Ethereum

the transformation that could see it overtake bitcoin

the transformation that could see it overtake bitcoin

The world’s second most valuable cryptocurrency, ether, hit all-time highs in price ahead of a major upgrade to its underlying platform, ethereum. Ether is currently worth a little less than US$500 billion (£363 billion). That’s still just under half of the largest cryptocurrency, bitcoin.


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But could this upgrade, a vital step towards a much greener and faster version of the current system, put Ethereum on the path to becoming the dominant platform on the internet and making Ether number one?

First, it is important to understand the difference between bitcoin and ethereum. Bitcoin is a system for people to send value to each other without the need for banks. It is built on a technology known as blockchains, which are online ledgers whose transactions are verified and recorded by a decentralized network of computers called validators.

These validators are incentivized for their work by receiving newly minted bitcoins as a reward, in what is known as “mining”. To make this more attractive, bitcoin is relatively rare: only around 18 million coins exist and the protocol is such that there can never be more than 21 million.

Ether vs bitcoin by total value (market cap)

Key: bitcoin = orange, ether = blue.
Commercial view

Ether works the same way as Bitcoin, but Ethereum is different. It’s a global software platform hostless, on which developers build thousands of blockchain-based applications.

This means that these applications can all work without being controlled by a company. Examples include cryptocurrency exchanges, insurance systemsand new types of games.

At the heart of the platform is the idea of ​​smart contracts, which are automated agreements that ensure money and assets change hands when certain conditions are met. All transactions on the platform ultimately use ether, and the success of the platform is why ether has been the second largest cryptocurrency after bitcoin for the past few years. The fact that ether powers the platform – even being called gas costs – gives it a utility and an intrinsic value that bitcoin does not have.

Why ethereum 2.0

Ethereum has several major issues, however. The first is that gasoline costs have become very expensive over the past two years because the network has become so popular and therefore very crowded.

Validators prioritize users who are willing to pay the highest fees for their transactions. For example, the average transaction at the time of writing on crypto exchange Uniswap costs about 44 USD in gas costs.

Bitcoin has comparable problems with congestion, which its developers try to solve by creating applications such as Lightning in addition that offer faster transaction speeds.

The second problem for Ethereum is that as it has become more popular, the amount of computing power used by validators has exploded. This is the same issue that has brought bitcoin a lot of negative publicity, as it uses a lot of electricity.

Bitcoin is currently wielding as much power as the whole of the Philippines, although its supporters to pretend that much of this energy would otherwise be wasted – for example, oil rigs burn natural gas because it is not profitable to sell it. Proponents also point out that the grid is moving towards using much more renewable energy over time.

Either way, the eventual creation of an ethereum 2.0 will fix these issues by moving the platform’s validation system from “proof of workto “proof of stake”. Without going into too many details, proof-of-work is a protocol in which validators all attempt to solve complex equations to prove that each proposed transaction is valid. With proof-of-stake, there is no need for all validators to perform this energy-intensive work, as the system chooses one at random to confirm each transaction.

Many in the bitcoin community are against Proof of Stake because it gives the biggest validators the most power, potentially allowing them to corrupt the validation system if they can gain control of more than half of the network. Ethereum proponents counter that proof-of-stake has built-in checks and balances that would prevent this from happening.

In both cases, ethereum 2.0 promises to reduce the platform’s power consumption by 99.9%, making it much more sustainable. It should also solve the gas charge issue by increasing the price of the platform processing capacity from 30 transactions per second to potentially 100,000, while enabling more sophisticated smart contracts than before.

How’s it going

The transition to ethereum 2.0 has been slow, riddled with protracted technical issues for more than two years. For the past few months, the new proof-of-stake blockchain has been running in a test format in parallel with the existing system, allowing developers to prepare it for a merger in 2022.

The upcoming update is basically a warm up for this fusion. Known as Altair, it introduces many technical changes designed to keep validators honest and make the system more decentralized. Assuming this goes as planned, all eyes will be on merging, and then later on another change known as “sharding” that will dramatically increase the system’s throughput.

Admittedly, the price of Ether was high before the Altair upgrade. Bitcoin’s recent surge to all-time highs has helped elevate the entire crypto market. But some of the price movement in ether likely reflects people betting that the upgrade will succeed, while the rest comes from speculators switching bitcoin and new funds entering the space.

Ether vs. “eth killers” by total value

Chart showing the market capitalization of ether and eth killers
SOL=solana (green), DOT=polkadot (yellow), ADA=cardano (orange).
Commercial view

Looking ahead to the merger of the two Ethereum blockchains, it will be interesting to see how all of this affects the price of Ether compared to the so-called “eth killers”. It is rival platforms like cardano and solana that have been very popular in recent months in part due to ethereum fee issues.

But ultimately, the question is what this will mean for bitcoin. Bitcoiners will continue to argue that their protocol is more decentralized than proof-of-stake, and they have the advantage of being the brand of crypto that investors are most comfortable risking their money with.

The question is whether these benefits are outweighed by Ethereum 2.0’s greener credentials and the fact that it can handle more transactions. Bitcoin is currently worth about twice as much as Ether, but talks back and forth about a “rollover” where Ether overtakes it. Could this happen in 2022? With bitcoin hegemony in play, it will be fascinating to find out.