Why You Should Be Paying Attention to Ethereum

Why You Should Be Paying Attention to Ethereum

Cryptocurrencies have taken the world by storm. Since 2013, the value of all cryptocurrencies in circulation has soared from $1.6 billion to more than $1.6 trillion at Wednesday’s prices, and roughly $1.4 trillion of that value was added in the past year, according to CoinMarketCap.

Bitcoin (CRYPTO:BTC) has been the leader of the pack, thanks to its first-mover advantage as the original cryptocurrency. However, in recent months, Ethereum (CRYPTO:ETH) has stolen Bitcoin’s thunder. In the past year, Ethereum has gained roughly 1,600%, while Bitcoin is up 300%.

Ethereum has caught fire for a number of reasons, but the most important aspect of the Ethereum network is its use of smart contracts. These smart contracts built on the Ethereum network are spurring a couple of innovations that give Ethereum its value: decentralized finance (DeFi) and non-fungible tokens (NFTs), whose popularity should be closely followed by investors.

The DeFi movement can’t be ignored

One of the biggest innovations spurred by the Ethereum network is DeFi. DeFi uses smart contracts on the Ethereum blockchain to offer traditional financial products, like insurance or loans, without the need of intermediaries like brokerages or banks.

These smart contracts eliminate the need for a trusted third party to verify the transaction. Nick Szabo, an early pioneer of digital currencies, likened them to digital vending machines. Smart contracts are programmable contracts between two parties that self-execute when specific conditions are satisfied. The third party is eliminated because the contract is programmable and exists on the blockchain, a secure and decentralized form of digital ledger technology.

The ultimate goal of DeFi is to eliminate third parties and make financial products such as loans, insurance, and trading more accessible to underserved markets. According to World Bank, 1.7 billion adults across the globe lack access to banking services. However, two-thirds of those do have access to a mobile phone and internet connection, and could benefit from DeFi. Given the problem it looks to solve, DeFi is a very attractive space right now.

A real-world example

Munich-based Etherisc built its first product, flight delay insurance, with smart contracts on the Ethereum network. It works this way: When a customer purchases flight delay insurance, it’s recorded on the blockchain in smart contract form. If a flight is delayed by 45 minutes or more, the self-executing contract pays out customers instantly. The smart contract allows the customer to avoid making claims with an insurance company, making insurance more efficient.

Etherisc sees insurance as one industry ripe for disruption by utilizing smart contracts, saying they could make the purchase and sale of insurance more efficient, lower operational costs, and provide greater transparency into the industry.

Ethereum leads the pack when it comes to decentralized contracts, whose popularity has taken off this year. According to DeFi Pulse, over $63 billion was locked up in smart contracts as of Wednesday, a 65-fold increase from the $953 million locked up in smart contracts just one year ago.

Leading the NFT trend, too

The Ethereum ecosystem is perfect for another purpose as well: non-fungible tokens.

One of the problems in the digital age is the ease with which we can duplicate digital assets like images, videos, and songs. NFTs aim to make digital products more like physical ones, by giving them scarcity, uniqueness, and proof of ownership.

NFTs have exploded in popularity in the past year. According to NonFungible, there were nearly $67 million in sales related to NFTs in 2020. So far in 2021, sales are an astounding $840 million, representing over 11 times growth from last year’s total – and the year isn’t over yet. Comparing the full month of April to the same month last year, NFT sales were up 82-fold. To say NFTs have exploded is an understatement.

The Ethereum network plays a key role in NFTs, as most NFTs are priced in Ether – the digital token of the Ethereum blockchain. In fact, the earliest and most popular NFTs, with names like CryptoKitties and CryptoPunks, are run on the Ethereum blockchain.

Ethereum is my favorite cryptocurrency

While Bitcoin was the original cryptocurrency, I think the smart contracts built into the Ethereum network make it a better cryptocurrency to invest in over the long haul. After all, there’s no denying the popularity of DeFi apps and NFTs – which are largely hosted on the Ethereum blockchain.

However, when dealing with cryptocurrencies, investors must be careful of a potential bubble, especially in the NFT space. According to NonFungible, the average sale price for crypto art had dropped 60% from its February high through the end of April. If the NFT bubble does pop, Ethereum and other cryptocurrencies will take a hit.

