big deal so in the traditional Finance World there is a term which is called the risk-free rate okay the risk-free rate is the rate of return of an investment with no risk of loss okay so basically the yield expected from a U.S treasury bond treasury bonds are debt that is offered by the US government okay so the yield expected from a U.S treasury bond is the risk-free rate of the United States Financial system and technically this

would be the Global Financial system too because basically everyone is is buying up U.S bonds okay and the reason this is true is that whether you hold US dollars or you hold U.S treasury bonds there are essentially no additional risks on your assets because they are backed completely by the US government okay so should the U.S government fail U.S treasury bonds could go to zero absolutely but so too with the US dollar so there's essentially no added risk to holding U.S treasury bonds over just holding US Dollars itself now I say essentially because there is never no risk um but it's basically no risk so they

call it the risk-free rate and this is important because Banks and Financial Services have sort of a baseline rate they can earn right because if they have any cash they can just put it in there and they earn whatever the yield is you know it's low but it's something or they can use that as a revenue stream that they can share to others who are you know Banks do this where you put your money in their savings account and they will put it into U.S treasury bonds and then they'll give some of that yield to you and they will take some of it as well okay so it allows for many Financial Services to be built on top of and a place for trillions of dollars to be parked right they just sit there and they earn their yield it also serves as a benchmark as any yield higher than the

risk the risk-free rate has some sort of added risk to it so you know if you are now taking a loan and it's or you're you know giving your assets and you're earning six percent well you know there's some underlying risk there you might not know what it is in the centralized world but you know that something more than the risk-free rate because the risk free rate is one percent or whatever it is I don't know okay so what's happening here is eth is about to create the risk-free rate of web 3. so with the transition to proof of stake you can now earn a risk-free rate on your eth those who choose to validate the ethereum network by staking their eth can earn a yield of let's say four to twelve percent right this just depends on how many people State now this yield so long as you don't use

lending platforms or daps to stake is essentially risk-free okay so you don't use things like Celsius or coinbase or Voyager or whatever we know that those are not risk-free of course so in the same scenario as the USD and U.S treasury bonds holding eth or staking your ease to earn yield has essentially the exact same risk right because if something happens to ethereum the network and it breaks or whatever I mean eth goes to zero right so does your yield so there is no difference right the only difference is you get to earn some yield if you're staking it so this provides a baseline yield for all of defy to be built on top of and utilized okay so while this doesn't seem like a

big deal to most most of us it's important to understand that institutions Banks and even governments love yield especially yield that doesn't bring any additional third-party risk of course there is risk in holding eth right but if institutions or governments or Banks or whoever want to hold eth anyway or want exposure to this new technology then they can do that plus gain a risk-free yield and that is something that many many institutions and governments and banks are looking for okay so a new Financial system in global economy is being built over the internet and for the first time everyone has an opportunity to invest in it and earn a

yield from it this is a big deal for the overall legitimacy of defy of crypto and of web 3 at large okay you can learn more about the internet Bond uh in an article from Bank list it's linked in the show notes in the newsletter if you check that out they have a good more detailed description for anyone that cares a lot about the financial aspects of this so the ethereum merge is a big deal for web3 okay web3 is an exciting space which is growing extremely extremely fast however it's important to understand that even the foundational layer of this industry is still being built out and approved upon ethereum as well as other layer 1 blockchains are still very new in a work in progress which is crazy crazy to

think about when you consider that blockchain settled over 16 trillion dollars in transactions in 2021. now the ethereum merge is a huge step in the right direction for the space you know in one moment which appears to be around September 15th the 16th 2022 the foundational layer of this industry will become a sustainable technology both in terms of its carbon footprint and its profitability and tokenomic structure as a blockchain okay finally the ethereum merge legitimizes ethereum and web3 by completing one of the largest technological Feats that this industry has ever seen in providing an internet native risk-free rate to the Global Financial system as I've been saying in the newsletter all year and on this

podcast don't fade the merge that's a wrap friends thank you so much for listening and I hope that this gives you some good insight into what's happening uh in this space and with this exciting event of the ethereum merge uh happening in about a month's time of the recording of This podcast um get ready for some fireworks and a lot to happen uh let's hope it goes smooth we do not know if it will actually work out there's a there is some risk right now that something could happen in the merge um I tend to be optimistic of this but we'll see what happens there's also going to be a lot of fun I talked about it on the roll up August 12th I believe is when it came out

um near the end of the news roll up there go listen to that to learn more about what's happening in this space in terms of miners potentially forking uh ethereum to continue the proof of work uh blockchain and there's going to be a lot going on there and so you're going to hear a lot of things um and I just hope that this one helps you kind of understand where this is going and then again if you listen to that podcast on the 12th of August you can understand what you should be doing and what you should not be doing in case things go a little bit crazy in this industry as they are so known to do um if you like this episode please do a few things one just give this a rating right if you're on Spotify you're on app

podcast takes you two seconds you can literally just open up your phone right now and just click the button give it a five star feel free to give us a review let us know if you liked it um on there if you're on YouTube just hit subscribe hit a like you can comment on YouTube as well any of these kind of things really help us to grow because when you like when you engage when you do anything on the podcast on the YouTube um it hits the algorithm the algorithm likes when people engage and it also lets us know what's going on if you like our content if we can improve our content Etc we are here to make the best learning experience possible for those in the web 3 space so again thank you so much for listening I'm Kyle reedhead uh and uh I can't wait to speak to you

again on the next episode okay everyone have a wonderful wonderful day all the best thank you for listening to web3 Academy we hope this helps you along your web3 journey if it does please share this episode And subscribe so you don't miss the next one by the way if you have yet to join the Discord Community you are missing out this is where all the magic happens this is where we learn where we ask questions where we network uh you want to be in there the link to join is in the description below and finally a quick disclaimer nothing in this podcast was Financial advice crypto and web 3 can be risky you can literally lose it all in fact if you invest on account of what we say you probably will lose it all so don't do that in all honesty the point

of this podcast is to remove the noise of markets and price and focus on utility and implementation anyway so you should not take any of this as Financial advice thank you friends and see you in the next one