How Ethereum's Next Big Upgrade Could Increase Its Value
How Ethereum's Next Big Upgrade Could Increase Its Value
Ethereum, the world's second-largest cryptocurrency, has many more uses when compared to Bitcoin. That makes a potentially better long-term investment.
Ethereum is a popular cryptocurrency with many real-world and practical uses. As it enables online financial transactions, it has gained value over the years.
This upcoming change in how the currency works could help it steadily build its value with every transaction.
As Ethereum grows in popularity, large financial firms are taking a greater interest in it.
Ethereum is a highly popular smart contract and decentralised application network. It can become an even more attractive investment due to changes in the process through which the people maintaining its network get paid. When the subsequent significant development in its upgrade roadmap happens, this change could decrease its supply and raise its value. That would be great news for investors attempting to hedge against inflation.
How Ethereum is changing its network
Since 5 August, part of the fees spent by the Ethereum network users, which used to make new coins to pay miners, has been destroyed or burnt. According to CoinMarketCap, 177,424 ETH got removed since the upgrade, and 117.3 million tokens are still in circulation. This change could make every existing coin more valuable.
Like Bitcoin, Miners currently use lots of energy to produce Ethereum under a proof-of-work consensus mechanism. At present, it has a variable annual inflation rate of around 2.8%. Once the network moves to a staking-based consensus, fewer new coins will be issued.
Ethereum holders will keep the network running smoothly by storing away or staking some or all of their tokens. It will replace the current system of being rewarded for solving challenging math problems. At present, 7.4 million ETH tokens, approximately 6.2% of the circulating supply, have already been staked. This staked ETH is currently earning an annual percentage yield of 5.8%, way more than any bank.
As per estimates through simulation, the circulating supply of Ethereum could narrow down by around 1.4% every year at the present rates of fee burning. That will happen after Ethereum's major upgrade sometime in late 2021 or early 2022. In theory, it could reduce the value of every token by the same proportion. That means that the circulating supply of the asset will shrink.
Ethereum has way more uses.
Bitcoin is presently seen as a store of value or a haven asset to hedge against inflation fiat currencies. But Ethereum is a fledgling financial landscape for the internet. It is more of an economy.
Apart from staking, Ethereum is also the basis for decentralised finance protocols. Many of them are based on Ethereum and its smart contracts. These smart contracts run on the blockchain and execute when predetermined conditions get met. We can also use them to build decentralised applications, known as dApps.
Currently, investors hold 7.7 million ETH locked up in DeFi protocols for liquidity mining, yield farming, or token swapping. That is where token holders can earn more crypto assets by providing collateral in crypto assets.
Ethereum is also the standard for most NFTs or non-fungible tokens, which has seen a boom in sales this year. NFTs are unique tokens on the blockchain proving ownership. They can represent gaming items, music, art, avatars, and real estate too.
Additionally, for stablecoins, Ethereum is the base layer. Stablecoins are digital assets pegged to a fiat currency. Tether is approximately half of the world's most popular stablecoin and is based on the Ethereum standard.
There is only a drawback to Ethereum's current popularity. Growing demand has inflated network fees that have led to average transactions costing $40. The upcoming upgrade includes speed up transactions and other improvements intended to reduce these fees. As of now, it gets rather tricky for apps and people to use Ethereum.
Why big banks are buying in
Compared to just a 70% rise since the beginning of 2021 for Bitcoin, Ethereum's strengths have pushed its prices 400% higher.
Large institutions like Grayscale have noticed and are investing heavily in Ethereum. Institutional funds provide wealthy clients exposure without them holding it.
Also, several large Wall Street banks have been bullish on Ethereum. In July, analysts of the investment bank Goldman Sachs see the potential of Ethereum growing to dominate the digital store of value in the future because of its practical uses.
Once it shifts away from mining, the network may also be seen as a more environmentally friendly investment that eco-conscious corporations would prefer.
These factors could cause a rise in demand and prices. It is along with the possibility of a reduction in its supply. Such a trend might only become pronounced if the COVID-19 pandemic drives currency devaluations and inflation on a global scale.
Increased regulation in the U.S., like the controversial crypto tax reporting bill, would hold back innovation and adoption of Ethereum in the short term. The faster blockchains in its competition like Polkadot or Cardano could threaten to become the de facto standard for DeFi, dApps and smart contracts.
These networks have recently gained traction as the crypto ecosystem grows. However, Ethereum has already established itself as the industry standard, as IBM in the early 1980s was for the computing industry. It cant be any mean feat to knock the network off its perch as it has the largest developer and supports the community. Also, many platforms are already running on Ethereum.
Keeping this in mind now might be a great time to buy and hold Ethereum for at least a couple of years.
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