Ethereum Switch: Caution Holders!

ETHEREUM, THE SECOND-LARGEST cryptocurrency with 17.7% market share, successfully shifted from proof-of-work (POW) to proof-of-stake (POS) consensus mechanism on September 15. In POW, miners solve increasingly complex series of mathematical problems. Based on their problem-solving skill, they get authority to create blocks in the blockchain, submit to the network and earn rewards. In POS, there is no mathematical problem. Instead, one has to stake coins, and the holder who has more Ethereum gets authority to alter the ledger. “It is like a capitalist model where the richer/bigger entity gets to validate transactions,” says Kumar Gaurav, founder and CEO of Cashaa, a blockchain-based fintech.

In POS, if one turns out to be a bad actor, as a punishment, he or she may lose a heavy amount or coins put on stake. One needs a very good reason to make alterations in blockchain in POS, says Kumar. The shift to POS, which requires far less power, is expected to make Ethereum blockchain 99.95% more energy efficient, which is positive for the crypto ecosystem. Yet, while experts anticipate increased adoption of Ethereum blockchain by innovators, they are asking token holders or investors to exercise caution. “We could see more De-fi (decentralised finance), NFT (non-fungible token) and Web 3.0 applications on Ethereum blockchain because of this upgrade,” says Avinash Shekhar, CEO, ZebPay.

Also, those holding Ethereum at the time of the switch are being given bonus tokens and any investor holding the asset with a horizon of two-three years will make a profit, says Tarusha Mittal, COO and co-founder, UniFarm.

However, some miners have decided to stick with POW. “Several miners have decided to form a chain and continue with POW — this chain is called ETHW. Users holding Ethereum at the time of the merger will get an equal number of assets on the ETHW chain, which is a windfall gain for them,” she adds. However, investors need to be cautious. “POW, which is still used by the largest cryptocurrency, Bitcoin, has been battle-tested for over 10 years, but POS is fairly new and at this moment we are not sure about hidden vulnerabilities or standards of security upgrades, which add to uncertainty,” says Mittal. Kumar Gaurav of Cashaa, who is also bullish on the token after the switch, says investors need to keep an eye on their tokens as nobody knows how things will pan out in future.

Advantage Investors!

Existing Ethereum holders can stake their tokens to earn rewards, says Shivam Thakral, CEO, BuyUcoin. The newly-merged ETH Blockchain on POS requires each participant to stake at least 32 tokens in order to be eligible for staking rewards and interest. Thirty-two Ethereum tokens mean you need roughly $41,000 ($1,281 x 32) or ₹33 lakh. However, if you do not have 32 ETH tokens, many centralised crypto platforms pool investments from small investors and stake on their behalf. Crypto platforms use staking on behalf of customers (lenders) to earn returns. It is a mechanism used by many cryptocurrencies to verify their transactions. Think of staking as crypto equivalent of putting money in a high-yield savings account. You receive a portion of interest the bank has earned from lending your money. Similarly, when you stake digital assets, you lock up your coins, which participate in running the blockchain and maintaining its security. In exchange, you earn rewards, calculated in percentage yields. The reward is in the form of additional tokens of cryptocurrency that you had staked and is credited to your wallet. The current staking reward on Ethereum is 4-5%.

“With the merger, ETH will become a yield-generating asset,” says Mahin Gupta, founder, Liminal, a wallet for digital assets.

Other Coin Holders: Be Wary

Crypto chains with POS as their USP will now face tough competition as ETH, the world's second-biggest crypto, will try to capture market share enjoyed by these protocols, says Gupta. Considering its large market share, ETH will start pulling users from other POS chains as it will become a yield-generating asset post-merger. "If chains like Polkadot, Cosmos or AVAX don’t offer any additional utility or use cases on top of their existing offerings, it would be much better to invest in a $163 billion ecosystem than any other," says Gupta.

On an immediate basis, the older Ethereum POW and ETC (Ethereum Classic) will show a negative impact in terms of price. The price of Ethereum Classic has fallen 23.4% post the merger, as per CoinGecko.

The next stage is sharding, a process to reduce network congestion and increase transaction speed. Vitalik Buterin, co-founder of Ethereum, believes Ethereum will be able to process close to 1,00,000 transactions per second. At present, it can do 25 per second.