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The gold standard was a monetary system where the value of a country’s currency was directly linked to the amount of gold holdings it possessed. The system was widely used by major economies across the world before falling out of favour in the 1970s. The gold standard made for easy currency exchanges as the rates were pegged back to the underlying gold supporting the individual currencies. As governments sought more flexibility over how to manage their economies, in particular, a desire to increase the amount of money in circulation, countries dropped the gold standard in favour of the fiat money system, where currencies are not backed up by a fixed commodity, in use today. Which country was first to introduce the gold standard? The UK was the first country to formally introduce the gold standard in 1821, but its origins date back to the 18th century as global trade was increasing dramatically. European countries wanted to standardise transactions and with gold already established as a method of exchange, it was the obvious commodity upon which to base this new standardised approach. Initially, it was just the UK on this new standard, with the country in a strong position to have a gold-backed currency thanks to the amount of metal it had amassed from its colonial empire. Portugal was the next major country to follow in 1854 with France and Germany following suit in the next couple of decades. During this interim period before the gold standard was more broadly adopted, most countries were on a bimetallic standard where both gold and silver were used to back up the value of the coins in circulation. The signing of the Gold Standard Act in 1900 by President William McKinley saw the US officially join the Europeans and establish gold as the sole metal (rather than silver) for redeeming paper currencies. It set the value of gold at $20.67 an ounce and valued the dollar at 25.8 grains of gold. By the start of the 20th century, nearly all countries were on a Gold Standard. For years, the gold standard was successful in providing a way for countries to keep their exchange rates stable and encourage the growth of international trade. It also made trading far less cumbersome with people only needing to carry paper and coins rather than the much denser gold that preceded them. Why did the gold standard fall? The outbreak of the First World War saw European countries and the US suspend the Gold Standard as the governments wanted the financial freedom to pay their escalating war bills. Although the standard was readopted at the end of the war, the ultimate breakdown of the system can be traced back to this suspension as from that point on governments were attracted by the financial liberation permitted by cutting the physical tie to gold. The Wall Street Crash of 1929 and the resulting Great Depression of the 1930s sparked a run on gold at the Federal Reserve as desperate Americans sought gold for their dollars. President Franklin D Roosevelt first closed the banks and then ordered all citizens to turn in their gold in exchange for dollars before signing the Gold Reserve Act in 1934, which withdrew gold from circulation and prohibited private ownership without a licence. It also enabled the heavily indebted government to pay its debts in dollars rather than gold and increased the price of gold to $35 an ounce, the first change since the 1900 Gold Standard Act. Roosevelt’s actions signalled the end of the Gold Standard, with its independence from government interference lost. Currencies did, however, remain pegged to gold and it wasn’t until the 1970s that the direct relationship was ended under President Richard Nixon as he tried to stave off stagflation. This era was marked by the rise of the Soviet Union and its vast oil reserves posed a threat to the US’s supremacy. With oil priced in US dollars, the Soviet Union was accumulating vast reserves of dollars from the sale of this key commodity and depositing them in European banks. The rising levels of US dollars overseas coupled with escalating inflation left the US unable to cover all the redemptions on its gold. Nixon reacted in 1971 by no longer allowing foreign governments to exchange their dollars for gold, effectively sounding the death knell to the gold standard. The dollar was decoupled from gold altogether in 1976. What would happen if we returned to the gold standard? After the abolishment of the gold standard, all money printed lacked tangible value, leading to a huge amount of fiat money being printed with no tangible backing. This has led to a devaluation of the dollar and a correlated increase in public debt; creating the modern banking system we have today. Kinesis has devised a unique solution by reintroducing a currency (KAU) which is based 1:1 on allocated gold and eliminates the need for a central bank by using blockchain technology. This currency provides people with the freedom to transact, beyond the control of financial institutions. This revolutionary technology provides a return to a sustainable monetary system based on physical assets, with full control and trust, placed back in the hands of the people who own it. A solution fit for the needs of a modern-day economy that draws on a history dating back more than 200 years. Rupert is a Market Analyst for Kinesis Money, responsible for updating the community with insights and analysis on the gold and silver markets. He brings with him a breadth of experience inwriting about energy and commodities having worked as an oil markets reporter and then precious metals reporter during the seven years he worked at Bloomberg News. As well as market analysis, Rupert writes longer-form thought leadership pieces on topics ranging from carbon markets, the growth of renewableenergy and the challenges of avoiding greenwash while investing sustainably. This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.
