Just as you thought the cryptocurrency market was (finally) down, headlines in a positive direction hit the headlines for another great jump. However, this time it was Ethereum (CCC:ETH-USD) that received the most accolades.
Although the # 2 cryptocurrency by market cap, it was # 1 in terms of gross percentage movement of established blockchain-based assets. Over the past seven days (time of writing – May 3, 2021) Ethereum has gained almost 32%. Separately Binance Coin (CCC:BNB-USD) 22% more, nothing else among the major senior coins beats.
The strengthening of Ethereum’s bullish trend is evidence that ETH is moving up based on its fundamentals. The underlying blockchain will undergo a significant change dubbed the Ethereum Improvement Protocol EIP1559, which I will discuss in detail shortly. But the main takeaway is that investors seem to be betting on a protocol change rather than pure speculation.
According to Matthew Dibba, chief operating officer and co-founder of Stack Funds, “Ethereum funding rates remain stable and turn negative early today on the FTX … improving.”
This is more than a reasonable assumption. According to Coindesk.com, “Funding rate calculated and paid every eight hours refers to the cost of holding long positions on an indefinite basis (futures contracts with no maturity). The high funding rate implies an increase in purchases in the derivatives market, which is currently not the case with Ether. “
While this may be reassuring for Ethereum, which currently costs over $ 3,000 and looks set to rise to $ 4,000 and possibly $ 5,000, the momentum is a double-edged sword. When people speculated on the price movement of ETH, you can use technical analysis to gauge the psychology of traders.
But while it is true that ETH is currently trading based on fundamentals, you need to have a deeper understanding of EIP1559.
Ethereum and Pandora’s Box for Fundamental Investments
Please note that I am not going to give a deeper understanding of Ethereum. I’ll walk you through the structure, but it’s up to you to do your due diligence.
At its most basic level, the Ethereum blockchain provides the foundation for multiple applications. But like any system, Ethereum requires administrators to keep things running smoothly and efficiently. As you know, blockchains are inherently decentralized, so the administration process rests on the shoulders of ETH miners.
Of course, no one works without material compensation (at least not for long). To entice miners to perform the necessary administrative tasks, the Ethereum blockchain requires gas payments to complete a transaction or complete a contract on the network. Technically, gas is a fee paid to miners in ETH coins for their efforts.
In practice, however, gas is a bribe. Indeed, during periods of network congestion, miners should prioritize starting transactions. This is where miners earn their salary as their collective tasks keep the Ethereum network running smoothly when under pressure. However, this process also creates inequality, because wealthy people will always carry out their operations by increasing the supply of gas.
To remedy this, ETH recommends proposal EIP1559, which introduces transparency in transaction fees and automates the gas auction system. It also severely weakens the control miners previously had over the flow of transactions on the network, in part by removing the win-win system from the gas trading process.
In other words, EIP1559 discourages gas bribery and reduces the income of Ethereum miners. Unsurprisingly, many miners argue over the EIP1559.
For me, this creates a Pandora’s box situation. While EIP1559 helped lift the price of ETH sky-high, it could also hurt the valuation if the offer doesn’t work out as expected. And I think this is a big possibility.
Life should never be fair
While economic justice was one of the most talked about topics in the past year, scientifically, fairness is a negative sign. For example, you will find justice in a discharged battery – dead, because the response inherent in the battery is in equilibrium and therefore the energy potential is zero.
This is the first thing I thought of while reading the details about the EIP1559. In my opinion, the new protocol removes the capitalist incentives that drive human innovation. There is a reason the Soviet Union failed: it focused on fairness among workers and thereby created a balance of mediocrity because it held back excellent work.
Why work harder when you get paid, like everyone else, for the bare minimum?
I’m not an Ethereum miner, so I can’t talk about it first-hand. But it looks like the original gas protocol incentivized miners to do their jobs well and rewarded with solid profits. So getting rid of this process can have unintended consequences.
It looks like Ethereum is going to “wake up” economically, as kids like to say. While this sounds good on paper, it may not work in the long run.
At the time of publication, Josh Enomoto was long in ETH.
A former senior business analyst at Sony Electronics, Josh Enomoto has helped close major contracts with Fortune Global 500 companies. Over the past few years, he has provided unique and critical insights to the investment markets as well as various other sectors including law, construction management and health. …