Impressive, thanks for the analysis
Patrick, you're a legend.
Ethereum isn't ready yet !!!
While Bitcoin has been making headlines, Ethereum has been making progress. Could the world’s second largest cryptocurrency by market cap be the first to deliver on the promise of the blockchain?
Forget about getting a word in, it was virtually impossible to even get a thought in as delegates from the various tribes bickered noisily at the table, each shouting above the other.
No, this wasn’t the United Nations General Assembly congregating in New York City, or a gathering of tribal leaders of the Maasai on the vast plains of Tanzania.
Instead, this was a gathering of the Saunders clan at a nondescript brownstone in Brooklyn, New York, arguing with each other over whose turn it was to host Thanksgiving Dinner this year — a responsibility that everyone and no one wanted.
As Bernard Saunders, the patriarch of the family sat at his oak dining table in silence, his wife of fifty years, Marjorie was trying her best to calm her brood.
If we can’t even have consensus on where to host Thanksgiving, what could we possibly hope to achieve when it comes to the world’s second largest cryptocurrency by market cap, Ethereum.
Yet by some miracle that seems to be what Ethereum is inching ever closer towards.
One of the trickiest bits about cryptocurrencies and the blockchain technology that they’re built atop is the need to establish and maintain consensus for any major changes to the network.
Because changes to a blockchain must pass through a consensus mechanism, getting core developers to agree on such changes can and do result in ideologically-charged differences, which can lead to a hard fork of the original blockchain, as was seen by the creation of Bitcoin Cash and Bitcoin SV, offspring of Bitcoin.
Yet somehow, the world’s most actively used blockchain is inching closer to the stuff of dreams, a consensus to move Ethereum from a “proof-of-work” model of securing the Ethereum blockchain, to a “proof-of-stake.”
That shift would dramatically increase the ability of Ethereum to process transactions, but could also push Ether’s price higher.
Since its inception in 2015, Ethereum has relied on the same energy-intensive and capacity-limited method as Bitcoin to secure its blockchain, with computers on its network having to agree on the current state of the digital ledger to secure the Ethereum blockchain.
But that hasn’t stopped Ethereum developers from pushing for change, working for years (often without remuneration) to transition to a system that instead uses a pooled amount of Ether (the cryptocurrency that runs on Ethereum) to secure the network, and by doing so, allow it to reach consensus that much faster.
This method of securing the blockchain is also known as “proof-of-stake,” and for the Ethereum network upgrade to pass, some 524,288 Ether needed to be pledged to a deposit contract, with these changes kicking in automatically next month.
And somehow, against all odds, in a cryptocurrency minute, the required amounts of Ether were staked — proof of stake will soon be reality.
While Ethereum has proved that even real world assets such as gold, have the potential to be digitalized and baked into the blockchain, it needs to serve up global volume to truly scale up.
Demand from innovations in decentralized finance, also known as DeFi and the selection of stablecoins (cryptocurrencies backed by dollars) built on Ethereum, have put pressure on the network to keep transaction times short and fees low.
Ethereum’s potential to create an alternative financial sector where trusted centralized intermediaries are eliminated, has seen demand for use of its blockchain soar.
But that has also led to periods of exorbitant transaction fees, the most recent of which was during the DeFi craze over the past summer and which saw GAS prices (Ether used to fund transfers on the Ethereum blockchain) soar.
DeFi is the answer to what happens when computer code takes the place of bankers.
The product of over a decade of experimentation with cryptocurrencies, DeFi touts the ability to manage money flows more efficiently and more cheaply, creating novel ways for savers to earn returns on their holdings.
Using decentralized applications called dApps (there is no shortage of idiosyncratic terms when it comes to cryptocurrencies), financial functions such as lending, borrowing and trading are all performed using smart contracts on the Ethereum blockchain.
dApps allow anyone to lend or borrow funds, go long or short on a range of assets, trade cryptocurrencies and earn interest in savings-like account, governed by rules baked into smart contracts.
Typically, when a deposit is made to a traditional bank, what the depositor doesn’t realize is that the deposit is in effect a loan to the bank, which is why the bank pays out interest.
