It’s been delayed for so long it’s become a meme, but the Merge—Ethereum’s shift away from energy-intensive mining to a different system for determining which transactions are valid called proof of stake—is finally on track to take place within the next 24 hours. 

Billed as one of the most important events in crypto history since the first Bitcoin block was mined, the Merge has massive implications for blockchain technology’s ability to scale. There’s also a lot of money riding on it—and a lot of risk if something goes wrong. Here’s what you need to know.

What is the Merge? Ethereum is a technology for digital money and applications. Invented by Russian-Canadian Vitalik Buterin, it is the second largest blockchain in the world by market capitalization, behind only Bitcoin. While Bitcoin’s principal aim is to function as money, Ethereum launched in 2015 with a broader goal of becoming the “world computer,” eliminating the need to trust a single company, person or government to keep massive amounts of assets and data safe and secure. Today, Ethereum is the blockchain of choice for crypto’s most popular applications, including DeFi, or decentralized finance, and NFTs—it powered the celebrity-fuelled rise of the Bored Ape Yacht Club, Beeple’s landmark US$69-million NFT art sale and many other major crypto headlines from the turbulent past year and a half.

The crypto sector ballooned to a US$3-trillion market capitalization last year, but even at its peak, it never really broke into the mainstream. Ethereum’s fees are notoriously high, making simple transactions like buying and selling NFTs too expensive for some. Hacks, thefts and bugs are common. Institutions remain wary of regulatory and other risks. And Bitcoin and Ethereum’s massive energy consumption has become a major public relations problem and a turnoff for increasingly ESG-focused investors.

The Merge doesn’t solve all of these problems, but it’s a start. Notably, the Ethereum Foundation estimates the network will use 99.95 per cent less energy once it’s complete.

What Canadian companies stand to profit? Toronto-based Ether Capital and Figment are making some of the biggest bets on the Merge in the world.

The proof-of-stake system Ethereum is moving to requires people to “stake” significant amounts of the protocol’s native cryptocurrency Ether, agreeing to lock it up for a period of time and participate in the network’s security and operations in exchange for rewards. It’s been possible to stake Ether since December 2020. Those who do so are putting significant faith in Ethereum’s developers to pull off the Merge and a future upgrade called Shanghai, expected six to 12 months from now. Until then, they can’t withdraw their Ether, or the rewards it accrues.

Ether Capital, which trades on Canada’s NEO exchange and invests in Ether and other assets that support the Ethereum ecosystem, started staking in 2020. The company has since staked a total of more than 20,000 Ether—currently worth about US$33 million, about half of the amount the company owns. CEO Brian Mosoff said the company decided staking half and keeping the other half liquid struck a good balance between supporting the protocol and signaling confidence in the Merge while protecting shareholders from risk.

“Over time, we will stake more,” he told The Logic. “This is a marathon, not a 100-metre dash.”

Figment, which in December 2021 raised a US$110-million Series C at a US$1.4 billion valuation, with backers including lead investor Thoma Bravo, Morgan Stanley’s Counterpoint Global and Binance Labs, helps clients stake tokens on a variety of proof-of-stake protocols, providing infrastructure and other services while allowing the token owners to keep control of their assets. Marketing director Robert Ellison told The Logic Figment has been referring to September as “Eth month.”

“Being one of the largest managers of Ethereum on the network, it’s very important to us,” Ellison said. “We always knew it was going to happen. It was just a matter of being patient.”

Which Canadian companies might lose out? Vancouver-based Hive Blockchain Technologies and Toronto’s Hut 8 Mining both mine Ether, meaning they use computers to generate random results, some of which earn them the right to add to Ethereum’s official record of transactions. In return, they collect Ether and transaction fees. It’s very energy-intensive for miners to generate enough guesses to be statistically likely to earn that right, a process designed to make it more expensive to cheat the system than to act in good faith. After the Merge, miners will no longer play a role in Ethereum, bringing that revenue stream to an end for Hive and Hut 8.

In July 2021—when the Merge was supposed to be about six months away—Hive announced plans to increase its Ethereum mining capacity. “​​The company is of the opinion that Ethereum 2.0 proof of stake will take at least another two years before Ethereum mining could become financially unattractive,” Hive executive chair Frank Holmes said in a release at the time. Hive, which trades on the TSX Venture and Nasdaq Capital Market exchanges and has seen its share price drop from a high of $29.95 in November 2021 to just $5.99 at Tuesday’s close, did not respond to a request for comment.

Hut 8, which trades on the Toronto Stock Exchange and has also seen a large drop in share price from $19.80 in November to $2.69 as of Tuesday, made a similar bet against the Merge in March 2021. The company bought US$30 million worth of equipment to mine Ethereum and other non-Bitcoin cryptocurrencies. In an email, CEO Jaime Leverton said the company recently moved 180 pieces of the equipment to its data centre in Kelowna, B.C., where it will be able to “pivot on demand” to providing artificial intelligence, machine learning or visual effects rendering services for clients. Hut 8 may also mine “the next most profitable proof-of-work digital asset,” she said. In a release last week, Hive said it’s also looking at a few different options for its Ethereum mining equipment, including mining other coins or using them for things like cloud computing and artificial intelligence. The pieces of equipment have “paid for themselves many times over,” the release said.

What’s next? Mosoff believes the switch to proof of stake could pave the way for Ethereum to eventually become the settlement layer for the traditional finance system. First, however, the Merge needs to happen flawlessly. Often compared to swapping out the engine in a plane while flying it, there’s a lot that could go wrong. “This is a US$200 billion protocol, with all the most important applications and activity taking place on it,” Mosoff said. “There’s no room for error.”

Mosoff said he’s also hoping more institutions will embrace Ethereum after the Merge, attracted by the yield they can generate by staking. The switch to proof of stake also comes with new legal considerations for investors, however. Some experts have argued Ether will meet the legal test for being considered a security after the Merge, which would put it under the jurisdiction of securities regulators and subject its trade to stringent requirements.

Jonathan Ip, a lawyer who advises blockchain and cryptocurrency companies, said this hypothetical may eventually be put to the legal test in Canada. For now, however, he said securities regulators appear to be more focused on getting cryptocurrency-trading platforms and other businesses in the sector to register with them. “It’ll be interesting to see if anyone tries to argue that, but my view is it’s probably not going to be a high priority,” he said.

There are a lot of unknowns, but the countdown to the Merge is also generating a lot of excitement, especially for people in the industry.

“I’ve crossed my toes, eyes, feet, arms,” Mosoff said. “We’re all going to be watching it. This is going to be one of the most important moments in crypto history.”