Speaker 1: This is Bloomberg Crypto and Daily Bloomberg. I heard podcast
Speaker 1: and I'm Stacy Marie Ishmael, Managing editor of Crypto for
Speaker 1: Bloomberg News. It's Tuesday, August. For crypto enthusiasts, a big
Speaker 1: change is in the air, and it's not just the
Speaker 1: change of seasons. The merge is a phrase on everyone's lips.
Speaker 1: It would be the Ethereum blockchain's most ambitious software upgrade ever,
Speaker 1: coming after years of delays. This upgrade would represent a
Speaker 1: fundamental overhaul of how the Ethereum blockchain works, and would,
Speaker 1: if all goes according to this very ambitious plan, a
Speaker 1: major shift away from the current approach that's known as
Speaker 1: proof of work. In its place, Ethereum would adopt the
Speaker 1: proof of steak model, which proponents say is significantly more
Speaker 1: energy efficient than proof of work, but skeptics worry is
Speaker 1: less secure. Ether has sold about six since June as
Speaker 1: traders and developers alike positioned themselves for this big transition.
Speaker 1: So what does the merge mean for users? What are
Speaker 1: the risks associated with this upgrade? And why is it
Speaker 1: finally happening now after all these years. Bloomberg Crypto reposes
Speaker 1: Olga Carey, pretty much everybody in this system will be affected,
Speaker 1: and David Pan, the amount of money involved in this
Speaker 1: is very, very striking. Join me today to tackle these questions.
Speaker 1: Hello and welcome. So today we're just gonna I'm just
Speaker 1: gonna say it, We're gonna get a little bit nerdy,
Speaker 1: but no one who's listening should be worried. I've got
Speaker 1: two of the foremost professionals as it comes to reporting
Speaker 1: on Ethereum and the merge in various studios today. I
Speaker 1: think we're in like three different states right now, such
Speaker 1: as the power of audio. But Olga, I'm going to
Speaker 1: start with you. We've said the word of the merge
Speaker 1: several times on this on this podcast, we've mentioned that
Speaker 1: it relates to what is basically a huge software upgrade
Speaker 1: for the Ethereum blockchain. But when we talk about the merge,
Speaker 1: what are we actually talking about? So we are talking
Speaker 1: about the change over in the way transactions on Ethereum
Speaker 1: are ordered. So today, uh, this very powerful computers called
Speaker 1: miners essentially do the job. And with the merge, we're
Speaker 1: going to switch to a much more energy efiicient system
Speaker 1: using essentially wallets with staked coins. This wallets are called validators.
Speaker 1: The new system is called proof of steak, and essentially
Speaker 1: it's gonna reduce energy consumption of ethereum by which is huge.
Speaker 1: And uh, it's also gonna mean sort of a number
Speaker 1: of major shifts for the whole etherorum ecosystem. So there's
Speaker 1: a couple of things there that I want to dive
Speaker 1: more deeply into. And I'm going to start with the
Speaker 1: big macro, which is what you say, is the whole
Speaker 1: ethereum ecosystem. Well, who is in that ecosystem? You know,
Speaker 1: Folks might know for example that to like buy a
Speaker 1: certain n f T S you have to pay an
Speaker 1: ether But what are the other elements of this ecosystem
Speaker 1: that are going to be affected? Pretty much everybody in
Speaker 1: this system will be affected. We are gonna see validators,
Speaker 1: of course, who are going to be key to ordering transactions.
Speaker 1: We're going to see builders who are going to be
Speaker 1: essentially packaging transactions into blocks and h Essentially, this change
Speaker 1: could attract more developers and more investors to etheroryum because
Speaker 1: it's very importan for a lot of investors to invest
Speaker 1: in energy efficient projects. They want to comply with their
Speaker 1: e s G requirements and the same is true with
Speaker 1: a lot of developers who are environmentally conscious, and so
Speaker 1: it's believed that once Ethereum switches over to this new system,
Speaker 1: this could potentially lead to an influx of new investors,
Speaker 1: new developers, and just new users who will be to
Speaker 1: whom this this idea of an environmentally friendly Ethereum will
Speaker 1: appeal to. Got it? So? Right now, Ethereum is on
Speaker 1: something that you described as proof of work, which is
Speaker 1: the same system that Bitcoin is on. So, David, I'm
Speaker 1: just gonna ask you if you had to explain the
Speaker 1: difference between proof of work and proof of stake to
Speaker 1: somebody without using a crypto example, what would you say.
Speaker 1: I think, at the end of the day, it's a
Speaker 1: it's a software. So the blockchain Ethereum is a blockchain.