With DeFi, yield farming typically involves lending cryptocurrencies in return for interest and sometimes fees, but more often than not, the returns are inflated by the platforms paying out those returns in their own proprietary tokens, with the real payoff in those tokens appreciating rapidly.
Typically someone with cryptocurrency would lend through a dApp such as Compound which then lends the cryptocurrency to another user who often borrows for trading or other more high-income generating activities.
Interest rates vary with demand but every additional day’s participation by providing liquidity on a dApp comes with bonus tokens from the platform, on top of interest and other fees.
But as with so many things in the cryptosphere, early iterations of DeFi products were rife with speculation and there was no shortage of fraud.
Promised annual rates of return in the 5-digits were also a product of that speculation and the DeFi bubble burst almost as quickly as it inflated.
That hasn’t dampened the promise of Ethereum however.
Because transactions on Ethereum can be processed automatically by programs known as smart contracts, which are immutable once etched into the blockchain, back office transactions for a wide variety of industries, including banking and trade finance, can be streamlined, potentially saving millions.
But the slow nature of the Ethereum network, a limitation of all current “proof-of-work” blockchains, has held back more widespread adoption.
A shift to “proof-of-stake” could change that.
But changing a foundational principle of any blockchain, especially one as heavily utilized as Ethereum, is like to trying to change the tires on a car while it’s barreling down the freeway at over a hundred miles an hour.
And considering how difficult it is to upgrade a technology that is already so heavily in use and that requires a consensus on the part of its users for the upgrade, that the needed amount of Ether has been met to shift to “proof-of-stake” is no mean feat.
The Ethereum upgrade to “proof-of-stake” will see users who staked Ether to process transactions, earn rewards on their stakes, and will see the Ethereum network split into 64 separate blockchains so that transactions can be processed more quickly.
That potential to increase the amount of throughput on the Ethereum blockchain has contributed in no small part to the price of Ether quadrupling since the start of this year.
And as more Ether gets staked to secure the Ethereum blockchain, the amount of Ether available for trading gets reduced, which should boost prices further.
A reduced floating supply of Ether, coupled with increased transaction capacity and speeds on the Ethereum blockchain, could also see investors spill over into other cryptocurrencies that ride atop of the Ethereum blockchain, referred to as “ERC20 tokens” — cryptocurrencies compatible with the Ethereum blockchain.
As the 2016 U.S. Presidential Elections demonstrated, apathy can be as dangerous for democracy as it can be for decentralization.
That there are sufficient numbers of Ether holders who are not completely apathetic and who may genuinely be interested to see the Ethereum blockchain develop and scale further is more than encouraging, is paradigm-shifting.
Despite the decentralization of the blockchain, the voices around the dining table of Ethereum are surprisingly speaking in one accord — perhaps consensus is not as elusive as imagined.
Impressive, thanks for the analysis
Patrick, you're a legend.
Ethereum isn't ready yet !!!
Patrick is an innovative entrepreneur and a lawyer passionate about cryptocurrencies and the business world. He is the CEO of Novum Global Technologies, a cryptocurrency quantitative trading firm. He understands the business concerns of founders and business people helping them to utilise the legal framework to structure their companies to take advantage of emerging technologies such as the blockchain in order to reach greater heights. His passion for travel, marketing and brand building has led him across careers and continents. He read law at the National University of Singapore and graduated with Honors in the Upper Division and joined one of Singapore’s top law firms, Allen & Gledhill where he was called to the Singapore Bar as an Advocate & Solicitor in 2005. He created Purer Skin, a skincare and inner beauty company which melds the traditional wisdom of ancient Asian ingredients such as Bird's Nest with modern technology. In 2010, his partner and himself successfully raised $589,000 from the National Research Foundation of Singapore under the Prime Minister’s Office. He has played a key role in the growth of Purer Skin from 11 retail points in Singapore to over 755 retail points in Singapore and 2 overseas in less than a year. He taught himself graphic design, coding, website design and video editing to create the Purer Skin brand and finished his training at a leading Digital Media Company.
Leave your comments
Post comment as a guest