Despite recent turmoil in the crypto market and significant declines in the prices of both Bitcoin (BTC) and Ethereum (ETH), both cryptocurrencies remain some of the best-performing assets of the last decades.
Although they face both a “crypto winter” and some measure of skepticism, both remain valuable digital assets on the bleeding edge of global, decentralized, technological growth.
And while the two cryptocurrencies are both considered “blue-chip” digital investments, the value behind them is derived from two very different use cases.
BTC is positioned as a form of scarce, desirable, digital property that can be used as collateral, while ETH is building the platform layer to an ecosystem from which many decentralized web applications can be built.
In other words, the Ethereum Virtual Machine and the availability of smart contracts makes ETH something of a global computer operating system upon which developers are deploying countless decentralized applications.
Ethereum is currently undertaking the bold step to change how transactions are validated on their blockchain. ETH will no longer use energy intensive, proof-of-work “mining” where computers solve puzzles to earn native cryptocurrency and instead will implement a process known as “proof-of-stake” where participants agree to “stake” or keep a portion of their ETH assets locked like a deposit or down payment of sorts.
This adoption will cut energy usage on the Ethereum blockchain by 99% and usher in more willing investors and participants who favor better environmental standards. Moreover, this network upgrade will remove bottlenecks and improve scalability and security.
Stakeholders
| Users | Anyone who owns ETH and uses the network’s native cryptocurrency to transact |
| Developers | Active builders on Ethereum creating new projects (web apps, games, fintech) |
| Miners | Individuals or groups performing computations, competing to secure the blockchain and validate transactions in exchange for ETH |
| Staking | Deposit ETH to activate validator software. As a validator, you are responsible for storing data, processing transactions, and adding new blocks to the blockchain |
Investors are watching the network transformation carefully to gain any insights into how it may impact valuation and price.
Historically, large events such as this one, including “Bitcoin halving” events (where the quantity of BTC released decreases, thus increasing scarcity), have coincided with large moves to the upside in crypto prices.
Ether Supply Table
| ETH produced per year today | 4,950,000 |
| ETH produced per year after the upgrade | 650,000 |
This Ethereum upgrade will remove miners and reduce billions of dollars of selling pressure from the market. ETH’s supply issuance per day will be cut dramatically, likely the equivalent of up to three “halving events.”
If you put this in perspective, Ethereum also has built a digital economy of dApps (decentralized applications) that BTC does not have. This likely amplifies the significance of the event, as network participants eagerly transact in Ether at a higher velocity than Bitcoin.
The entire cryptocurrency-based web3 ecosystem has become increasingly reliant on Ethereum as the leading Layer One blockchain.
Demand Dynamics
What drives up cryptocurrency prices? Demand for blockspace on the blockchain.
Layer One blockchains like Ethereum sell blocks that are secured on the chain. Demand for this resource comes from the potential utility or use cases (derived benefits) from using a particular blockchain network. Put simply, it’s the value of what could be accomplished with each block.
Lucas Campbell outlined this process nicely in his recent Bankless article. Let’s summarize these thoughts as follows:
- Blockchains must incentivize demand through improvements in what they can offer people in the world – this process induces an increase in transaction revenue.
- Reduce security expenses.
“Blocks become more valuable as the application layer becomes more vibrant because applications (think DeFi, NFTs) create economic opportunities inside blocks. Blockspace revenue is almost directly correlated to the number of valuable applications on the network and the opportunity they hold.”
Currently, Ethereum has over $15 million staked on its new network – Beacon Chain. This transformation is likely to be completed by the end of the summer as October marks an important upcoming Ethereum conference.
Conclusion
The impending merge for Ethereum will further improve the fundamental economics of the network by reducing supply growth, preventing congestion on the network, and returning incentives to long-term holders of Ethereum who commit to staking or locking their holdings. This will offer the opportunity to these holders to generate increased yield (between 4-7% annual percentage yield) simply by remaining a long-term holder of ETH.
So if you don’t already own some Ethereum, now is the time to buy low on it.
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Have you invested in Ethereum before? Other forms of crypto? Tell us about your crypto investing experiences in the comments below.