Two days away from the Merge, last week’s Ethereum outflows across digital asset funds jumped to -$61.6 million, out of a total of $63 million. This is peculiar because the Merge is practically set in stone. Moreover, in the last three months, Ethereum (ETH) gained 60%, largely boosted by the Merge hype.
In this light, the recent outflows indicate investor anxiety as Ethereum transitions from proof-of-work (PoW) to proof-of-stake (PoS). Is there a reason for concern?
Bellatrix Update Hiccup the Likely Culprit for Heightened Concern
Last week, Ethereum developers activated a layer that allows validators on the new PoS Beacon Chain to receive data from the old Ethereum PoW chain, run by miners. This was the Bellatrix update, the last activation before the docking itself. Dubbed Paris, the docking will remove miners from its ecosystem and replace them with ~99% more energy-efficient validators.
In other words, the Paris upgrade will mark the completion of the Merge as the most ambitious undertaking in software history. Due to the complexity of syncing thousands of clients and terabytes of data, however, it is inevitable that bugs pop up.
Although the Bellatrix update was deemed successful, 5% of validators went offline during the activation. This resulted in a 9%, or 1 in 10, missed block rate, as reported by Gnosis co-founder Martin Köppelmann.
Block rate refers to the time frame validators need to verify transaction’s one block and add it to the blockchain, as an immutable public ledger. The increase from the typical 0.5% missed block rate to 9% is an 18x risk increase that cannot be ignored. However, at the time Bellatrix was activated, 25.6% of clients were not yet ready to sync up for the Merge.
As you can see, this percentage has since dropped to 15.3%, at press time. Moreover, some people had the “glass is half-full” outlook. Cyber security expert and EthHub co-founder, Anthony Sassano, noted that a 5% validator drop was actually “amazing”, all things considered.
There seems to be an agreement among Ethereum developers that not much can go wrong, which can’t be recovered from. After all, many hard forks have already been tested and completed for Bellatrix to be possible. The final one was completed three days ago, without any major issues.
Nonetheless, the Merge is a pioneering undertaking and should be treated as such. Binance had already suspended ETH and wETH deposits and withdrawals on September 6th, which will be in effect until the Merge is complete.
Cardano And Polygon Saw Positive But Minor Inflows
Compared to past periods of inflows and outflows, the last five weeks saw a small downward bump, totaling $99 million. While Ethereum 2.0 anxiety dominated last week’s outflows at $62 million, Bitcoin also saw some negative action at $13 million. Likewise, short Bitcoin investments increased by $10.6 million, once again demonstrating bearish sentiment.
As with previous weeks, Cardano and Polygon are the exceptions, with $0.4 million inflows each. This is not surprising. Cardano (ADA) jumped by +13% between September 8th and 10th, as it undergoes its own Vasil hard fork. Scheduled to be complete one week after the Merge is done, the Vasil upgrade should improve the network’s scalability and performance.
At the same time, Ethereum’s layer 2 scalability solution, Polygon (MATIC), is continuing to rack up business partnerships. So far, Polygon has been adopted by Yuga Labs, DraftKings (NASDAQ:DKNG), Stripe, Reddit, Walt Disney Company (NYSE:DIS), Meta Platforms (NASDAQ:META), and Starbucks (NASDAQ:SBUX) as the most recent partner. Of course, the success of Polygon ultimately depends on Ethereum.
Given that one is getting small inflows while the other is bleeding investments, it suggests that investors are hedging their bets, but not in the long run.