Speaker 1: A proof of work is one way to secure the network,
Speaker 1: and also, you know, to validate the transaction data on
Speaker 1: the digital ledger. And from proof of work to proof
Speaker 1: of steak, I would say, like, how exactly we secured
Speaker 1: the network validate the data on the blockchain. On the
Speaker 1: proof of work, we use computers. On the proof of steake,
Speaker 1: we use validators who are essentially, you know, the people
Speaker 1: who are holding Etherem in the note. Okay, so on
Speaker 1: proof of work on current ethereum blockchain, on Bitcoin, you
Speaker 1: David send a bitcoin to Olga, which you can't actually
Speaker 1: because you don't hold any but you know, different, different
Speaker 1: disclosure story. But in theory, you send a bitcoin to
Speaker 1: Olga because you just have twenty dollars lying around and
Speaker 1: for that transaction to kind of go through and be validated,
Speaker 1: there's a bunch of computers somewhere that are kind of
Speaker 1: processing the existence of that transaction and saying like, yes,
Speaker 1: this thing is valid. This has moved from you David
Speaker 1: to your wallet David to your wallet Bulga. And that's
Speaker 1: kind of like simplistically the proof of work conversation. Right
Speaker 1: there are like computers figuring out computationally that this thing,
Speaker 1: this transaction is valid. If you on a proof of
Speaker 1: steak blockchain move one ether from your wallet David to Olga.
Speaker 1: What is it that the the validators do exactly that's
Speaker 1: different from what the computers and bitcoin do. So the
Speaker 1: new softwaware, the updated software will randomly assign, you know,
Speaker 1: the task of validating this particular data to a specific
Speaker 1: group of Um validators. You know, people who are holding
Speaker 1: essentially people who are holding the ether cryptocurrency, and they
Speaker 1: will perform the task of validating the data in the
Speaker 1: servers that belonged to them. So that's one of the
Speaker 1: reasons why proof of steak could have higher speed transaction speed.
Speaker 1: It's because improved work. You have to update this data
Speaker 1: among millions of computers and they have to be in
Speaker 1: sync of the same data at the same time. That's
Speaker 1: why we call it decentralized proof of work mechanism. But
Speaker 1: like under proof a stake, it's like you have this
Speaker 1: like a selected group of validators who are validating the
Speaker 1: data on blockchain, which is faster and which is like
Speaker 1: easier to prove the transactions. How do you become a validator?
Speaker 1: I mean there are a couple of ways. Ideally you
Speaker 1: can stake at least a thirty two either tokens um
Speaker 1: you can operate as a note. But like as far
Speaker 1: as I know, a lot of these people do not
Speaker 1: have thirty two either, because that's a lot of money
Speaker 1: for average person. So people put their holdings into centralized
Speaker 1: exchanges like coin based and cracking, and they will stake
Speaker 1: the tokens for investors for the users, and the users
Speaker 1: can enjoy the yields, and the other major way is decentralized.
Speaker 1: The platforms were also providing staking services for either holders.
Speaker 1: The biggest the one it is called Little It's a
Speaker 1: protocol and investors can put their either into the protocol
Speaker 1: and and aren't yield from from it. So, Olga, I'm
Speaker 1: going to go back to you. What's about moving from
Speaker 1: proof of work to proof of steak leads to that
Speaker 1: supposed increase in energy efficiency. So today to mine etheryum,
Speaker 1: people use very powerful computers. When you move to proof
Speaker 1: of steak, you will be able to use essentially a
Speaker 1: laptop to be a validator on the network. Basically you
Speaker 1: don't need as much computing power and so that makes
Speaker 1: the whole system much more energy efficient. To be a
Speaker 1: minor you have to have a data center to be
Speaker 1: a validator, you can have like a MacBook exact pretty much, yea,
Speaker 1: pretty much. Yeah, that's a pretty significant jump. And you know,
Speaker 1: oor go one of the you know, we've we sort
Speaker 1: of talked about the mechanics here, but I want to
Speaker 1: go back to the idea of this being a gigantic
Speaker 1: software upgrade. I don't know if any of you have
Speaker 1: ever like upgraded your computer or your phone, and then
Speaker 1: suddenly nothing works anymore, and it's just really frustrating, and
Speaker 1: you're like, why is this software upgrade going to go
Speaker 1: completely smoothly? Like is everything just gonna be totally fine?
Speaker 1: You know? That's the funny thing. I think a lot
Speaker 1: of people today expect that it's gonna just be a
Speaker 1: switch over. One second it's one system, another second it's
Speaker 1: another system. Nobody even noticed anything, and ideally this is
Speaker 1: exactly what's going to happen. Nobody will notice the thing.
Speaker 1: But uh, if if we go by past experience, chances
Speaker 1: are things are not gonna go as smoothly as that.
