Ethereum Gets Its First Improvement Proposal; Here’s What It Means For Investors

The Ethereum blockchain is getting one step closer to its 2.0 upgrade. That’s really exciting news for you, the Netcoins Progressive Investor.

Why?

Ethereum 2.0 is going to make the blockchain more scalable and more efficient than it ever has been before. It means moving from a Proof-of-Work algorithm to a more efficient proof-of-stake algorithm that makes it easier to generate new Ethereum tokens and more energy-efficient to grow the Ethereum economy.

Here’s the thing. Developers are only one step closer on a road that is still a long and arduous one. Investors also need to consider how the broader market is reacting to the recent pullback in crypto prices.

The news of progress is certainly exciting for those that are bullish on Ethereum, but there are many details to fill you in on. It’s also important to explain what this all means to you as an investor.

Here’s everything you need to know.

 

The Ethereum Improvement Proposal for Adopting Proof of Stake

The Ethereum Improvement Proposal for implementing a proof-of-stake consensus algorithm on the Ethereum blockchain is number 3675 (written as EIP-3675).

How did the proposal come to fruition?

Mikhail Kalinin, a researcher who works for blockchain consulting firm ConsenSys, has created a pull request for EIP-3675.

A pull request is a mechanism for telling others about changes you’ve made to a branch in the repository of a project’s coding structure. GitHub.com is a developer community website that essentially allows developers to converge, edit and build the coding structures that result in the blockchains we all know and love.

When somebody creates a pull request, they’re essentially asking the developer community to make a decision. In this case, that’s big news for Ethereum and the progress towards a proof-of-stake algorithm.

The Next Step for Implementing the Proposal

Ethereum’s core developers discussed EIP-3675 during a meeting on July 30, 2021. The developer community is a close-knit one and ultimately it seems like the majority of developers want this to happen.

This proposal theoretically should increase the fundamental value of the Ethereum blockchain, both in the short term and the long run.

But don’t be surprised if the price of Ethereum tokens doesn’t skyrocket right away. It’s one thing to agree to a proposal. It’s another thing to implement, and some skeptics still don’t believe that the Ethereum 2.0 upgrade will work without a hitch. It’s a big undertaking.

A Quick Refresher: What Is Proof of Stake Versus Proof-Of-Work and Why Is It Better?

A proof-of-stake algorithm allows validators on a blockchain to reach consensus based on random selection and the number of tokens a validator is willing to stake in order to support a network. The Ethereum 2.0 upgrade will allow individuals to become validators as long as they hold at least 32 Ethereum tokens.

Proof-of-stake algorithms are more efficient because they have nothing to do with computing power. As long as you can show the blockchain and the community of validators that you’re invested in helping the project to succeed through your staking contributions, you can be chosen as a validator, and you also benefit from earning a percentage on your Ethereum holdings.

Proof-of-Work algorithms use computing power to validate transactions and everybody has to compete to solve cryptographic puzzles. The puzzles get progressively harder to solve which means you need more and more computing power. It’s not great for the environment, and these days a project like Bitcoin requires mining power at such a large-scale that the average person will never earn coins through mining.

 

Why the Current Ethereum Proposal Isn’t Necessarily a Signal to Buy ETH Tokens Just Yet

Many Ethereum purists believe in The Flippening. The Flippening is a meme-ish term that refers to the moment where Ethereum will become more valuable than Bitcoin by market cap.

At the height of the cryptocurrency bull run in 2017, Ethereum got pretty close, but it didn’t happen. 

Four years later, Ethereum proponents think that the 2.0 upgrade is what will act as the catalyst that finally makes it the most valuable cryptocurrency in the world.

Here’s the thing. That likely still won’t happen anytime soon and there won’t necessarily be a ‘flippening’.

This Ethereum proposal is definitely a great milestone, but it’s not the end of the road. Tim Beiko is a developer for the Ethereum Foundation who helps coordinate upgrades to the blockchain. He says that in order for Ethereum to upgrade to its 2.0 version by the end of the year, nearly every step along the way in the execution of that would have to go perfectly.

