Business Maverick

AFTER THE BELL

Live long and prosper, Ethereum

Live long and prosper, Ethereum
(Photo: Unsplash)

Why is it that everything to do with crypto has to sound like something from science fiction? We have just had the Merge. And that is neither a new beaming-up technique from Star Trek nor a new application of the Force from Star Wars.

The cynics among us might say that everything in crypto sounds like science fiction because, at its root, crypto is science fiction. The science part is the tech, the fiction part is the utility. With bitcoin and ethereum both down by half over the past year, the value is beginning to feel like a kind of fiction too.

But often, I find, the most interesting things happen when organisations are under pressure, rather than when they are soaring away full of confidence and vigour. And, actually, a lot has been happening that could change the future of crypto fundamentally, starting with Thursday’s Ethereum Merge.

There are many people who may describe this better than I can, but the main aim of the Merge was to change the nature of the problem which sits at the heart of crypto. Bitcoin, Ethereum and many others were created by solving complicated computer puzzles. That’s necessary because if the computation is simple then too many coins would be created, and if it’s too hard, there would be too few.

The problem is that in order to solve these problems, it suddenly became profitable for crypto miners to establish mammoth computer centres which consume electricity on a gargantuan scale. The system of solving cryptographic algorithms, or equations, is called “proof of work”. Proof-of-work (PoW) blockchains are secured and verified by virtual miners around the world racing to be the first to solve these puzzles.

Using this much electricity, estimated for Bitcoin at 110 terawatt-hours per year, has obvious environmental consequences. That’s more electricity than many small countries consume, including Paraguay and Panama. So the Ethereum community decided to switch over to a “proof-of-stake” system. And the Merge on Thursday, or Wednesday night, depending on where you live, was the process that took place.

Proof-of-stake implements randomly chosen validators to make sure the transaction is reliable, compensating them in return with crypto. Hence, in a proof-of-stake system, the process of “staking” serves a similar function to PoW’s mining, but network participants are selected to add the latest batch of transactions to the blockchain, earning their crypto in exchange.

Okay, if you are anything like me, your brain is now buzzing. But the point is that using the proof-of-stake system means that the entire system uses something like 99.8% less electricity.


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So, the immediate question is … well, there are a bunch of immediate questions. I suppose the first question is: Will changing systems mean my ethereum immediately becomes more valuable? And the answer to that, sadly, is no. We can see that because now, very shortly after the Merge, ethereum is down 8%. The Merge solves the electricity usage problem, but otherwise doesn’t change the fundamental dynamics of the coin.

The next immediate question is: Will my ethereum immediately become less valuable? Why yes, my dear Umberto, it does certainly appear so … see above.

There are thousands of apps and systems built on the Ethereum blockchain and it still remains to be seen whether these will be affected in some way by the Merge. It doesn’t seem so, but it’s early days; based on previous upgrades, some faults take time to show themselves.

About $33.5-billion worth of ether is currently deposited in 554 decentralised finance applications alone, says Bloomberg, quoting data provider DefiLlama. This risk is why there are so many short holders of ethereum out there, and somehow that overhang has to find its way out of the market.

Another immediate question: What happens if you don’t want to stop mining ethereum the old way? They are planning to allow this to carry on, using a coin called EthereumPoW, but whether this will get support or not remains to be seen; it seems unlikely.

What about non-immediate questions? What does this all mean? Actually, this is the important part, because solving the electricity usage problem is only the first step for Ethereum. At the moment, actual usage of the system can be expensive; prices shoot up as the network becomes overburdened. But that is being addressed, too, and if this is successful, a system called “scaling” is likely to be developed pretty soon to solve that problem. And Ethereum has identified other issues that require solutions to tackle.

Crypto enthusiasts are down in the dumps at the moment because their dreams of sailing yachts around the world have been rudely interrupted. But often, setbacks are a necessary part of growth. We may still look back on this period as a time of growing pains rather than a precursor to failure. Or to put it another way, fear is the path to the light side. Or some such. DM/BM

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  • Sydney Kaye says:

    The cost of manufacture has no bearing on the object’s value. Even if this mumbo jumbo has any basis in fact it is irrelevent because Ethereum has no value and like all crypto was and remains a Ponzi scheme.

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