Speaker 1: So if we'll look at ethereums sixteen major staftware upgrade,
Speaker 1: back then, there were literally weak sort of an uh
Speaker 1: puple of months of problems that arose from that switch.
Speaker 1: The main issue was replay attacks, because when a blockchain
Speaker 1: upgrades to new software, very often there is a contingent
Speaker 1: of people who likes the system just the way it
Speaker 1: was and they don't want to upgrade and they don't
Speaker 1: want to switch to a new system, and so they
Speaker 1: essentially copy the software and uh start running what is
Speaker 1: called a fork. So essentially, it's it's the same Ethereum
Speaker 1: with the same coins, with the same applications, but it's
Speaker 1: going to be using say proof of work instead of
Speaker 1: proof of stake this time. And what can happen in
Speaker 1: a replay attack is that a hacker can use users
Speaker 1: transaction on one of those chains that that look very
Speaker 1: similar to each other and replay it on on the
Speaker 1: other chain, and the user can lose coins. This was
Speaker 1: rampant in Ethereum implemented some protections against this since then,
Speaker 1: but we could still still see some replay attack is
Speaker 1: if some of the applications hadn't sort of implemented the
Speaker 1: protections properly. And in addition to that, we could also
Speaker 1: see some other glitches which came up during the last
Speaker 1: test before the merge was announced. It was called the
Speaker 1: Girly merge test. And during that test, some of the
Speaker 1: validator's nodes sort of didn't quite sink properly, and there
Speaker 1: were several blocks that sort of said that I am
Speaker 1: the block when the merge happened, So so very curious.
Speaker 1: Strange things happened basically during the last test before the merge,
Speaker 1: and the same kind of strange things could occur during
Speaker 1: the merge, and in the most sort of extreme scenario,
Speaker 1: we could potentially see the need for the network to
Speaker 1: be paused and for some blocks to be redone. So
Speaker 1: there could be a lot of issues that come up,
Speaker 1: and in fact, a lot of experts say, you know,
Speaker 1: if you're a user trying to do as little as
Speaker 1: possible around the merge, don't do anything if you don't
Speaker 1: need to, and just be very very careful. Up next,
Speaker 1: Bloomberg reporters Olga Karif and David pan unpacked some of
Speaker 1: the risks involved in the merge and what could go wrong. So,
Speaker 1: if I'm hearing you correctly, a replay attack is like
Speaker 1: the clue is in the name. So let's let's say
Speaker 1: I am on the one version I'm on, like the
Speaker 1: upgraded software, and I sell an n f T, or
Speaker 1: I buy something or do some kind of defied transaction.
Speaker 1: Somebody can look at my transaction history and effectively like
Speaker 1: spoof me on the fork and make it look like
Speaker 1: I'm selling that n f T again, or you know,
Speaker 1: I'm doing that transaction again. So as a as a
Speaker 1: user and potentially exposed to like twice as much financial
Speaker 1: risk than I was when I did it the first time.
Speaker 1: It's like if somebody clones your credit card and then
Speaker 1: you know, it's just like repeating everything that you've done previously,
Speaker 1: other than like not doing anything while while this upgrade
Speaker 1: is happening. What do you do to protect yourself if
Speaker 1: you're kind of a user and you're worried about this.
Speaker 1: One idea that people suggested was that, okay, if you
Speaker 1: want to do something on the fork chain, before you
Speaker 1: do anything, just move all your coins into a different
Speaker 1: wallet so that the wallet that is assigned to you
Speaker 1: on the fork chain does not look the same as
Speaker 1: the wallet that you now have, and then every player
Speaker 1: attack cannot really happen. So that's that's one idea, But
Speaker 1: a lot of people just caution people to just stay
Speaker 1: away from from from doing anything if you can. Neither
Speaker 1: of those sounds like the best possible outcome for for
Speaker 1: an end user. So what is it supposed to happen.
Speaker 1: There's a clock tracking this, and the timing could still change,
Speaker 1: but for right now, it's supposed to be September fifteen.
Speaker 1: But the thing is the timing will depend on how
Speaker 1: much computing power is supporting ethereum, how much minor support
Speaker 1: it has. It is possible that really close to the
Speaker 1: time of the merge, a bunch of miners will decide
Speaker 1: to sell their equipment or switch to supporting another chain,
Speaker 1: and all of a sudden, Ethereum loses a bunch of
Speaker 1: minor support and then the merge could be pulled forward.
Speaker 1: So the timing is still very much in flux, but
Speaker 1: but it's would hopefully happen in the next few weeks.