The spot silver price is the live benchmark price at which an ounce of physical silver can be bought or sold, at that particular snapshot in time. As this is a dynamic market with multiple factors, the spot price is constantly fluctuating. As well as the spot price for silver, there is also a liquid futures market for the precious metal that provides an insight into the long-term sentiment for silver. While less actively traded than its precious metal peer in gold, the spot silver price is still closely followed by traders and investors alike, with the metal particularly popular among retail investors with its lower cost entry point than gold. What is spot silver? Spot silver is the price a buyer can purchase silver for on the spot. It provides an immediate snapshot of where silver is trading at on the international markets and gives a reference price for dealers, jewellers, traders, fabricators and other interested parties to use in their daily activities. This spot price is most commonly stated in dollars per ounce of silver but can also be a price per gram or kilo as well as being converted into any foreign currency as befits the truly global appeal of silver. While spot silver reflects what the price of silver is now, there is also an actively traded futures market for silver on exchanges, such as COMEX. How are silver futures prices calculated? There are three different types of silver futures products available on COMEX. They are the silver futures, which have a contract size of 5,000 troy ounces, the micro silver futures with a lot size of 1,000 ounces and the e-mini silver futures where each contract is 2,500 ounces. While the silver and mini silver futures are physically deliverable, that is to say when the contract expires the equivalent amount of ounces must be delivered, the e-mini contract is financially settled. Trading on these contracts starts for delivery in the current month and extends as far out as two years into the future. Typically the nearest month to delivery is the most liquid contract. The price that these different months are trading out sets the curve for the silver futures market. If the price is higher for those contracts nearest to delivery, this is an indication of strong demand and is known as a market in backwardation. The reverse, where prices are higher for later months, indicates a weak market and is known as contango. These monthly contracts are available for trading on the exchanges during market hours and are highly liquid with tight spreads between bids and offers. The volume of silver traded on exchanges far outnumbers the amount of physical silver available with contracts changing hands multiples of times. How is the silver price determined? As well as the spot and futures price, there is also the London Bullion Market Association (LBMA) Silver Price, which serves as the global benchmark price for unallocated silver delivered in London. The price is determined by a daily auction operated by the ICE Benchmark Association (IBA) and takes place at 12pm each day. There are currently 16 banks and trading houses registered as direct and indirect participants in this daily auction with the trades carried out by these firms during the auction forming the basis for the LBMA’s silver price. The final price of the auction becomes the official Silver Price and the auction is settled in US dollars. This is then published in a variety of international currencies based on the foreign exchange levels at the time. In summary, there are three main prices for silver. The spot price for immediate purchases, the futures price for silver to be delivered in upcoming months and the daily LBMA silver price that is the benchmark used for long-term contracts. How does Kinesis’ silver price differ from spot silver? As well as the silver prices mentioned above, Kinesis has created its own silver product, KAG. This digital currency combines the timeless value of physical silver with a cryptocurrency's borderless value and efficiency - without the inherent volatility. Kinesis KAG is available as a 1-ounce silver token and is underpinned by the equivalent volume of physical silver (of a minimum fineness of 999) from an approved refiner. Each KAG is backed by one ounce of fine silver stored in fully insured and audited vaults. Kinesis’ silver price is based on fully allocated physical silver with 1 KAG the price of 1 ounce of fully allocated silver. The KAG silver price is calculated via the aggregation of the silver in these vaults across the world, which covers 13 vaults across 9 countries. This global coverage enables Kinesis to offer some of the best available prices for physical silver. By making silver digital, KAG makes this timeless asset relevant for the modern world. Rupert is a Market Analyst for Kinesis Money, responsible for updating the community with insights and analysis on the gold and silver markets. He brings with him a breadth of experience inwriting about energy and commodities having worked as an oil markets reporter and then precious metals reporter during the seven years he worked at Bloomberg News. As well as market analysis, Rupert writes longer-form thought leadership pieces on topics ranging from carbon markets, the growth of renewableenergy and the challenges of avoiding greenwash while investing sustainably. This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.
