The Ethereum blockchain has been upgrading to Ethereum 2.0 throughout 2021, a project that will continue into 2022. The London hard fork, or split, in August introduced coin burning, which is expected to support the value of the ETH coin by reducing supply as its use grows.
The Altair upgrade was activated on the main network on 27 October. The upgrade to the Ethereum Beacon Chain tests the transition to proof-of-stake (PoS) block mining. The main Ethereum chain will merge with the Beacon Chain in 2022 to complete the Ethereum 2.0 upgrade.
- Lower energy consumption – Changing Ethereum’s consensus layer to proof-of-stake rids the network of miners and replaces them with validators. Under proof-of-work, Ethereum requires miners to compete for hash power by consuming electricity. By using randomness to assign block production, proof-of-stake is able to run with significantly lower energy consumption. The Ethereum Foundation predicts that after the Merge the network will use at least 99.95% less energy than it does in its current state.
- Deflationary ether – An Ethereum research report modeled the impact the combination of EIP 1559 and proof-of-stake will have on ether’s circulating supply. The transaction fee burn combined with lower rewards and ether locked for validating will drive the circulating supply equilibrium down to between 27.3 and 49.5 million ETH. For comparison, the current supply is sitting at 118 million ETH and is still slightly inflationary after the addition of EIP 1559.
- Same execution layer – Ethereum’s current execution layer will be ported over to the incoming proof-of-stake consensus layer and supported by the clients that are currently in charge of Eth1. For existing users and application developers, this means that interacting with Ethereum will remain incredibly similar post-Merge.
- Increased/similar transaction fees – While impossible to predict, it is entirely possible that transaction fees will initially increase or remain the same post-Merge. Once Ethereum sheds the narrative that it consumes more energy than a moderately sized country, new users and entities may come onboard to use the technology and increase the current demand for blockspace. However, impending upgrades (such as sharding, rollups and calldata improvements) to the network after the Merge will focus on increasing scalability without sacrificing decentralization.
- A road to decentralization and scalability – Running a validator on the Beacon Chain requires 32 ETH, an upfront investment of over $120,000 at current prices. While this is not a low barrier to entry, it still removes the economy of scale that exists in mining proof-of-work chains. By replacing hash power with randomness/statistics and keeping block size low, Ethereum enables any user with average hardware to profitably run an Ethereum validator. Additionally, under proof-of-stake, the Ethereum network will have the capability to implement sharding and other scalability focused upgrades that will lower transaction costs down the road.
As you can see from the chart below, Ethereum’s price has increased more than 400%, while Bitcoin is up roughly 70%.
A. Ethereum has greater utility
Bitcoin’s original promise was as a digital currency that would not be controlled by a central government or other institution. While Bitcoin has gained widespread adoption as an investment, its progress as an alternative currency has been slower. Today, about 15,000 businesses in the world accept Bitcoin. That may sound like a lot, but that’s only about 1 out of every 10,000 of the hundreds of millions of business in the world.
Ethereum isn’t as widely accepted by real-world businesses as Bitcoin, but it’s the leader in the space where cryptocurrencies are gaining hold — in the metaverse, with NFTs, and with other real-world applications.
In fact, Ethereum has become the de facto medium for buying and selling NFTs because its blockchain enables smart contracts, while Bitcoin’s does not. Ethereum was designed to support smart contracts, which automatically execute transactions without the help of an intermediary. That has applications beyond just non-fungible tokens, including in real estate transactions, for concert tickets, and other such purchases where the item in question needs to be authenticated.
As Ethereum is showing, the future of cryptocurrency isn’t about displacing the dollar, but serving needs that fiat currency can’t meet on its own.
B. Ethereum is attracting more developers
In the tech world, developer interest is often a leading indicator of where technology is going. The technology or platform with the most developers tends to win over the long run, as attracting developers leads to a virtuous cycle of attracting more, which leads to more improvements to that platform. It’s a massive network effect that builds a wide economic moat.
In crypto, Ethereum is the pacesetter when it comes to developers working on its platform. According to a report from venture firm Electric Capital, Ethereum had an average of nearly 2,300 developers as of the third quarter of 2020, while Bitcoin had less than 400. The report also found that more than 300 new developers were joining Ethereum each month.
With a significantly larger base of developers, Ethereum will be much more nimble and better able to adapt to new use cases than Bitcoin. Its developers are currently working on the Eth2 upgrade, which will make Ethereum more sustainable, secure, and scalable, supporting thousands of transactions per second. While Bitcoin has a similar project in the Lightning Network, Ethereum’s lead in developers will make it faster and more likely to succeed in upgrading and advancing its architecture.
C. The future of crypto is going toward Ethereum
Throughout 2021, momentum has been building for NFTs, Decentralized Autonomous Organizations (DAOs), Decentralized Finance (DeFi), and the metaverse. Those cryptocurrency applications all favor Ethereum over Bitcoin, and they’re likely to gain steam in 2022 as well.
One virtual world, Decentraland, has seen its user base skyrocket tenfold in the last few months, reaching 300,000 monthly active users. Many of the crypto tokens used in the most popular virtual world like Decentraland’s MANA and Sandbox’s SAND are built on the Ethereum blockchain, showing how Ethereum has already established itself as a foundational platform in the metaverse. It’s essential to the next iteration of the blockchain.
By comparison, Bitcoin seems frozen in a particular time and place. It has benefited enormously from its first-mover’s advantage, name recognition, and cult-like following, but according to Bitcoin bulls, the best argument for its value seems to be that it’s a form of “digital gold” since its supply is artificially capped. That argument seems specious, given that Bitcoin, like most cryptos, has been highly volatile, and tends to move in the same direction as the stock market, making it a poor hedge on risky assets, gold’s intended purpose. Ethereum, on the other hand, is much more flexible and adaptable to the direction of the crypto universe.
2021 showed that cryptocurrencies have applications far beyond Bitcoin, and that trend will continue in 2022. As interest and adoption in areas like NFTs, DeFi, and the metaverse continue to grow, Ethereum will benefit as well, making it a good bet that it will outperform Bitcoin once again in 2022.
To end off, It is important to keep in mind that cryptocurrency markets remain extremely volatile, making it difficult to accurately predict what a coin’s price will be in a few hours, and even harder to give long-term estimates. As such, analysts and algorithm-based forecasters can and do get their predictions wrong.
Crypto Wellness is important, and I personally recommend that you always do your own research, and consider the latest market trends, news, technical and fundamental analysis, and expert opinion before making any investment decision. And never invest more than you can afford to lose.