The Merge #2: Anthony Sassano and Stani Kulechov
Ethereum's pathway to mainstream adoption and the impact of the Merge
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Read time: ~5 minutes
The Merge is an 8-part series run by the ssv network, to teach people everything they need to know about one of the biggest upcoming events for the Ethereum blockchain.
This is a summary of Part #2, in which Anthony Sassano speaks to Stani Kulechov, the founder of AAVE.
In case you missed it, here’s the summary of Part 1.
We’ll cover:
Ethereum’s path to mainstream adoption
How the Merge will impact users
The potential of Ethereum Layer 2s
Building through the bear market
1/ The path to mainstream adoption
Stani is someone who thinks a lot about how crypto will get mainstream adoption. He’s excited about The Merge and Ethereum’s transition to proof-of-stake because it puts Ethereum on a pathway to enabling that.
Firstly, it’ll be easier for anyone to become a validator. Using capital to secure a network with a proof-of-stake consensus mechanism makes it more accessible for anyone to become a validator of the network, compared to needing sophisticated mining facilities & technical knowledge with proof-of-work.
More importantly, there’ll be a 99%+ reduction in Ethereum’s ecological footprint post-Merge. Even though people can theoretically know that proof-of-stake solves the environmental problem of proof-of-work, Stani believes that being able to progress into a state where the transition is completed, and where Ethereum’s environmental impact is no longer an issue will significantly help with mainstream adoption. He believes it’ll remove a huge barrier for onboarding new users & developers.
Stani: With the applications we’re building, a lot of the users that are coming in are always thinking about the green aspect… From a developer perspective, having the greener blockchain is a really, really big upside. It’ll drive more developers.
2/ The impact of the Merge
Anthony and Stani discussed some of the impacts of the Merge.
Firstly, block times will slightly decrease from 13 seconds to 12 seconds. However, this won’t have any material impact on transaction times for users.
Secondly, Ethereum will most likely become more decentralised, given it’ll be easier for anyone to become a validator of the network by simply staking ETH. However, it’s worth nothing that there’s been a rise of staking pools, creating user-friendly ways to stake ETH. There’s a risk that these staking pools grow too large in comparison to independent validators, which would compromise Ethereum’s level of decentralisation. This could be problematic because one of the core value propositions of Ethereum is decentralisation & security.
Lastly, stETH will be one step closer to being redeemable for ETH on a 1:1 basis. For context, users can currently stake their ETH on the Beacon Chain, but they have to do so in multiples of 32 ETH, which is locked up until withdrawals are enabled 6-12 months post-Merge. Because this created a large barrier to entry, liquid staking protocols like Lido Finance emerged.
With Lido, users can stake any amount of ETH and rather than having their ETH locked up, they receive a token representing their staked position. Users stake ETH, and Lido gives them staked ETH, or stETH, in return. stETH can be swapped back to ETH on a decentralised exchange, or used as per normal in DeFi, e.g. as collateral for loans or to provide liquidity.
There were some concerns within the crypto community that the value of stETH had “de-pegged” from ETH, e.g. at the time of writing, 1 stETH can be traded on decentralised exchanged for ~0.968 ETH instead of 1 ETH. However, Stani clarifies that this isn’t actually an issue, and in fact makes sense given there’s still a lot of time before stETH can be redeemed for ETH. Regardless of the stETH/ETH exchange rate, when the time comes, 1 stETH will be redeemable for 1 ETH.
His advice?
Stani: If you’re coming into the ETH ecosystem, it’s actually more beneficial to buy stETH. That way you have a bigger upside when you later convert it to ETH.
As you can see, the Merge has fairly limited impacts on the experience of using Etherum. However, if we take a peek beyond the Merge, we’ll start to see an even clearer pathway towards mainstream adoption for Ethereum.
3/ The potential of Layer 2s
For mainstream adoption to happen, Stani believes we need to scale the Ethereum network to a point where transactions are happening instantly and users don’t have to worry about transaction fees. With scale, he expects we’ll see:
blockchain-based payment rails matching the scale & speed of Visa and MasterCard
the creation of new DeFi protocols which require fast movements of capital, like the trading of interest rates & derivatives
mainstream usage of decentralised social networks, which will empower users to own their own content & data
This can all be possible through the use of Layer 2 blockchains.
In short, Layer 2’s are extensions of the Ethereum blockchain which will scale the capacity of the Ethereum network. They move the processing of transactions off Ethereum (enabling scaling), but still submit transaction data in bundles back on Ethereum (maintaining security).
Stani: It just opens a completely new way of thinking of scalability while still using the security that comes from the Ethereum network.
Given transactions still need to be submitted on Ethereum, one important step for Layer 2s is to reduce the cost of storing data on Ethereum; a change which may be in scope for the first Ethereum upgrade post-merge, called Shanghai.
4/ Building through the bear market
Unrelated to the Merge, Anthony and Stani also discussed the current state of the market. Stani was around for the 2018 crypto bear markets, but this time, he’s not as worried. Back then, he says the space was “pretty much a desert”. Now, he sees so many big ecosystems and so much utility.
He’s personally excited to see what people end up building through the bear market:
Stani: I’m super excited to see people building through a bear market. It’s one of the hardest times to build. You might question yourself, your product, your abilities, your market timing and everything else on top of that. It feels like everything is falling apart but at the same time there’s less noise as well.