Speaker 1: There were expectations that the march would happen years ago
Speaker 1: and even you know this June and it didn't. But
Speaker 1: but this is the first time when it's actually bench caeduled,
Speaker 1: officially scheduled. So, David, who's going to make money on this?
Speaker 1: And who's gonna lose money on this? So the biggest
Speaker 1: winners are some of these centralized exchanges who are facilitating staking.
Speaker 1: They are charging a fee by providing staking services to
Speaker 1: their users. Most of the exchanges they don't have their
Speaker 1: own staking infrastructure, which you know where like you can
Speaker 1: operate the software to a stake the tokens directly. Coin
Speaker 1: base is is a good example. It doesn't have the
Speaker 1: staking infrastructure, but like it provides very attractive yields to
Speaker 1: its users through the Staking programs. Its source of staking
Speaker 1: infrastructure from a third party company called kim k I
Speaker 1: L and they are they're the winners after the merge
Speaker 1: and then of course cracking for instance, they actually bought
Speaker 1: Staking infrastructure provider about a year and a half ago,
Speaker 1: so they also have their hand in that business as well.
Speaker 1: The amount of money involved in this is very, very striking.
Speaker 1: One analysts expected that there there's going to be over
Speaker 1: one hundred and forty billion dollars worth of the tokens
Speaker 1: being staked in the protocol because if we look at
Speaker 1: the other major proof of state networks like Salana and Cardano,
Speaker 1: they have a ratio of anywhere between six of the
Speaker 1: total supply being staked in their protocol were like in
Speaker 1: the Staking programs. One thing that occurs to me that
Speaker 1: we should probably define is just what staking is sure
Speaker 1: so so, Staking is essentially using your coins to order
Speaker 1: transactions on the network. And what's cool about staking is
Speaker 1: that it's a very good way for the network to
Speaker 1: keep tabs on validators that order transactions and make and
Speaker 1: and keep them honest essentially, because if a steaker is
Speaker 1: doing something bad for the network is not being honest.
Speaker 1: It's not verifye you know, or ordering transactions correctly, then
Speaker 1: that validator can potentially lose its steak. It's coins could
Speaker 1: be taken away. And that's a very effective way of
Speaker 1: making sure that validators don't do something they shouldn't. For example,
Speaker 1: you know, attack the network, try to to push through
Speaker 1: a transaction using the same coin twice, that sort of thing.
Speaker 1: Because one of the insensives that we didn't describe in
Speaker 1: terms of staking is the fact that if you as
Speaker 1: a normal person, you know, like stakes your crypto on
Speaker 1: and exchange, you get a yield on it. Right, So
Speaker 1: if you like on the Cracking website for example, um,
Speaker 1: they're advertising as of mid August or up to yearly
Speaker 1: on your up too for as we this word that
Speaker 1: we've been using for like staking your crypto on on
Speaker 1: these exchanges. So there are lots of different incentives at
Speaker 1: play here. Well, we will be watching it unfold, and
Speaker 1: we've been writing about how it unfolds, and we'll be
Speaker 1: talking about how it unfolds on the podcast, so you know,
Speaker 1: I'm sure we'll I'll be talking to both of you
Speaker 1: again in the coming weeks. Thank you, thank you, thank you.
Speaker 1: You can find more of Olga and David's reporting on
Speaker 1: the Bloomberg terminal on Bloomberg dot com or follow them
Speaker 1: on Twitter. Olga is at Olga Karif that's k H
Speaker 1: A R I F. And David is at David Pan
Speaker 1: Underscore one. On the next episode of Bloomberg Crypto, We're
Speaker 1: gonna get into stable coins, and into one of them
Speaker 1: in particular. Tether is one of the largest and most
Speaker 1: liquid digital assets trading today, and that market influence has
Speaker 1: attracted both regulatory scrutiny and investors skepticism. We'll discuss Tether's
Speaker 1: late just disclosures about its assets and what the market
Speaker 1: is expecting next m This is Bloomberg Crypto, a daily
Speaker 1: podcast from Bloomberg and I Heart Radio. For more shows
Speaker 1: from I Heart Radio, visit the I Heart Radio app,
Speaker 1: Apple Podcasts, or wherever you get your podcasts. Send us
Speaker 1: your comments, questions, or suggestions for the show to Crypto
Speaker 1: at Bloomberg dot net or find us on Twitter. We're
Speaker 1: at Crypto. The supervising producer of Bloomberg Crypto is Vicky Verglina.
Speaker 1: Our senior producer is Janet Babin. Our producer is Sharon Barriro.
Speaker 1: Associate producer is Ty Butler desta wonder at is our engineer.
Speaker 1: Original music by Leo Sidran. I'm Stacy Marie schmal We'll
Speaker 1: be back tomorrow.