HUI: SPX Ratio The chart below shows the HUI: SPX ratio, where HUI is the Amex Gold Bugs Index 14 major gold-producing companies, and the SPX represents the S&P 500 stock market index. The price of gold is shown by the black line, with the data recorded from the year 2000. The only time mining stocks have been cheaper relative to the stock market was in late 2000, when the secular precious metals bull market was emerging. Since late 2015, when the ratio fell to its current level, the mining stocks and precious metals have been in an uptrend, albeit with a high degree of volatility. What also stands out in the chart is that the spread between the price of gold and the HUI: SPX ratio is considerably wider now than it has been at any time going back to at least 2000. For me, this suggests that not only might a bottom be forming, but any move higher has a strong possibility of sustainability. A Bottom in the Gold Market? The rallies in the sector since late 2015 have been relatively short in duration - six months in 2016 and twenty-two months from late 2018 to August 2020. By "sustainability," I mean a bull move that lasts at least three years, like the ones from 2001-2004, 2005-2008 and 2008 to 2011. I’ve received many emails on the question of whether people should be selling, hedging or holding at the moment. I have been struggling with that dilemma ever since I sold a big position in NUGT puts. Direxion Daily Gold Miners Index Bull 2X Shares (NUGT) is a leveraged exchange-traded fund (ETF), I was using to hedge at the end of April. While I regret not keeping the hedge in place with 20/20 hindsight, the current decline in the sector is reaching historic extremes. Sell or Hold? That is the Question As for whether or not to sell at this point. I'm going to hold. I've survived sell-offs like this in the summers of 2006 and 2008 plus the sell-off in late 2018. I would be shocked if the sector is entering an extended decline like the one that occurred from last 2011 to the end of 2015. One reason, aside from the glaring strength of the fundamentals that support much higher prices in the precious metals sector, is that there has not yet been a frenzied, parabolic, high-volume price-chasing move higher. The best example of that is the run-up in the entire sector that occurred in late 2010 and into the spring of 2011. Indicators of Metals Sector Bottoming I'm starting to see several indicators that have been present in the past when the precious metals sector is bottoming. Both gold and the mining stocks (Amex Gold Bugs Index) are as extremely cheap/oversold relative to the S&P 500 as at any time going back to 2001 when the precious metals bull was beginning. Second, the hedge funds per the weekly Comex Commitment of Traders report are now net short both paper silver and gold (the gross short position exceeds the gross long position). It's rare when the hedge funds go net short Comex gold futures. The banks are net long silver contracts and they are aggressively covering their gross gold short position. Historically, this positioning in Comex gold and silver futures between the banks and the hedge funds has often preceded big moves higher in the entire precious metals sector. Finally, Newmont Mining (NEM) after its post-earnings blood-bath in the stock market on July 25th is at its most oversold technically going back to 1987 (the Dow plunged 25% in October 1987). This is another indicator that the sector may be bottoming. Precious Metals & Stock Market Divergence This is not to say that gold, silver and mining stocks will not go lower from here. Anything can happen if the stock market falls off of a cliff, the risk of which is quite high currently. However, I believe that most of the potential sellers are now sold out of their long positions in the mining stocks. Furthermore, in addition to being short gold and silver futures contracts, the hedge funds are also likely shorting mining stocks via GDX. In any indication of rally in the sector, the hedge funds will quickly cover their short positions and go long. It's my strong conviction that ultimately, whether or not the stock market has a considerable amount of additional downside - and I believe it does - at some point the precious metals sector will diverge positively from the rest of the stock market and head eventually to new all-time highs. See November 2008 to March 2011 for an example of this occurrence. Dave Kranzler is a hedge fund manager, precious metals analyst, and author. After years of trading expertise build-up on Wall Street, Dave now co-manages a Denver-based, precious metals and mining stock investment fund. This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis. The views expressed in this article are those held by Dave Kranzler and not Kinesis.