It sounds like we aren’t going to see the full upgrade until at least 2022. What does that all mean for investors?

Should You Invest in Ethereum Now That Looks like EIP-3675 Has Gone Through?

The short answer to this question is, it depends. I’m aware that progressive investors like you don’t like hearing that, but time in the market is better than timing the market. One catalyst won’t guarantee you success in your investing strategy even if you do get the benefit of a short-term spike.

The question is, what is the likelihood of a short-term spike specifically related to this upgrade? There is probably some chance that your Ethereum holdings will increase in value just because of the meeting or the proposed upgrade.

EIP-3675 is only one step along the way, and investors have likely already priced in the benefits of the proposal anyway. Couple that with the fact that the market has bounced back in terms of price increases over the last two weeks, there’s a chance that a broader market downturn in what seems to still be an overall bearish market could wipe away any short-term gains anyway.

Other Ethereum Improvement Proposals That Could Get Investors Excited

EIP-1559 is another Ethereum Improvement Proposal scheduled for August 5. It will help the project take another step forward in making the token a deflationary asset. The idea is that every time somebody transacts on the Ethereum blockchain after this proposal, a portion of the transaction fee will be burned.

Any time the supply of a token is reduced, the value should go up. However, one thing to remember about Ethereum is that the overall supply is theoretically unlimited. It’s not like Bitcoin where the supply is exactly 21 million coins and there will never be more.

Still, many other altcoin projects burn tokens and investors generally favour that. So don’t be surprised if sometime in 2022, Ethereum sees a huge bump in value.

There are two other events to consider. One is an upgrade called Altair that takes place in October. It will help make Ethereum 2.0 fully functional.

The other thing to consider is that the implementation of EIP-3675 is up against a preprogrammed ticking time bomb that could make it difficult.

In 2015, an upgrade to Ethereum made mining progressively more difficult over time as a way to ensure that developers would always be quick in implementing new changes to the network. This time could make it really hard if not impossible to achieve these upgrades, which is a downside.

The good news is that that ticking time bomb can be extended for a while thanks to another improvement proposal, EIP-3554.

So Many Proposals, So Little Time; Investors Should Think Critically

Even if you’re a short-term crypto investor, you still need to have a long-term view of things. Making fundamental changes to a blockchain takes time, and it also takes time for the market to understand those changes and how they will actually impact things like transaction volume, utility, transaction speed, and scalability.

With such exciting news about Ethereum coming out it might be tempting to jump the gun and pour all of your crypto capital into a stalwart project that everyone trusts, but if you’ve already been dollar-cost averaging your way in and you’re in a good position, you can afford to wait until the fundamental value of the project increases before you add more capital.

At the end of the day, the choice is yours. Just remember, when it comes to investing, you should follow the same principle as an astute woodworker would follow when building a birdhouse. Measure twice cut once. Do your due diligence and always protect your downside.

Buy Ethereum at Netcoins with 0% Funding Fees

Sign up for a Netcoins account and add to your holdings without paying any funding fees. Netcoins is one of the most trusted cryptocurrency exchanges in Vancouver and serves all of Canada. You can buy Ethereum tokens, Bitcoin, Litecoin, XRP, Bitcoin Cash, and Canada’s first stablecoin, QCAD.

Remember that nothing is guaranteed in the cryptocurrency space at any given moment, but the Ethereum upgrade is many years of development in the making, and the project’s loyal following, fundamental value in spaces like DeFi, NFTs, and smart contracts makes it one of the sounder crypto investments anybody would ever make.

There are thousands of dud projects out there, but Ethereum is certainly not one of them. Upcoming Ethereum Improvement Proposals are only going to make the blockchain more robust and more valuable than ever. When the price is going to catch up to the fundamental value is anybody’s guess.

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