Ethereum update may allow it to become the dominant blockchain

The Bitcoin versus Ethereum battle hots up

For crypto fans the idea that there is a battle between cryptocurrencies would not sit well. They would argue that the battle is against the centralised fiat systems that restrict their ambitions for a true financial revolution. The two largest are Bitcoin and Ethereum which collectively has a market cap of about $530 billion.

Whatever.

It might be worth pointing out that the original money system was no monetary system. People bartered goods, in effect we used Non Fungible Tokens (NFTs) all the time. One chicken was not the same as any other.

It was impractical though so we used other things that were easier to carry (the residents of the Yap Islands went their own way in case you have not seen a Rai stone).

Metals became the norm as they were rare enough but also common enough. The catch was that rulers could not get enough of it themselves or worse had to manage the issues when the items used for trade could not be standardised and so some felt they were being cheated. This was the start of centralising money. 2700 years ago in modern day Turkey the first coins were minted from a mix of gold and silver and unless they had the lion stamp they were not acceptable. Now the King could make as much as he wanted and buy what he needed for his Kingdom. So not that different from modern day crypto creators minting their coins.

But crypto is decentralised and so can’t be the same as some king issuing their own currency! Not really, anyone can issue a new coin, the catch is whether anyone would give you actual currency for your newly created coin. There are over 10 000 by Statista’s count in Feb this year, for comparison there are less than 250 countries so enough coins for 40 cryptocurrencies for every fiat currency.

The element that is decentralised is how the transactions are approved. Rather than central players that verify that a person claiming to have funds and that wants to exchange some of those funds with someone else for goods or services, the initial blockchains would rely on a process open to anyone to solve a mathematical problem which when solved would commit the changes to the central database of transactions as accurate. The person that supplied the solution would be rewarded with tokens of that cryptocurrency. Everyone was trying to solve the same problem and so trying to introduce an entry that was not accurate would be unlikely as there were many others looking to do the same and would invariably do so before just one operator could.

The catch is that as the value of the rewards grew, the number of people trying to solve the problem increased. When millions are trying to solve the same problem the problem needs to be made more difficult to have it solved at a set time frame. This is a simplification and not all networks use the same system, but the intention to make it decentralised and trustless has had the consequence that it took enormous amounts of energy to operate.

Proof of Stake

This was the proof-of-work method as the reward was given to the user that could demonstrate that they did the work to solve the problem.

The Bitcoin network still uses this method while the Ethereum network has recently switched to a revised system called proof-of-stake.

In this system, users wanting to verify transactions set aside 32 Ether (the currency token for Ethereum) which is worth a little less than a R1 million. You could do it on your own, get someone else or join a pool. The rewards are given for the blocks you validate and fees based on the effort to complete the transactions.

It gets complicated here as while Bitcoin only manages a payment token, Ethereum is a smart contract blockchain. Each transaction is a form of computer program to carry out potentially complicated tasks. The fees are based on how much work is needed to execute and validate the operation. Those that carry these operations out for users earn the rewards for doing them.

It does not mean that miners will earn more, or more transactions will take place or that transactions will get cheaper.

The merge was specifically introduced to reduce the energy needed to complete the tasks.

According to Ethereum they determined that 112 Terawatt hours per year (TW/yr) were needed to validate the blockchain, while Bitcoin needed about 200 TW/yr, which is a lot. A typical home in South Africa will use about 0.00001 TW/yr. After the merge they claim that the network will only need 0.01 TW/yr so the same as about 1 000 homes rather than over 11 million.

Another comparison is how much energy is used per year for gold mining which is 240 TW/yr and watching YouTube reportedly uses 244 TW/yr.

So what about the other improvements?

This is where the other other terms that rhyme with merge come in. The plan to increase the number of transactions is adding sharding which increases transactions for a few dozen per second to 100 000 a second which is called the Surge. Visa does about 24 000 up to as much as 65 000 transactions per second, Mastercard about 5 000 per second and Bitcoin currently does about 7 but their new lighting network promises as much as 1 million per second.

The updates may look like an increase in centralisation and in some respects there is value in building a more robust centralised system through consensus, but it is also a very large system making it hard for anyone to operate as a node, but the Verge update will make what is needed less onerous.

And finally they wish to trim the unneeded code to keep things more secure which is being called the Purge.

It is a necessary evolution that will continue to make the case for blockchains. The jury may still be out for them needing to be completely decentralised, but if operated by global consensus via a body like the United Nations, it may see a new global currency that will not favour the US and the dollar quite so much but also not something used for scams and money laundering, but even if it does not become the new global norm, it will certainly improve how we evolve our own currencies.



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