The crypto world is holding its breath as Ethereum’s upgrade nears and no one knows what the consequences will be. Dominik Spicher from 21 Analytics said which Swiss platform is likely to benefit the most from the switch.
Any day now starting this Saturday, Ethereum will change the way it verifies transactions on its system in a technological upgrade.
What is remarkable about the upgrade is that it is being done on a running system, one which holds around $300 billion without counting the assets that run via its platform, co-founder of 21 Analytics Dominik Spicher said in an interview.
Flying at 30,000 Feet
The oft-used analogy is that such an upgrade «equates to changing a plane’s engine while it is 30,000 feet off the ground,» he added. The engine of blockchain technologies is the mechanism used to find a consensus, which allows participants to transact with each other and create smart contracts.
Until now, Ethereum has done this by using the proof-of-work (PoW) concept, but as of next week, it will apply a method called proof-of-stake (PoS).
A Stake Through the Heart of Work
One key difference between the two mechanisms is that to participate in PoS one needs to hold the system’s native currency, in this case, Ether, whereas the prerequisites for PoW are external, such as electricity and hardware. PoW verifications can take place without any resources internal to the chain, which is seen as one of its main advantages.
For Ethereum, this is about to change now that stake is required.
By relying on users who are prepared to lock away assets, the platform also can confiscate a user’s stake if they misbehave by approving two conflicting transactions, for example. Furthermore, it makes the process more centralized.
Essentially, those with the largest stake will end up with a certain amount of power in the system, Spicher said. Paradoxically, this sounds like a development that will make the system more centralized, although one of blockchain technology’s main purposes is to be decentralized.
Bitcoin Suisse, which is one of the larger holders of Ethereum coins, will be the one gaining from all of this, using its stake to earn the right to verify transactions on the ether network and reaping transaction and commission fees in the process.
Spicher, whose co-owned company 21 Analytics provides compliance and data protection software to clients who transact with blockchain assets, is particularly interested to see how Ethereum deals with confiscating stakes from people who decide to censor certain transactions, for example to sanctioned addresses.
Although diverging paths are accounted for within Ethereum’s model with so-called hard forks, they still need to be managed. In PoS where every step in the mining process can be tracked it is easier to do this. But when this work process falls away and is replaced by stake as in PoS traceability, it is much harder and likely to cause huge problems, Spicher said.
Rise of the Machines
On the blockchain, as in life, where different opinions and money are involved, fights erupt easily.
If we can let the machines do their thing, it will probably be clean. But if people need to start discussing which chain is the correct one to follow after the change, that’s where it will get messy, he added.
There is the oft-stated idea that by switching to the new energy-friendly verification process, Ether will become more attractive than Bitcoin. Yet this assumption ignores that Bitcoin has a whole different value proposition, Spicher explains.
Bitcoin’s main aim is to be an alternative to national currencies. Ethereum however, was created as an open-source platform to allow anyone to create applications within the Ethereum network using its native currency.
Their differing purposes make them attractive to investors for different reasons. Although traders, exchanges, and crypto hedge funds may benefit from Bitcoin in times of high volatility, its main value is seen as a long-term, stable and conservative store of value, Spicher said.
Investors who buy Ethereum however, are betting on the currency fueling a myriad of applications running on its platform in the future and accruing value that way, he added.