Ethereum has undergone a massive network upgrade called consolidation that proponents say will make transactions more energy efficient. After the consolidation, ether prices fell after a significant rally prior to the event.
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Ether rose this week to a nine-month high, ahead of a mainnet upgrade that some cryptocurrency enthusiasts say will make the digital currency a more profitable long-term investment.
The world’s second largest cryptocurrency is up about 6% over the past three days, crossing $1,900, while bitcoin is almost flat above that stretch.
Starting next Wednesday, an upgrade to the blockchain, dubbed Shabela, will allow ether holders to withdraw their assets. Up until this point, investors will have to use centralized exchanges like Coinbase or decentralized finance (DeFi) protocols like Lido, to essentially exchange closed-ended ether for a token of equivalent value.
The recent rally followed a similar pattern to previous waves of enthusiasm surrounding network updates. In September, Ethereum rallied ahead of a historic transition to a more energy-efficient method of securing the network, called Proof of Stake.
Ethereum once had an extensive network of miners across the planet running highly specialized computers that solved mathematical equations in order to validate transactions. After a so-called “merger” upgrade in September, Ethereum moved to the Proof of Stake system, replacing miners with validators. Instead of running large banks of computers, validators make use of the existing cache of ether as a way to verify transactions and mint new tokens.
“Ether itself becomes a productive asset,” said Danny Ryan, a researcher at the Ethereum Foundation, regarding the September upgrade. “It’s not something you might just speculate about, but something that can earn returns.”
In the post-consolidation era, ether has taken on some of the characteristics of a traditional financial asset, paying interest to its holders.
“This is probably the lowest risk return within the Ethereum ecosystem,” Ryan said, adding that return in other corners of DeFi includes smart contracts and other types of counterparty risk.
So far this year, ether has underperformed bitcoin, but recent gains have helped close the gap. Ether is up nearly 59% this year, against Bitcoin’s gain of 70% in 2023.
currently, More than 18 million ether tokens It is worth around $32.5 billion, which means that 15% of the total supply of ether is considered a locked asset.
While the upcoming upgrade will unlock much of this value, giving holders more control over their assets, there is some concern that issuing so many tokens will have a significant impact on the market. Even with capped withdrawals, ether could be worth nearly $2.4 billion on the open market, K33 Research he said in a note on Tuesday.
“Soon after the upgrade is completed, a large amount of ETH will be unlocked, and many people will also sell their ETH,” said Ilya Volkov, who runs a blockchain-based financial technology platform. Volkov said he is optimistic in the long run.
The ratio between open interest for ether selling options and demand reached its highest level since May on Tuesday, according to data provided by crypto data analytics and news firm The Block. This may indicate a buildup of bearish bets leading to a network upgrade.
According to research from Bernstein, of the 18 million ether tokens locked on the blockchain, roughly 70% are cryptocurrencies through protocols such as Lido, which creates a measure of liquidity for investors.
“Liquidity for 70% of pegged ETH is nothing new, they could do it anyway,” Bernstein wrote. The company described the remaining 30% of equity holders as “original believers,” and it is unlikely that they will exit their positions at this price.
Having the ability to deposit and withdraw tokens could encourage more investors to get involved in ether, and some analysts have said they expect a large influx of capital into the network once it is proven that the funds raised can be taken with relative ease.
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