2022-01-07 15:22:19

Ethereum May Linger if the Proof-of-Stake Transition Takes Too Long

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Ethereum (CCC:ETH-USD) is set to make some major changes during 2022. This is according to Vitalik Buterin, Ethereum’s co-founder, who recently gave an update on some of the changes that are in store for ETH.

Source: shutterstock

Fortunately, Cryposlate magazine reported on Jan. 5 a summary of all the updates and announcements from Buterin. The article is helpful in that it combined a recent interview with Buterin and a blog post he wrote in late December.

In addition, on Dec. 1, Buterin tweeted about a “roadmap diagram for where Ethereum protocol development is at and what’s coming in what order.”

The Ethereum Proof-of-Stake Transition

One of the key issues in the Cryptoslate article was when the Ethereum 2.0 merge will actually occur. That is when the crypto will transition from using a proof-of-work (i.e., crypto mining) system to validate transactions to a proof-of-stake system.

In response to a question, Buterin said he thinks the whole upgrade process is about halfway complete. He added that once the merger with Ethereum 2.0 is complete, the process will be 60% complete.

However, he gave no specific date for the merger with Ethereum 2.0 in order to transition to proof-of-stake. The Cryptoslate article refers to piece put out by Consensys, which says the merger will occur sometime in the first quarter or Q2.

There have been delays to getting this transition started. This has to do with the beginning of an event called the difficulty time bomb. I have written about this in the past, and Cryptoslate has written several articles about these delays.

Essentially, the difficulty time bomb is the introduction of harder Ethereum mining requirements. Due to diminishing returns and lower return on investment (ROI), the goal is to convince most miners to transition from mining, or proof-of-work, to proof-of-stake.

Where This Leaves ETH

The fundamental issues with Ethereum relate to the high cost of its transactions as well as the long time period it takes to get transactions completed.

This has to do with the scalability of the blockchain network. That is why Buterin talks about “sharding,” “rollups” and “chain.” Suffice it to say that this is an even more difficult problem than both the merger issue and the transition to proof-of-stake.

As a result, don’t expect to see Ethereum’s costs and time period for transactions fall quickly this year. Based on everything I have read, I suspect it will take at least another year or two.

Meanwhile, Ethereum’s miners and the owners of its promotion organization continue to make a lot of money. This cost is borne by ETH owners and most other transactions on the platform. This is why so many other Ethereum competitor cryptos will have plenty of time to build their market share.

What to Do With Ethereum

Last year Ethereum performed quite well, up more than 416%. But I suspect that until ETH makes significant progress, as Buterin says it will, the crypto will languish.

It may take another 2 years for Ethereum to significantly lower its costs and speed up transactions. If that happens, don’t expect ETH to move notably higher until the end is in sight.

For example, the first move is the merger with Ethereum 2.0 and the change to proof-of-stake. If that gets delayed again due to the difficulty time bomb, don’t expect Ethereum to move higher. Its upside may become directly related to the start of that event.

If traders become suspicious that there will be further delays, I don’t expect they will be too keen to take long-term positions in ETH. That will lower its demand and essentially hurt the trading price.

On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance at mrhake.medium.com and and runs the Total Yield Value Guide, which you can review here.

The post Ethereum May Linger if the Proof-of-Stake Transition Takes Too Long appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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