When hearing about the potential returns from Gold ETFs, it can be an easy bandwagon to jump on. The promises of market exposure and returns without the necessity for ownership can seem appealing - at a first glance. However, an aspect less explored in the discussion of Gold ETFs is the potential risks they entail. These can often be downplayed by providers as part and parcel of the inherent structure and operation of Gold ETFs. Keep reading to find out more about the differences between these two types of gold investment, and why investing in gold shares is not the same as digitalised gold. What is digital gold (gold-backed crypto)? Digital gold - often termed gold-backed crypto - is transforming the nature of gold investment, and reinventing the asset by increasing its liquidity and making it more readily available via the blockchain. Gold-backed crypto is a digital representation of the underlying asset, physical gold bullion. With the most providers, gold-backed coins or tokens are allocated on a 1:1 basis, with their equivalent amount in physical gold bullion. For instance, one KAU is backed by one gram of physically allocated gold. Alongside the advent of blockchain, digital gold has risen in popularity in recent years, reducing the barriers to entry for individuals seeking access to gold investment. And, although a relatively new innovation, digital gold is making waves by securing individuals with an alternative form of payment to fiat currencies. With many analysts arguing that the market is displaying behaviour typical of a recessionary economy, the constantly evolving technology of blockchain is enabling individuals to take ownership of an asset, recognised for its safe-haven properties. Why choose digital gold? Purchasing digital gold currencies can be an advantageous method of acquiring the asset - especially in comparison to unbacked digital currencies. Store of Value The value of gold-backed crypto is derived from the fact that every single coin or token is pegged to a physical, tangible asset. For this reason, many recognise that asset-backed ‘stablecoins’ have the ability to circumvent one of crypto’s major pitfalls - a lack of intrinsic value, which leaves them vulnerable to severe price fluctuations. Safe Haven While physical backing is important, digital gold owes credence to backing from an asset that has been considered a ‘safe haven’ investment for millennia. Investors in the metal benefit from the fact that gold has maintained its purchasing power throughout time, due to the fact that it cannot be printed - rather, only minted. In the current economic climate, many are returning to gold in response to high levels of inflation on both sides of the Atlantic - those not seen for 40 years - as well as a particularly volatile market already in play. Utility as Money Another aspect of gold-backed crypto to consider is the sheer fact that it is transforming the metals industry, reshaping its utility beyond an investment vehicle, into a global, borderless currency. With the addition of a card, users are able to spend their bullion at the exact point of sale, in seconds. The aid of the blockchain offers the potential for individuals to integrate gold as a standard part of their daily payments - just like any other currency. Not to mention, although gold-backed crypto is a digital currency, users are entitled to redeem the underlying gold backing their coins anytime they wish to, with providers like Kinesis offering redemption from as low as 100g for gold. Auditing As a finer point, it is a given that digital gold is readily associated with the transparency and immutability of the blockchain, to account for all coins or tokens in circulation. But while the blockchain itself does provide a safeguard in that matter, auditing for the physical metals is also essential to consider. It’s important to ensure that any gold-backed cryptocurrency provider completes frequent, independent audits by industry specialists, to verify their holdings against coins or tokens. What are gold ETFs? Gold Exchange-traded Funds are known under the broader umbrella term of Commodity ETFs, which are used for investment into raw goods, such as precious metals or crude oil. Investors typically select ETFs as a way to diversify their portfolios, with these funds offering exposure to a pool of bonds, stocks, or other assets, without the need to acquire each of them separately. When an investor buys stocks, they invest entirely in one company, whereas ETF investment gives the option for investors or traders to buy a single or multiple shares within an ETF. For a more detailed breakdown of ETFs, see our blog post here. Some of the most popular gold ETFs hold physical gold to back their shares, with the share price tracking the price of gold. Due to the ease at which they can be traded, ETFs are often the cause of volatility in the gold market, with those holding gold ETFs often the first to be impacted by market movements - for better, or worse. ETF investments are handled passively since returns are gathered from the tracked valuation of pooled assets rather than usage within a system. In light of this, investors have little control over their potential returns, than if they were garnered through spending or trading the asset itself, for example. Gold ETFs - the pitfalls For new starters in the