As an investor, it’s important to understand the volatility of cryptocurrencies and allocate your capital accordingly. Despite how much I like Ethereum, I also know the price could potentially correct 40% to 60% or more due to rampant speculation in the space.

This doesn’t mean it’s a bad long-term investment, though. The best approach as a long-term investor is to allocate a small percent of your portfolio to the cryptocurrency and dollar-cost average into that position over time. Dollar-cost averaging will help smooth out the average price paid for your position, as you should be buying along peaks and valleys along the way while keeping a long-term investment perspective in mind.

Ethereum crypto will soon be 99.95% more environmentally friendly — here’s how

Editor’s note The information on this page should not be used as investment advice. Tom’s Guide can not tell you whether you should invest in a particular cryptocurrency, or in the market as a whole. Crypto prices can go down as well as up and you could get back less than you put in.

Ethereum (ETH) is set to slash its energy consumption by 99.95% within months as it makes the transition to a new infrastructure model.

The world’s second biggest cryptocurrency currently has a carbon footprint comparable to that of Sri Lanka, but according to a blog post from the project, the shift to Ethereum 2.0 will dramatically reduce its energy needs. And while there’s as yet no set date for when the change will take place, the post states that it will happen “in the upcoming months.”

Tesla’s announcement last week that it would stop accepting Bitcoin (BTC) as payment for its eco-friendly electric cars, due to the environmental impact of crypto mining operations, put the spotlight on the immense energy demands required of some of the top cryptocurrency performers.

Bitcoin’s proof-of-work consensus model requires high-powered computers — including specialized mining rigs — to constantly solve energy-intensive math equations for a chance to earn BTC rewards. According to Digiconomist, the entire Bitcoin mining network’s energy consumption has soared of late, and has a carbon footprint comparable to that of Portugal.

Ethereum (ETH) also uses a proof-of-work consensus approach for mining, and though not as power-hungry as Bitcoin, its total estimated consumption has multiplied by three times since the start of 2021.

Fortunately, there’s hope on the horizon. Ethereum 2.0 will feature a new proof-of-stake blockchain model that relies on validators holding tokens within the network. That will eliminate the need for power-hungry PCs mining ETH, and new estimates suggest that Ethereum 2.0 will be truly transformative, indeed.

According to The Ethereum Foundation, the non-profit organization that supports research and development behind the blockchain, the Ethereum 2.0 upgrade will no longer require “a country’s worth of power,” dramatically scaling down the energy demands of the network.

The foundation’s post on the matter suggests that the Ethereum 2.0 proof-of-stake network may only consume around 2.62 megawatts, or about as much as a small American town with about 2,100 homes, it claims. Not bad for a smart contract platform that powers a cryptocurrency that as of last week had a total market cap above $500 billion (it’s lower now), and is the backbone of loads of decentralized finance (DeFi) apps, crypto games, and other services.

To put it another way, a chart shared by the foundation suggests that if a single Bitcoin transaction was as tall as Dubai’s Burj Khalifa skyscraper and a current Ethereum transaction was the Leaning Tower of Pisa, then an ETH 2.0 transaction would be comparatively as tall as a single 0.025m screw.

Precisely when Ethereum 2.0 will roll out remains to be seen, however. The post states that teams of engineers are working overtime to ensure that The Merge, as the upgrade is being called, “arrives as soon as possible” — but then again, Ethereum 2.0 has been on the cards for years now.

Still, for those who have concerns about Ethereum’s energy consumption, these estimates are a seemingly positive sign of eco-friendly change on the horizon for the rising cryptocurrency.

Andrew Hayward is a writer and editor based in Chicago. His work covering tech, crypto, games, and esports has appeared in more than 100 publications around the world, including Polygon, Rolling Stone, Decrypt, and Stuff. He has covered cryptocurrency extensively since 2019, including coins, crypto games, and NFTs, and interviewed many creators and prominent figures in the space. He has also personally invested in several coins and currently holds less than 1 BTC, 2 ETH, and 700 ADA, along with smaller amounts of other coins. View all articles by Andrew here.

