With so much attention paid to cryptocurrencies lately, it’s only natural that number two Ethereum (CCC:ETH-USD) generates plenty of headlines, particularly for its shift toward a proof-of-stake (PoS) protocol. On the other hand, Ethereum Classic (CCC:ETC-USD) looks comparatively anachronistic, insisting on staying the course with proof of work (PoW).
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But could the environmentally unfriendly status quo be a lifesaver for ETC-USD?
For full disclosure, I’m a supporter of Ethereum as well as Ethereum Classic, owning a modest position in both underlying cryptocurrencies. Yet when I hear this talk about proof of stake and how wonderful it’s going to be, to me, it sounds like blockchain babble: all whimsical, fantastical notions of fairness, equity and environmental sustainability but lacking proven substance.
That’s not to say that the ETH blockchain won’t pull off a PoS transition. However, the ambitious initiative may encounter troubles down the road. If so, Ethereum Classic may turn out to be the ether-based blockchain to believe in. Here are three reasons why.
Take It from the Soviets: Communal Equity Will Never Work
As with most Americans, I’m absolutely horrified with the images coming out of Afghanistan. Without getting into any of the geopolitical underpinnings, it’s undoubtedly a human tragedy.
Perhaps not surprisingly, though, certain Russian diplomats had choice words for the U.S. exit. It’s interesting because decades ago, the roles were flipped. The Americans were telling the Russians (well, the Soviet Union at the time) to get the “puck” out of Afghanistan — a common backdrop leading up to the iconic “Miracle on Ice” game.
The incursion into Afghanistan was a lesson we should have learned from the Soviets, but we didn’t. Now, Ethereum is about to make another error that the Soviets committed long ago: assuming that communal equity initiatives will work.
One of the challenges of a PoS protocol is that the ability to accrue rewards will be centralized among those with the greatest stake, thereby hurting the spirit of decentralization. To remedy this, Ethereum backers have proposed an equitable mechanism of ETH distribution.
While the math might work, I think it’s impossible to create fairness in a given community, analog or digital. It’s not just the Soviets. Look at some of the countries or entities that have “democratic” or “liberation” in their names: they’re anything but what they claim to be.
For whatever reason, government agencies throughout history have failed in implementing social equity. In my view, it’s doubtful that a blockchain protocol can.
Ethereum Classic Runs a Proven Platform
Another factor to consider for Ethereum Classic is that its underlying PoW protocol is a proven platform. No, it’s not perfect. As many proponents of PoS transitions will tell you, PoW protocols are comparatively cumbersome, inefficient and costly from both a monetary and environmental perspective.
I’m not going to disagree. But the main challenge I see with the ETH network moving to a staking algorithm is that decentralization by itself is a pioneering experiment. That is, whether you use blockchain for payment processing or smart contracts or any other endeavor, you do not have centralized recourse when stuff goes wrong — there’s no customer service in the blockchain since there’s no centralized authority.
Nevertheless, the grand experiment that is Bitcoin (CCC:BTC-USD) has so far proven to be viable. Of course, Bitcoin runs a PoW protocol (which is a big part of the reason why it’s so pricey). Nevertheless, we’re still working through this decentralization of everything movement. Now, you want to add the vagaries of PoS protocols?
While I’m not necessarily a cheerleader for Ethereum Classic, I will say this: vagaries about PoS’ viability exist. For instance, many crypto backers are unsure how to handle Byzantine fault tolerance incidents in PoS protocols or the mechanism on addressing network consensus contradictions.
In other words, there might be a lot more work involved for Ethereum.
ETC Economics Make Sense
I’m a big believer in the concept that there’s no such thing as a free lunch. If you are eating for free, someone else is paying for it. And there might be a reason for it — reasons that may or may not align with your ultimate best interests.
Regarding the ETH network’s shift to PoS, the economics of staking might not be desirable in the end. Simply, if the transactional verification process under PoS is that much more energy efficient, then it implies that the new protocol will be cheaper. And if the process is cheaper, I struggle to understand how ETH would then keep its lofty market value.
While critics of cryptos blast Bitcoin’s five-digit price tag, it has some fundamental justification if you think about it. First, people want it. Second, it’s incredibly difficult to extract. Essentially, the valuation principle runs parallel with precious metals. People also want such commodities because they are rare.
If you can just pick up bullion bars in your backyard, then their market value will almost surely decline.
Therefore, the PoW protocol that Ethereum Classic continues to run seems to make the most sense. As in anything in life, valuable objects, entities and people have a higher cost associated to them. Artificially reduce the cost and I believe you’ll end up with a less valuable product or service.
It’s All Speculation
I want to be clear about something. Whether you’re a supporter of Ethereum or Ethereum Classic, the most important point is that these are speculative assets. You don’t want to invest in either one with money you can’t afford to lose.
That said, for those who want to take a gamble, Ethereum Classic just might offer something for you. Ultimately, I see a big risk in dealing with the devil you don’t know — proof of stake — than the devil you know — proof of work.
If you’re already invested in cryptos, this juncture might be a time to consider diversifying (or hedging) into ETC.
On the date of publication, Josh Enomoto held a LONG position in ETH, ETC and BTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.