field of gold ETFs, this avenue can at first appear as a cost-effective way to access gold and a substitute for owning the physical asset. However, there are also some significant risks to consider associated with this avenue. Real Exposure? While many argue that gold ETFs offer exposure to physical gold, investment in one does not guarantee legal title ownership of the asset itself. This means that if or when the investor opts to redeem their shares, the ETF provider is not contractually obliged to supply them with a single gram of gold, and is well within their right to provide a ‘cash equivalent’. This begs the question of whether ETFs can truly provide exposure to the physical gold market if the investor cannot take ownership of the underlying asset. One of the leading providers in the Gold ETF market specifies that investors must own a minimum of 100,000 shares before they can submit a request to redeem gold, and even then, the provider can settle in cash. Counterparty Risk Another aspect to point out is the importance of physical allocation when considering buying gold. Since Gold ETFs are traded on the commodities market, they are subject to counterparty risk. It is often the case that the value of ETF shares issued is greater than the value of the gold owned by the fund, which becomes a problem in the event of insolvency of the custodian or sub-custodian. This is the risk that holders of ETF shares must be willing to take and is an increasing possibility in times of unforeseen market circumstances or poor market decisions. Even concerning leading funds in the precious metals space, the issue of unallocated gold can leave investors vulnerable to an ETF provider's unfulfilled obligations and their consequences. Digital gold vs gold ETFs The challenge of weighing up the optimal asset for both long-term investors and active traders often leads those contemplating gold to navigate towards the outwardly simple and easy access world of ETFs. However, it is only later down the line that these same investors can be met with a whole host of maintenance fees, counterparty risk and lack of control over ETF investment. It is worth considering that digital gold combines all the properties of physical gold - ownership, asset control, proven value, and portfolio diversification - attracting investors to this option in the first place. Digital gold gives individuals the opportunity to access this, all while combining the benefits normally associated with ETFs, such as flexible trading, and in some cases, zero storage fees on insured gold bullion. In the form of digital gold, access to gold investment is much simpler and more efficient for anyone seeking to benefit from the metal, with Kinesis now providing that opportunity through a bespoke platform and easy-to-use interface. At a time when inflation is skyrocketing, and the value of certain fiat currencies is cascading down a steepening slope into decline, digitalised gold (KAU) brings investors in contact with fully allocated, legal title ownership of physical bullion. Rather than an investment solely based on paper market trading, gold on the blockchain leverages the gold investment proposition by combining the liquidity, and low-cost trading normally associated with ETFs, with ownership of the physical asset. Traders and spenders of Kinesis Gold can also participate in a usage-based yields system, where a portion of transaction fees are shared with users across the entire network, every month. Find out how Kinesis is transforming gold investment Learn More This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.
Gold was first discovered in California on January 24, 1848 by James Marshall. The gold rush that ensued after Marshall's discovery took place between1848 and 1855. What was the California Gold Rush? The event led to the transformation of California from a largely ranching and farming state into what would eventually become - if California was an independent country - the fifth largest economy in the world. In fact, the gold rushes in the U.S. and Australia are credited for stimulating a global economic boom in the late 1800s. California was admitted as the thirty-first state of the United States in 1850 during the gold rush. The term "eureka" - which is derived from an ancient Greek term meaning "I have found it," became the state motto of California in reference to this discovery of gold. The word has been included in the California State Seal since its original design in 1850. As the story goes, Mr Marshall was employed as a carpenter to build John Sutter's mill on the South Fork of the American river in Coloma, California on the western slope of the Sierra mountains. While on-site at the sawmill on that historic day, Marshall reached down and picked up what he knew was a gold nugget in the ditch that drains water away from the waterwheel. He and his crew then found more gold nearby. Marshall showed the discovery to Sutter, who wanted to keep the news quiet. Ironically, Sutter's motive was to avoid a gold rush into the region in order to protect his plans to build an agricultural empire rather than making the effort to find more gold. Discovery of Gold in California Prior to Marshall's gold discovery, there were roughly only 14,000 non-Native Americans living in California. As word of the discovery leaked out, six thousand