The price of Ethereum, the second most popular and valued cryptocurrency behind Bitcoin, hit an all time high this week. It brought with it a reopened discussion on the past and future of the token, and forced me to consider that, despite getting paid to write about it, I don’t know shit about how it works. So I set out to find out.
Ethereum uses a proof of work (PoW) model, the cryptocurrency standard. This means that tokens are acquired (‘mined’) by solving complex equations to validate transactions on the blockchain. It takes immense computer power to do so, leading to the much-publicized environmental impact of the network.
The value of ETH began to explode in late July. Soon afterward, the EIP-1559 software update went live, causing a small amount of ETH to be removed from circulation (‘burned’) with each transaction. Purported to make transaction fees more predictable, it also helped the price to skyrocket — if demand stays constant and supply depreciates, value appreciates.
Taken together, it makes sense that one of these bad boys could go for almost $4.5k — it is a scarce resource with a practical utility in high demand currently. But pending changes to the network might flip the model on its head, for better or worse.
Yesterday, the Altair upgrade went live, laying the groundwork for ETH 2.0. ETH 2.0 is the name given to Ethereum’s rumored shift to a proof of stake (PoS) model. This would make mining obsolete — instead, users validate transactions based on the portion of coins they hold — and reduce the environmental impact by 99%. This would lower the precipitous cost of entry (ETH gas fees are at an all time high now too) but also restrict it to those users already holding the coin. Still, to them, it couldn’t come soon enough.
However, along with the Altair announcement, ETH 2.0 was simultaneously pushed back to 2022, and, to hear Twitter tell it, we’re more likely to have Dre’s Detox by then. ETH 2.0 has been in the pipeline for many years now, and smaller tokens such as Solana and Tezos are already proving out the PoS model. For cryptocurrency to be sustainable, scalable, and viable in the long run, the changes Ethereum claims to be making will need to be made. But whether they make them in time to maintain their momentum or are made irrelevant before they can remains to be seen.