Why Crypto Aficionados Have Their Eyes Trained On Ethereum
Bitcoin grabs most headlines, having become almost synonymous with cryptocurrencies. But ask the true crypto believers and many will tell you that Ether, built on the Ethereum blockchain network, is the real deal.
This has been the case for awhile and lately Ethereum has also overtaken Bitcoin in terms of price gains.
A single coin of Ether, traded at $3,429 as on September 8, has gained 77% since mid-July, when cryptocurrencies bottomed out and started to rebound. Bitcoin prices have risen a more modest 40% over this period.
Ethereum's network is vastly different from Bitcoin's and helps open up the possibility of many real-life applications other than payments. For instance, non-fungible tokens or NFTs directly result from Ethereum's smart contract system, which can provide instant and non-destructible proof of ownership of one's assets.
The 'London Fork'
A few fundamental changes have led to Ether's outperformance in recent months. One of them, introduced in the beginning of August, has come to be known as the "London hard fork".
Like Android or iOS have frequent software upgrades, the Ethereum network also saw a new update called EIP-1559 (Ethereum improvement proposal). A hard fork means a significant modification to the protocol, resulting in a divergence between the old protocol and the new one.
With EIP-1559, a new "base fee" concept was introduced. The old protocol required users to bid for validation of their transaction, often making it costly and unrealistic. The new mechanism replaces the bidding structure with an automated "set fee", that depends on how congested the network is.
Users who want priority in the transaction validation queue can now tip instead of bidding higher.
"After the upgrade, miners wouldn't receive the earlier amount they used to get, but a tip that the customer might give them (miners) for placing the transaction on the immediate block," Avinash Shekhar, the co-chief executive officer of crypto exchange ZebPay, explained. This, in turn, will reduce their incentive to mine.
The update also automatically burns or destroys a part of the transaction fee to limit coins' supply artificially.
Burning is the process of intentionally destroying coins or tokens by sending them to an 'eater address'. This would, typically, be for inactive coins. In another scenario, where a network plans a 'burning event', coins will be equally taken from stakeholders.
If coins are scarce, their value rises.
Ethereum will be burned after every transaction on the blockchain. In other words, it would create a short-term escalation of price due to the supply crunch, and the lower availability of Ethereum across global exchanges.Avinash Shekhar, Co-CEO, ZebPay
Stepping Stone To Ethereum 2.0
The London hard fork also included another switch, EIP-3554, in technical parlance. The update paves the way for Ethereum 2.0, a comprehensive overhaul of the system that has been in the works for years.
The EIP-3554 update gives miners time to prepare for the radical shift, and a deadline is set for December 2021. It acts like a preliminary update that's prepping everyone on the blockchain to brace for an overhaul.
Once the December deadline is hit, the blockchain shall shift from a proof-of-work model to proof-of-stake, leveraging the user's existing cache or memory to verify transactions.
A Strong Number Two
The upcoming changes have meant that interest in Ether is high, not just from retail investors but also institutions.
Kryptoin, a US-based digital finance firm, has filed with the SEC to launch an Ether-focused exchange-traded fund. Others such as WisdomTree and VanEck, have unveiled plans to create Ether-based ETFs.
"The boom in NFT adoption, as well as the continued innovation in decentralised finance (DeFi), will ensure that Ethereum continues to be the strong number two to Bitcoin with few analysts expecting the cryptocurrency to overtake Bitcoin in the future in terms of market capitalisation," said Vikram Subburaj, co-founder and chief executive officer of Giottus crypto exchange.
Higher prices and wider utility of the Ethereum network has led to increased interest across Indian investors as well.
"The top five Indian exchanges recorded $20 million in daily trading volume for Ethereum since last month," estimated Hitesh Malviya, founder of ItsBlockchain, a specialised blockchain research and investment platform. To be sure, this still accounts for only 0.05% of the global trading volume.
Data from India's Giottus crypto exchange also suggests that there are at least twice the number of users who have invested in Ethereum compared to Bitcoin. Meanwhile, users who have invested in Ethereum and ERC-20 tokens (tokens that are launched on Ethereum blockchain) are six times that of Bitcoin.
Industry-wide data, however, is not available.
According to the 2021 Global DeFi Adoption Index by blockchain data platform Chainalysis, India ranks sixth in terms of DeFi adoption. DeFi is primarily designed on the Ethereum network, enabling peer-to-peer transfers, swift settlements, tokenisation, and more. This, too, is driving local interest in Ethereum.
Polygon, an Indian crypto startup, has developed an Ethereum sidechain to deliver better infrastructure scaling. "After the major success of Polygon, more startups are finding their way into the crypto and blockchain sector," Malviya said.