prospectors flocked to California in 1848. But by the beginning of 1849, word of the gold rush spread around the world and another ninety thousand people moved there in 1849, giving borne to the term "forty-niners" (in case you wondered why the San Francisco NFL football team adopted the nickname "49ers"). People came from all over the world to California to look for their fortune, with many coming from China, Mexico, Europe and Australia. Of the approximately 300,000 peopled who flooded into the State during the gold rush roughly half came from overland and half from overseas. San Francisco was a tiny settlement of 200 people in 1846. But by 1852, it had "boomed" to 36,000 people. Panning for Gold "Mining" back then is not what we know as mining now. Gold mined by these early miners was formed by minerals deposited in rocks that came to the surface around four hundred million years ago. Water from streams carried nuggets of gold downstream and deposited them in river beds. The gravel beds became so richly concentrated, that the gold rush miners were able to retrieve flakes and nuggets in economically material quantities with pans ("panning for gold"). Panning, however, does not enable a large-scale mining operation. Soon, groups of prospectors shifted to placer mining to speed up and increase the size of the gold extraction. Basic placer mining uses wooden troughs, called a ‘sluice box’, which is designed to use water flowing through the boxes to capture the small particles of gold that would fall out of the slurry of water and gravel flowing through the box. Gold - the Economic Effect on California The economic effect of the gold rush on California was enormous. Many of the early prospectors became wealthy during this period. They could often earn ten times the amount per day they would make at other jobs. It's estimated that twelve million ounces of gold were mined during the Gold Rush time period. The hoards of people looking to strike it rich hunting for gold gave rise to new towns wherever a new gold discovery was made. This in turn spawned mercantilism and banking activities. The California Gold Rush was followed closely by gold rushes in Oregon (1851) Colorado (1858), Idaho (1860), Nevada (1870's), and Washington (1897). Not only did the Gold Rush transform California economically, but the various U.S. gold rushes, along with the Australian gold rush (1851) pushed the world into the gold standard. Prior to 1850, only Britain and a few of its colonies were on the gold standard. The majority of other countries were either on the silver standard or a bimetallic standard (gold and silver). But the numerous gold rushes increased world gold supplies to the point that an international gold standard, which was rolled out in 1873, thereby became practical. Along with this, robust economic activity was stimulated globally. When did the Gold Rush end? Circling back to the person who sparked the Gold Rush, James Marshall went on to become a partner in a gold mine near Kelsey, California. But the mine was a bust, leaving Marshall close to bankruptcy. Sadly, Marshall passed away penniless in 1885. In 1890, a monument and tomb were constructed in his honour. A statute of Marshall pointing to the place he discovered gold was placed on top of the monument, thereby immortalizing him and the significance to the State of California of his serendipitous gold discovery. Dave Kranzler is a hedge fund manager, precious metals analyst and author. After years of trading expertise build-up on Wall Street, Dave now co-manages a Denver-based, precious metals and mining stock investment fund. This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis. The views expressed in this article are those held by Dave Kranzler and not Kinesis.
Since its inception in 2015, Ethereum has earned an overwhelmingly positive reputation as a blockchain for everything crypto-related, thanks to its robust infrastructure and longevity within the industry. Ethereum's native token, Ether (ETH), sits second in terms of market capitalisation with a valuation of over $170 billion and over $50 billion in assets secured across its expansive Decentralised Finance (DeFi) space. Now, Ethereum is making the next step in its evolution with ‘The Merge’ - a transition from a proof-of-work (POW) blockchain to proof-of-stake (POS). What is ‘The Merge’? ‘The Merge’ could see Ethereum move to a proof-of-stake model, making Ethereum mining obsolete and opening the door for a drastic decline in energy usage across the crypto industry. It also introduces yields for Ethereum holders via ‘ETH2.0’ staking. Ethereum currently uses an energy-intensive proof-of-work model, which means miners have to use specialised equipment to ‘mine’ blocks on the network. Mining blocks involve using graphics cards and specialised equipment to solve a complex cryptographic puzzle. Currently, these new blocks have to be mined to complete transactions and verify them on the blockchain, meaning that the function is imperative for the blockchain to operate smoothly. Through the transition to a proof-of-stake model, ‘The Merge’ will remove the need to mine Ethereum - which is both time and energy-intensive - to validate transactions and bring more scalability and efficiency to the network. Today, the Ethereum blockchain continues to be secured using the proof-of-work