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Ethereum is the largest technology platform powering thousands of decentralized applications. It has undergone the largest software upgrade since its launch in September 2022. The update included the platform’s switch from the proof-of-work protocol to the proof-of-stake protocol. It was a direct response of Ethereum to the mounting criticism regarding the adverse environmental impacts of the technology. As a platform directly powering Ether (ETH), the second-largest cryptocurrency after Bitcoin (BTC), many ask the question of whether it became more attractive to investors. Viktor Kochetov, the founder of the global financial ecosystem Kyrrex, offers insights into this issue.
Many still confuse Ethereum and Ether, which calls for a quick recap of the differences between the two. Ethereum is a commnuity-run blockchain technology platform. Its users can create decentralized applications, hold assets, interact, and transact without a central authority. Ether or ETH is a digital currency or cryptocurrency running on the Ethereum platform. Each ETH transaction has a fee paid by the user that powers Ethereum. Naturally, both Ethereum and ETH depend on each other for existence and growth.
So what called for a massive software upgrade of Ethereum? To answer this question, it is crucial to look back at the history of the platform and its mechanism. Originally, Ethereum relied on the proof-of-work protocol to create Ether and validate the transactions. This protocol required the mining process, which included a large volume of calculations performed by the miners' hardware. The stronger processing capacity of the mining equipment (usually graphics cards) and its greater scale was increasing the probability of success. Specifically, miners with large mining farms including servers, graphics cards, and cooling systems could generate more ETH. This led to the expansion of the mining farms, which required progressively more electricity to operate. More cooling systems were necessary to maintain the equipment.
Over time, it became apparent that the proof-of-work protocol was unsustainable. Amid the global efforts to reduce the negative environmental impacts of businesses, the protocol started receiving more negative attention from regulators and environmental protection groups. The U.S. White House released a report specifically stating that the proof-of-work mining operations were standing in the way of environmental efforts. The time for a change has come, but what could the platforms like Ethereum do to replace the proof-of-work protocol? After all, it was central to the security and production of the ETH.
The new proof-of-stake protocol came as a solution. Unlike proof-of-work, proof-of-stake does not require mining to produce ETH and uphold its security. Instead, proof-of-stake relies on the staked ETH for achieving consensus. Validators replace miners by staking ETH into a smart contract on Ethereum. This smart contract acts as collateral against the validator because of the ability to destroy it in case of the validator’s dishonesty. Validators check the validity of new blocks propagated over the network while also creating and propagating the blocks themselves.
Many refer to the September 2022 Ethereum upgrade as a “big merge.” The reason is that Ethereum Mainnet merged with a separate proof-of-stake blockchain, the Beacon Chain. At the moment, both exist as a single proof-of-stake chain. The upgrade directly contributed to the reduction in energy used by Ethereum. Specifically, the technology uses 99.95% less energy after the upgrade than it did before. What does this mean for investors?
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First of all, Ethereum became more environmentally friendly and received an opportunity to boost its suitable growth.
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It is no longer a target of government regulators worldwide because of the mentioned negative environmental impacts.
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Ethereum and ETH gained credibility in the eyes of the investment community and environmental groups as a “green technology and cryptocurrency.”
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Institutional investors received an opportunity to buy ETH, which was impossible because of the negative connotation before.
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Furthermore, proof-of-stake limits the supply of ETH, which should drive up its value because of the lower supply and new deflationary role.
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The proof-of-stake also improves the security element because of the faster recovery from the potential 51% attacks. The financial punishment of the potential violators is a strong risk-hedging mechanism in itself.
The upgrade seems like a definite win for all parties. So how did the markets react to the news about the upgrade and in the weeks after? After Ethereum published the news about the upgrade in August 2022, the ETH price increased from $1,618 to $1,981, which was an 18% increase. The price dropped shortly to increase again to $1,776 before the merger in September. However, the ETH price dropped to $1,252 immediately after the merger to start increasing only towards the end of October. What could be the reasons behind such an unenthusiastic reaction in the markets?
It seems that the experts agree that the reason behind the decline was outside the upgrade process. It was a combination of the overall bearishness of the crypto and stock markets, as well as the potential classification of cryptocurrencies as securities in the U.S. The latter could mean that ETH would have to revert to the proof-of-work protocol to have legal status.
Despite these risks, the advantages of the upgrade stand strong for the ETH. Its new status as a green cryptocurrency strengthens its position in the markets and ensures its sustainability. The layer two technologies, such as sharding and roll-ups, will contribute to its future scalability. The viewpoint of this article’s author is that ETH is currently a severely undervalued currency and a financial asset that should be highly attractive to long-term investors.
Author Bio
Viktor Kochetov is the founder of the global financial ecosystem Kyrrex.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.