Is Ether the coin for the future?

Cryptocurrency has exploded in popularity in recent years, and its possible applications could revolutionise the world’s financial and internet systems. The interest in cryptocurrency arises from its blockchain technology, a publicly available ledger that contains the details of all transactions, which is secured and verified with cryptography. This system requires people called “miners” to use considerable computing power to help verify transactions and place blocks on the chain, who are subsequently rewarded with currency for their efforts. This results in a decentralised financial system, which removes the influence of a central issuing authority on the value and production of currency, theoretically making cryptocurrency difficult to manipulate. 

One of the major players in this industry is Ethereum, which was founded in 2013 by Vitalik Buterin, a computer scientist from Russia. It is the second largest cryptocurrency in the world, with a market capitalisation of 489 billion USD. The networks use has increased massively since its development, and its currency called Ether has rallied eightfold this year to 4,150 USD. With the presence of thousands of different cryptocurrencies, Ethereum stands out through its use of innovative technology such as smart contracts, that automatically execute when certain conditions are met. 

One of the reasons behind its recent rally are investors speculating that Ethereum could transition into a deflationary asset, as the currency enters a new phase and the number of Ether coins that are being issued will now reduce significantly. Furthermore, a change to the method of validation carried out by miners means some tokens will be removed out of circulation. These factors will lead to a drop in the supply of Ethereum and could lead to an increase in the price of Ether coins.  Another cause of the rally is news of an approval of an exchange traded fund based upon the value of Bitcoin to be sold on US stock exchanges by the SEC. This has sparked hopes that one based on Ethereum will soon be approved, which will make the currency more available for investment and show its gradual acceptance as a legitimate financial currency. 

Additionally, there are hopes that Ethereum could be the system used for the theoretical Web 3.0, a term used to describe the transition of the internet from the dominance of large, centralised tech giants who monopolise user’s personal data; to decentralised applications in which data is shared between users. This is because of its blockchain proving very attractive for use by developers, with an estimated 60 percent of firms in the industry utilising it for their software.

However, the Ethereum network only allows 15 transactions per second, often resulting in bottlenecks during busy times on the network, during which only the highest value transactions are executed. This has hindered Ethereum’s viability as a currency, and proposed changes are taking far longer than expected. One solution is the existence of “layer twos,” which run on top of the blockchain and aggregate transactions which are then processed as one, helping to lighten the severity of bottlenecks.  This issue with the scalability of the number of transactions per second has resulted in other cryptocurrencies with greater processing capacity becoming more favourable, such as Avalanche which allows over 4,500 transactions per second.

The root of this issue for Ethereum lies in the massive amount of computing power required for the verification of transactions in the blockchain, something which has also raised concerns from an environmental standpoint. One transaction on the Ethereum blockchain consumes as much electricity as the average household uses in a workweek, and it is feared that wider adaption of Ethereum could prove to be unsustainable. However, a proposed change in the way the blockchain is verified next year could see energy consumption fall by 99.5 percent, but this involves using a system which has never been implemented before and could give rise to other issues. 

Ethereum’s adaptation by software developers on its blockchain may see its Ether coin become more widely used. Moreover, its probable approval for exchange traded funds that will increase its legitimacy in the eyes of financial institutions are all positives for investors, as they may see Ether’s price increase. However, the viability of Ethereum for investors is paradoxical, as to give good investment returns it must increase significantly in value on an annual basis. Contradictory to this, the supposed end goal of it being a widely used currency means it must be an inflationary asset to encourage spending by holders of the Ether coin. Ether must instead be thought of as a store of value rather than worthwhile currency by investors, especially considering its current transaction restrictions. In this capacity it is still useful, as it can be used to safely shield funds from the influence of a malicious governments for example, however there is no intrinsic value to the coin so speculative investment may prove to be risky.

By Alex de Souza

Sector Head: Dylan Buckley