Ethereum to reduce emissions as cryptos face climate scrutiny

Developers who work on ethereum’s underlying infrastructure said in a blog post this week that the cryptocurrency would be transitioning to a new method of recording and validating transactions that will reduce carbon emissions by an estimated 99.95%. Photo: Beata Zawrzel/NurPhoto via Getty Images

Ethereum (ETH-USD), the world’s second biggest cryptocurrency, is set to get a software upgrade that will drastically reduce its carbon footprint.

Developers who work on ethereum’s underlying infrastructure said in a blog post this week that the cryptocurrency would be transitioning to a new method of recording and validating transactions that will reduce carbon emissions by an estimated 99.95%.

The planned overhaul comes amid growing scrutiny of the environmental impact of cryptocurrencies. Last week Tesla (TSLA) boss Elon Musk said his business was abandoning plans to accept bitcoin as payment, citing environmental concerns.

Read more: How bad is bitcoin for the environment?

In a blog post this week, the Ethereum Foundation — a non-profit that works to maintain the network underpinning the digital asset — said it would soon shift ethereum to a new infrastructure that would “end the process of expending a country’s worth of energy on consensus.”

Developers plan to shift ethereum from a “proof of work” system to a “proof of stake” system.

Watch: What are the risks of investing in cryptocurrency?

Under a proof of work system, computers around the world complete cryptographic maths equations to validate and secure transactions on the network. Solving these equations uses up huge amounts of electricity in the form of computing power. The vast power required stops one individual or group from being able to target the network and overpower it, theoretically allowing an entity to write in transactions sending themselves cryptocurrency.

Under a proof of stake system, participants in the network simply have to prove they hold ethereum to contribute to its underlying operations. Computers “stake” their ethereum and in return can validate and secure transactions on the network. A majority of participants in the network must validate transactions for them to go through, which acts as a check against fraud.

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Carl Beekhuizen, a developer at the Ethereum Foundation, said in a blog that while there was no “concrete statistics on energy consumption” for ethereum, his “ballpark” estimates suggested the change in the infrastructure would reduce its energy usage by around 99.95%.

Read more: Bitcoin, ethereum and the blockchain technology behind decentralised finance

“A Proof-of-Stake Ethereum therefore consumes something on the order of 2.62 megawatt,” Beekhuizen wrote. “This is not on the scale of countries, provinces, or even cities, but that of a small town (around 2,100 American homes).

“For reference, Proof-of-Work (PoW) consensus on Ethereum currently consumes the energy equivalent of a medium-sized country.”

Analysts at Bank of America said in March that ethereum was estimated to be using the same amount of energy each year as Cuba.

Beekhuizen said a proof of stake system would mean energy usage is uncorrelated with price. Under the current system, ethereum’s energy usage rises and falls in line with its price.

The planned transition comes as cryptocurrencies face heightened scrutiny of their environmental impact. Elon Musk was forced to abandon plans for Tesla to accept bitcoin (BTC-USD) as payment, following a backlash linked to the cryptocurrency’s environmental impact.

Bitcoin also uses a proof of work model. Its underlying network uses more energy per year than Ukraine. Analysts at Bank of America said earlier this year that investors had to “pay attention to the enormous environmental costs of Bitcoin”.

Read more: Tesla’s bitcoin investment has carbon footprint of 1.8 million cars

Beekhuizen said ethereum’s new infrastructure means each transaction should use the same amount of electricity as “about 20 minutes of TV.”

“By contrast, Ethereum PoW uses the equivalent energy of a house for 2.8 days per transaction and Bitcoin consumes 38 house-days worth,” he wrote.

The changes will have major implications for the environmental impact of the broader cryptocurrency space. Ethereum is used as the infrastructure for many other cryptocurrency projects and so-called “decentralized finance” applications.

Shifting ethereum from proof of work to proof of stake has been planned for years but the plan has been beset by political and technical problems. Beekhuizen said the infrastructure was now up and running and being tested. The foundation hopes to complete the shift in the “upcoming months”.

Bank of America analysts said earlier this year that the shift to proof of stake “could reduce Ether’s carbon footprint” but warned it would “increase both the social and governance risks of this crypto-currency.”

News of the looming shift came as ethereum and other cryptocurrencies crashed to the lowest point in months. A broad sell-off hit the market on Wednesday, wiping out billions. Ethereum dropped as much as 40% on the day before recovering on Thursday.

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