The cyclical boom in cryptocurrency valuation comes and goes. In March of this year, Bitcoin hit a record high of $ 60,000 per coin, inferior to the previous “boom” of 2017.
In general, the higher the reputation of Bitcoin, the higher the value of other cryptocurrencies, and as a result, the interest in blockchain technology. As the value of Bitcoin increases, so does the value of all other cryptocurrencies such as Ethereum (ETH). It’s easy to think of Ethereum as “silver” as opposed to “gold” in Bitcoin. However, in reality, the Bitcoin blockchain is rarely used for anything other than Bitcoin trading, but the Ethereum blockchain is also a platform for executing program logic on the blockchain (smart contract). These smart contracts enhance the ever-diversifying family of distributed applications. In addition, while the core technology behind Bitcoin is fairly static, the Ethereum network is poised to undergo some major technological shifts.
Proof of work
The Ethereum and Bitcoin blockchains originally shared the same core algorithm for protecting transactions, the Proof of Work Protocol. With this protocol, the public blockchain is vulnerable to hacking. To tamper with transactions, you need to apply the computing power equivalent to the entire distributed network of blockchain nodes. Proof of Work is a truly unique innovation that enables distributed systems to ensure the integrity of data records. However, work proofs are computationally and environmentally very expensive and limit the transaction throughput that your network can support.
The limits of Proof of Work on Ethereum were seen in 2017 during the “CryptoKitties” boom. CryptoKitties started as an Ethereum game that allows players to breed “digital cats”. The unique identity of each cat was stored on the blockchain, and each cat had its own genetic structure. Some “kittens” were very valuable and traded violently, but due to delays in processing Ethereum transactions during peak processing, the Ethereum network knelt down.
NFT
Recently, a similar boom has been seen in another category of digital assets, primarily through Ethereum. Non-fungible tokens (NFTs) are Ethereum-based identifiers associated with real-world assets. Regular Ethereum tokens are “substitutable” — my ETH coins can be exchanged for your ETH coins. However, NFTs are associated with certain assets in the real world and cannot be converted to other assets. An NFT has been created that represents ownership of the artwork, in-game item, or collectible.
Some of the NFT concepts make a lot of sense. Blockchain-based tokens can actually be used to transfer ownership of related real-world items without the need for third-party intermediaries. However, many NFTs have been created that appear to be associated with intangible or easily copied digital artifacts. For example, Twitter co-founder Jack Dorsey’s first tweet was “sold” as an NFT for 1630 ETH ($ 2.9 million).
Strengthening Ethereum
No matter what you think about NFTs, the increased load on the Ethereum network poses another scalability crisis. Ethereum transaction fees have exceeded the limit and network delays are increasing. For Ethereum to succeed in competing with up-and-coming alternative chains such as Hedera Hashgraph, it needs to do something to improve network throughput. Fortunately, with ETH 2.0, Ethereum is about to undergo some major paradigm shifts. This can improve throughput.
First, Ethereum’s “Beacon Chain” introduced an alternative to proof of work for confirming transactions. The proof of work is replaced by a “proof of stake” where the validator stakes a certain amount of Ethereum to ensure integrity. Proof of Work requires you to collect an unreasonable amount of computing power to forge transactions, while Proof of Stake requires you to collect an unreasonable amount of Ethereum currency. Second, the “shard chain” allows the Ethereum network to be split into multiple blockchains and operated in parallel, increasing throughput proportionally. Both enhancements are planned for 2021.
Given the already active activity on the Ethereum network and the rapid capitalization of Ethereum cryptocurrencies (at the time of this writing), these changes could significantly increase the use of Ethereum. The rise in the value of the Ethereum currency has already outpaced the tremendous rise in Bitcoin. After the introduction of ETH 2.0, it is not hard to imagine that Ethereum will compete with Bitcoin as the dominant blockchain.