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Ethereum has switched. Your move, bitcoin

It's been more than a month since the ethereum switch, and while its market cap has fallen and bitcoin's has stayed flat, many think it's only a matter of time

A woman pays for her coffee with crypto at a cashless cafe in Singapore Reuters/Edgar Su
A woman pays for her coffee with crypto at a cashless cafe in Singapore

On September 15, the ethereum switch was completed.

Nine years after the cryptocurrency was born and two years in the planning, the project to overhaul a tech platform – known as the Merge – was a feat of coordination and open-source software engineers all investing their time and effort.

In the world of blockchain, the change was equivalent to changing from a diesel car to an electric one.

Ethereum isn’t the market leader: it has a share of over 20 percent compared to bitcoin’s 40 percent. Bitcoin can claim first-mover advantage too – it dates back to the white paper published by Satoshi Nakamoto in 2008 – but in blockchain terms, it is still driving a diesel.

To understand the Merge, let’s go back to basics. A blockchain is simply a database that is distributed across many computers, rather than being held on a single computer or device.

The decentralised nature means there is no single point of failure. Data once uploaded is immutable and more secure than any conventional database.

In order to add data to a blockchain database, it has to be processed by a cryptographic algorithm that only grants access to those with the right permissions (keys). This process of checking permissions and validating transactions is also known as the consensus mechanism. 

The most common consensus systems for blockchain are proof of work (PoW) and proof of stake (PoS). Each approach has pros and cons, but PoS consumes significantly less energy than PoW. It has been estimated that the PoW blockchains used by cryptos burn through as much power every year as a small country.

Ethereum has switched to PoS, bitcoin is still using PoW.

In a climate of energy scarcity and rising costs, PoW is no longer an appropriate blockchain mechanism so the change by ethereum is necessary to its very survival.

The switch also replaces miners –  the name given to those who maintain and validate the PoW network – with those who act more like casinos, where one stakes capital to enable participation in the network. The more you stake (the minimum is $42,500), the bigger the vote. 

Old-school miners are frustrated because the change has meant the millions they had invested in hardware to enable PoW is now redundant.

This has in turn dented the performance of semiconductor manufacturers such as Nvidia, the dominant provider of chips to miners.

Since the Merge to the time of writing, the price of an ether token (ETH) has fallen by 10 percent, giving a market capitalisation of about $166 billion. Bitcoin’s market cap has been flat at around $378 billion over the same period.

This lays to rest the idea that ethereum’s market cap will overtake bitcoin’s in the short term, but many still believe this is likely over the medium term.

From an infrastructure, agility and energy usage perspective, I agree. This doesn’t mean the so-called crypto winter is over, though – both currencies are still down two-thirds over a year.

Unlike bitcoin, ethereum can be used to automate transactions by storing computer code that creates smart contracts, which removes the role of an intermediary.

This makes it the language of choice for applications such as decentralised finance, where the technology improves alongside the underlying infrastructure. 

Ethereum is already widely used in private enterprise blockchains thanks to its flexibility and programmable features. Supply chain traceability is a killer-application, along with operational processes that do not require the high transaction processing speeds of payments. 

While ethereum has become a leader in the blockchain universe, it is not yet dominant. Who knows whether there will be a better blockchain language tomorrow?

Further, there is a global shortage of software engineers and this is even more acute when it comes to blockchains. This is why there has been a lot of interest in platforms or “bridges” such as Marco, Finboot’s “low-code” platform and ecosystem that enables different blockchains to work together, powering “no-code” applications.

For blockchain-powered solutions to succeed, the complex technology needs to be packaged into easy-to-use, plug-and-play enterprise software solutions.

Chief information officers and industry leaders should embrace the no-code/low-code approach as the optimum route to accelerate and facilitate the adoption of this technology.

The change to PoS might ensure ethereum’s survival. Web 3 – the decentralisaton of the internet – is receiving a lot of attention and the new ethereum could become the language of choice. 

Similarly to the humble petrol station, which is updating its product offering as the world moves to EVs, bitcoin may struggle to overcome its structural flaws. Watch this space.

Nish Kotecha is a serial tech entrepreneur and board professional. He is the chair and co-founder of Finboot

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