The value of the second most valuable cryptocurrency in the world, ether, hit its all-time high on the eve of a major update to the platform it is based on, Ethereum. And today it has an aggregate value of just under five hundred billion dollars, slightly less than half that of the world‘s leading cryptocurrency, bitcoin.
But how is it possible that such an update, fundamental towards a much greener and faster version of the current system, could put Ethereum on the path of becoming the dominant platform on the internet and make ether the number one cryptocurrency?
First of all it is important to understand the difference between bitcoin and ether. Bitcoin is a system that allows people to send money to each other without resorting to banks. It is built on a technology known as blockchain, a sort of online ledger whose transactions are controlled and recorded by a decentralized network of computers called validators.
These validators, as an incentive to their work, receive freshly minted bitcoins as a reward, in an operation known as mining, “Extraction”. To make it more attractive, the availability of bitcoin is relatively limited: there are only around 18 million coins in all, and the protocol is such that there can never be more than 21 million in circulation.
In this sense, ether works in a similar way to bitcoin. But Ethereum, the worldwide platform it refers to, is different: it doesn’t have a host, and developers are building thousands of applications based on the host. blockchain. This means that these applications can run without being controlled by a private company. And, among these applications, at the moment are those that manage cryptocurrency exchanges, insurance systems and new types of games.
At the heart of the platform are so-called smart contracts, which are automated agreements that ensure that money and assets change hands once certain conditions are met. All transactions on the platform use ether, and the platform’s success is why, in recent years, ether has been the second largest cryptocurrency after bitcoin. But the fact that ether feeds its own platform (commissions, fees, are calculated on the basis of gas, the unit of measurement of the work done by Ethereum to carry out transactions or any interaction within the network, and are paid in ether) provides it with a utility and intrinsic value that bitcoin does not possess.
Why Ethereum 2.0
However, Ethereum has various and important problems. The first is that the price of the gas fees it has grown a lot in the last couple of years, because the network has become popular and is therefore congested.
For this, validators prioritize users who are willing to pay the highest fees for their transactions. For example, the average transaction on the Uniswap cryptocurrency exchange financial protocol costs, at the time of writing, about $ 44 in gas fees.
Bitcoin has similar congestion problems, which its developers are trying to solve by building applications like Lightning, which boast faster transaction speeds.
The second problem for Ethereum is that, as it has become more popular, the computational power of validators has skyrocketed. And it is the same problem that has brought a lot of negative publicity to bitcoin, because it uses a lot of electricity: at the moment, the same amount consumed throughout the Philippines, although its supporters believe that much of this energy would still be wasted – for example by platforms. petroleum that burn natural gas because it is not profitable to sell it. Additionally, ether fans also point out that the grid is using more and more renewable energy.
In any case, the eventual creation of an Ethereum 2.0 will solve these problems, moving the validation system of the platform from a system proof of work (“Proof of work”) to one proof of stake (“Proof that you have an interest in the game”). Without going into too much detail, proof of work it is a protocol in which validators all attempt to solve complex equations to prove that each proposed transaction is valid. It is very energy consuming. With one system proof of stakeinstead, there is no need for all validators to do this work, because the system chooses one at random to confirm each transaction.
Many people in the bitcoin community are against the proof of stake because it concentrates power in the hands of the main validators, which would allow them to corrupt the validation system if they manage to gain control of more than half of the network. But Ethereum supporters argue that the proof of stake it has built-in checks and balances that prevent this from happening.
In any case, Ethereum 2.0 promises to reduce the platform’s energy consumption by 99.9 percent, making it much more sustainable. It should also solve the problem of gas fees, potentially increasing the platform’s processing capacity from thirty transactions per second to one hundred thousand, as well as enabling more sophisticated smart contracts than before.
How things are going
The transition to Ethereum 2.0 has been slow and punctuated by technical problems that have been dragging on for over two years. In recent months the new blockchain proof-of-stake it worked in a test format, parallel to the existing system, allowing developers to plan a merger in 2022.
The next update will essentially be a dress rehearsal of this merger. It is known as Altair, and it will introduce several technical changes designed to maintain the honesty of the validators and make the system more decentralized. Assuming that the process goes as planned, all eyes will be on the merger and, soon after, on another modification known as sharding, which will greatly increase the processing capacity of the system.
Meanwhile, ether’s value has actually strengthened ahead of Altair. The reasons are varied. The recent surge in bitcoin to its all-time highs has contributed to the growth of the entire cryptocurrency market. Part of ether’s price swings likely reflects the fact that people are betting the upgrade will be a success. The rest is due to speculators switching from bitcoin to ether and new money coming into play.
In the period preceding the merger of the two Ethereum blockchains it will be interesting to see how this will affect the price of ether in relation to the so-called eth killer. The latter are rival platforms, for example Cardano and Solana, which in recent months have enjoyed popularity also due to the problems of gas fees.
But in the end the real question is: what will all of this mean for bitcoin? According to supporters, its protocol will be more decentralized than the system proof of stake, with the benefit of remaining the cryptocurrency brand that investors feel most comfortable with when it comes to investing.
Ethereum 2.0, however, will have more ecological credentials and will be able to manage a greater number of transactions. Bitcoin is currently worth around double that of ether, but rumors of a possible are racing flippening, or rather of an overtaking by ether. Could it happen in 2022? Given that what is at stake is the hegemony of bitcoin, it will be fascinating to find out.
(Translation by Federico Ferrone)
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