With such a rapid increase in the price of Ethereum over recent weeks, concerns have been raised over whether this current level ($230-$260) is sustainable, or whether we are witnessing a bubble that may pop dramatically in the weeks ahead. I am not one for analyzing graphs, Fibonacci sequences or “reading the technicals” – a quick way to go broke – but I can talk a bit about the fundamentals of Ethereum and the outlook ahead. Remember, I am not a qualified financial advisor – always tread with caution in the crypto-sphere, this is just my opinion.
Proof of Stake
In early 2018 the Ethereum Foundation is expected to move the network consensus model from Proof of Work to Proof of Stake. Both of these consensus models are capable of securing massive distributed networks through incentive structures (hence the need for a public blockchain to use a cryptocurrency), however Proof of Stake differs greatly.
In Ethereum’s proposed Proof of Stake consensus model, the network is secured by staking Ether in a specialized smart contract and “voting” on valid blocks. Those staking in an attempt to attack the network (“voting” for invalid blocks) will lose their stake, whilst those who act honestly will receive “interest” payments. This not only has great environmental advantages when compared to Proof of Work (no massive consumption of electricity), but PoS has the following price implications:
- An enormous volume of Ether will be time-locked in staking contracts and taken out of supply indefinitely
- Fewer coins will need to be issued per block as cost of mining (electricity) is tremendously reduced
Full details on Ethereum’s Proof of Stake.
One problem that all public blockchains face is the issue of scalability. Every transacation that is made must be validated by every node on the network, resulting in enormous congestion when the network is under heavy use (as we saw recently with the Mysterium and BAT token sales). How can the Ethereum blockchain scale to allow hundreds of transactions per second (currently limited to 7-15 tx/s) without compromising security, speed or decentralization? Many look to “off-chain” solutions, where 3rd party payment channels like Raiden can be opened and closed with a single “on-chain” transaction – without the need to account for every transaction inside the payment channel. However, these payment channels have their own limitations (security and usability), hence the need for “sharding”: a strategy to segment and validate the Ethereum blockchain in “chunks”.
Sharding and Proof of Stake are two network upgrades that were proposed and outlined by the Ethereum Foundation from the very beginning. One of the dominating forces behind Ethereum is this clear roadmap for the development of the technology. Having this agreement in place from day 0 has helped to avoid unanticipated and contentious scaling debates like those which have been seen in Bitcoin. Leadership has without a doubt been a contributing factor in driving the rapid growth of the Ethereum network, however on the contrary, it does also highlight a centralization risk. How would the price of Ether be affected in the event of a lead developer’s unexpected death, or the possibility of “going rogue” – admittedly the latter would likely be futile.
Many users, investors and those new to the industry consider the blockchain space to be in heated competition. A price rise of Ether must come at the expense of Bitcoin or others and vice versa. Which currency “will win”? This is simply not the case, as Andreas Antonopolous puts so elegantly at this Silicon Valley Ethereum meetup:
Is Ethereum in a Bubble?
Fundamentally, I do not believe that Ethereum is in a bubble. Multi-billion dollar corporations are adopting Ethereum, new Ethereum tokens are being distributed and used, smart contracts are demonstrating purpose, demand for fiat-alternatives is increasing globally and new use cases are being realized on a weekly basis. If you believe that blockchain, like the Internet, will transform social, economic and political landscapes, then consider that investing in Ether is analogous to investing in HTTP requests of the early Internet – the Internet itself is on sale. For the first time in history, it is possible for anyone anywhere in the world to invest in the underlying protocol of a global infrastructure. And at the time of writing, the market capitalization of one such infrastructure is $22bn – or about 5% of Facebook.
Cryptoasets are enormously volatile, never invest more than you can afford to lose