Ethereum ‘Merge’ May Present New Opportunities For Investors

Developers and crypto enthusiasts are not the only ones who will be closely watching Ethereum’s so-called “Merge” in the next couple of weeks.

Investors also will be eyeing the big shift—looking at both opportunities and potential pitfalls.

“This is a huge step forward for Ethereum,” said Jack O’Holleran,the co-founder and CEO of blockchain scalability platform Skale Labs.

What is the Merge?

While talk of the Merge has proliferated as the shift comes closer, the actual change has been in the works for years.

Fundamentally, the Merge is a software transition from using proof-of-work to proof-of-stake to validate transactions. The blockchain successfully tested the transition—or Merge, as it is called—in July and the move to proof-of-stake is now expected in the middle of September.

The change is significant as proof-of-work consensus involves people solving complex equations in order to validate a transaction—also called mining. The method—which is also used by Bitcoin—is extremely energy-intensive and therefore considered by many to be environmentally unfriendly.

On the other hand, proof-of-stake—used by other newer blockchains—allows users to “stake” cryptocurrency in order to be part of a lottery system to validate transactions. While it uses less energy—as well as speeds up transaction time and cuts down on fees—some opponents say the system favors only those with money.

Nevertheless, the Merge is coming to the most popular blockchain and those in the industry will be watching closely.

“I believe it boosts the whole ecosystem,” said Yash Patel, general partner at Telstra Ventures.

Patel said the implications of the Merge will drive further developer interest around new utility and applications built on Ethereum.

“I think the Ethereum ecosystem—and the many VC-backed projects and companies built on it—will receive a boost,” he said.

Investing in the blockchain

While it is difficult to break out venture investment in only Ethereum, blockchain investment as a whole has continued to be strong, even in the slowing market of 2022, according to Crunchbase data. Already this year, VC-backed startups have received nearly $13.6 billion in funding—just off the record pace last year when such companies saw $21.2 billion in investment.

While the Merge may not be the sole driver of new investments, it likely will contribute as Web3 and its usability get worked out, said O’Holleran, who also invests in the blockchain and crypto space.

Investors likely will not just focus on Web3 infrastructure platforms now, but also more future investments in actual Web3 products to compete with current Web2 offerings, he added.

“I think the Merge is more of a piece of the equation” driving investment, O’Holleran said. “But it will drive more investment into Ethereum projects.”

Rollups and crypto

Ethereum’s shift could attract more investment to Layer 2 rollups—which help scale Ethereum with off-chain computation.

“It certainly solidifies it as a scalable network,” said Jake Brukhman, founder and CEO at CoinFund, which focuses on crypto and blockchain investments. “It makes it more attractive to build on.”

Examples of such rollups would include Andreessen Horowitz-backed Optimism and Mir Protocol, which was acquired by India-based Polygon late last year for $400 million.

Lastly, the Merge should be another step in removing the friction associated with crypto going mainstream, Patel said. It also could calm price volatility as true builders move back into the ecosystem versus just price speculators, he added.

However, before looking at new opportunities, investors will be keeping a watchful eye to make sure the Merge goes successfully—especially those with investments around the Ethereum blockchain, Brukhman pointed out.

“Everyone will be looking to see what happens,” said Brukhman, adding he does not expect issues. “Once it is successful, that removes risk.”

To see more of our Web3 coverage, visit Crunchbase’s Web3 Tracker—a new site to look at startups, investors and funding news concerning all aspects of Web3, cryptocurrencies and blockchain.

Illustration: Dom Guzman

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