Cryptocurrency investors have arguably just had one of the least chaotic weeks in months now.
Overall, prices have stabilised.
The market as a whole is back above $1 trillion. Granted, we’re still very far from the $3 trillion reached in November in the midst of cryptomania, but that’s a lot better than the $700 billion and $800 billion thresholds that the market fell to in June and early July.
All eyes remain focused on bitcoin (BTC), which concentrates 40% of the value of the digital currency market. The king of cryptocurrencies is now hovering around the $24,000 threshold after falling to $18,000 in June.
Over the past seven days, BTC is up 3%, according to data compiled by the firm CoinGecko. The market value is estimated at around 455 billion dollars.
Ether is the real star
But the real star of the market rally is Ethereum or Ether (ETH), the second digital currency by market capitalization. Over the past seven days, ETH has gained more than 7% and is currently trading around $1,700 for a market capitalization of $203.6 billion at the time of writing. ETH represents 18% of the cryptocurrency market.
A wind of optimism is currently blowing in the direction of ETH.
The reason is simple: the Ethereum ecosystem, which makes it possible to make payments using its native cryptocurrency ETH, is about to achieve the biggest update, called Merge, in its history scheduled for September 19.
Bitcoin and Ethereum are fundamentally different because the former was designed to enable decentralized finance, while the latter was designed to also enable applications and contracts.
Both systems use blockchain technology to validate and record transactions, but an upcoming change in the way Ethereum operates will mean the way they do so is different, with ramifications for speed, durability, reliability and availability.
Transition from Proof-of-Work to Proof-of-Stake
On Ethereum, we have seen the rise of various trends such as initial coin offerings (ICOs), Decentralized Finance (DeFi), non-fungible tokens (NFTS) and more recently metaverse.
However, network performance is unable to keep up with the increasing demand. Thus, Ethereum has been the victim of significant congestion for several months. One of the main consequences of this congestion has been the drastic increase in online fees.
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The developers have envisioned several developments aimed at improving the performance of the network and allowing it to process a greater volume of transactions, without negatively affecting the user experience.
These changes have long been grouped under the name Ethereum 2.0. The main changes are the transition from proof-of-work to proof-of-stake, and the deployment of sharding, a solution that aims to divide the network into several subnets, in order to increase processing capacity.
Proof-of-Work v. Proof-of-Stake
Proof-of-work asks participants to perform complex calculations for the chance to become the user who will validate a set of transactions and add them to the blockchain, which will allow them to earn a certain amount of cryptocurrency.
The “job” is to guess, as accurately as possible, a unique alphanumeric string of 64 characters. This work used to be done by amateurs, but the processing power needed increases over time, so the “mining process” is now reserved for specialized companies and organizations, meaning those who can afford to buy the hardware and the power to run it.
Proof-of-work consensus mechanism like bitcoin has come under a lot of criticism due to the amount of power used by the hardware used.
Proof-of-stake asks participants to stake their own money for the ability to validate transactions and add a block to a blockchain, instead of performing complex calculations.
The more cryptocurrencies a person stakes, the more likely they are to be chosen to complete a block of transactions on a blockchain and earn a certain number of coins. Not requiring powerful hardware, proof-of-stake is considered a greener consensus mechanism than proof-of-work.
Ethereum “will use at least ~99.95% less energy after merging,” the Ethereum Foundation said.
The merger aims to connect the “application part” of Ethereum as we know it, namely the entire application ecosystem (Ethereum 1.0), to the new proof-of-stake consensus mechanism (Ethereum 2.0). As a reminder, this consensus layer was deployed in December 2020, via the launch of the beacon chain.
Basically, Ethereum will be the addition of Ethereum 1.0 (execution layer) + Ethereum 2.0 (consensus layer).
The Ethereum developers hope to complete the merger of the two entities on September 19 after a third test planned for August. The first two tests, one in June and another this month, went without a hitch.
The main advantages of the merger are that transaction costs will fall, and it will make operations more efficient and faster.