model whilst a separate network dedicated to scalability runs alongside using proof-of-stake. The Merge will bring the two together and create a new ‘Mainnet’ running on proof-of-stake - dubbed the Beacon Chain - that can run smart contracts whilst maintaining the full history and the current state of the Ethereum blockchain. How will 'The Merge' change Ethereum? Firstly, the move to a POS model via the Beacon Chain is speculated to reduce the energy usage from Ethereum by an estimated 99%. Many in the industry see the overcoming of this ‘excess energy’ stumbling block as the biggest upcoming change to the Ethereum blockchain. It challenges the hardline narrative that cryptocurrencies use too much energy when using a POW model, which has led to an outcry from regulators and crypto-outsiders looking to clamp down and curb its energy usage. The move to a PoS model could see energy usage on the Ethereum blockchain fall by an estimated 99% The Ethereum Foundation also claims that The Merge could solve Ethereum's scalability issues, which have hamstrung the blockchain’s attempts to build a more decentralised world. Currently, the Ethereum blockchain completes about thirty transactions per second. After the Merge, it’s expected that the number of transactions completed could rise tenfold and beyond. Additionally, the Merge is set to bring a deflationary model to the blockchain. Ethereum currently uses EIP-1559 to burn a programmed amount of ETH during each transaction made on the blockchain, meaning that the more transactions are completed, the more ETH is burnt daily. The change to a POS model also introduces lower emissions (the amount produced) of Ethereum, meaning that the amount of Ethereum produced per day could soon be outweighed by the amount burnt - making it a ‘net deflationary’ asset. On top of the burn mechanism and the deflationary model, more ETH will also be taken out of circulation with the introduction of Ethereum staking, which will use its native token - Ether (ETH) - to validate transactions on the blockchain. Currently, over 12.5 million Ethereum - which is close to 10% of the current circulating supply - from 70k depositors has already been committed to the staking contract, with more expected to be added when ‘The Merge’ is implemented. Will 'The Merge' reduce gas fees? Despite the blockchain’s move to a more sustainable, eco-friendly approach, the Merge won’t affect the periodically high transaction fees on Ethereum. The Merge only changes the consensus layer from POW to POS, which is expected to reduce the blockchain's energy usage by over 99% and grant better security for Ethereum. This means that the Merge makes no difference to users, as gas fees are determined by supply and demand on the blockchain. To put it simply, the transaction fee acts as a type of ‘energy’ on the blockchain, meaning that when there is a high demand on the network, fees are naturally higher as more ‘energy’ is being used to complete the transaction. When will 'The Merge' happen? The Merge is due to be implemented during the third quarter of 2022 according to the Ethereum Foundation. Vitalik Buterin, the founder of Ethereum, has recently revealed that if there are no problems with the testing before the launch, the merge “will happen in August”.Buterin added that “there’s always a risk of problems and delays”, proposing that both September and October are possible launch dates too. Tim Beiko, a member of the Ethereum Foundation, also revealed that The Merge is on track for a mid-September launch in a recent development meeting. Will ‘The Merge’ affect DeFi and NFTs? With the rise in popularity of DeFi platforms and the recent explosion of non-fungible tokens (NFTs) driving users in their masses to Ethereum, the blockchain has struggled to maintain a consistent level of stability in recent months. Users have been plagued by high transaction fees and slower speeds, which has seen some users move to alternative blockchains like Avalanche and Solana seeking a cheaper and faster alternative. Through the Merge, the blockchain will eventually become more scalable, and over time, be able to handle more network stress with better efficiency. Also, the amount of gas required to complete a transaction may reduce over time as more transactions can be completed faster - perhaps leading to a gradual reduction in fees for users. Both the scalability and higher throughput of transactions could also make purchasing and minting NFTs cheaper for users, alongside making often-costly interactions with DeFi platforms less expensive over time. The upcoming ‘Merge’ marks a milestone development in Ethereum’s rich blockchain history, and now looks set to assist the Ethereum Foundation in its mission of dampening existing fears over the blockchain's energy consumption and its ability to scale to match user demand. Sean Dickens is a cryptocurrency writer and analyst that brings rich experience in content creation and reporting within the industry, having worked freelance for an array of global clients and reporting on the latest news atCoin Rivet. Sean has alsofeaturedon NFT and Decentralised Finance panels as both a moderator and speaker to provide detailed insights and analysis on cryptocurrencies. This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.
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