Could Ethereum Classic be a Great Investment?

Earlier in the year, the soaring rise of Bitcoin immediately captured the mainstream media’s attention, as analysts covered with near incredulity the original cryptocurrency jumping from one record-breaking threshold to another. But as BTC marched its way toward $50,000 and beyond, alternative cryptos or altcoins also garnered tremendous awareness.

One of the reasons of course is psychological. To buy one BTC at $50,000 is the equivalent of purchasing a premium luxury vehicle. Mentally, that’s a big hurdle to cross. On the other hand, you can purchase several million units of low-priced altcoins (or more) for the same amount of money. Mathematically, the risk is usually higher for such investments but emotionally it’s much more palatable.

But among more sophisticated investors, fundamental catalysts undergirded their acquisitive strategies. Currently, the undisputed number two to Bitcoin is Ethereum. Specializing in smart contracts, Ethereum (ETH) represents the constantly evolving nature of the blockchain. Whereas Bitcoin proved the viability of a decentralized peer-to-peer (P2P) network, Ethereum had bigger plans: to replace the trust model in human-facilitated contracts with blockchain technology, thereby creating the concept of smart contracts.

So far, the greater flexibility of Ethereum’s architecture and its myriad possible applications boosted Ethereum’s profile as a technical foundation and investment opportunity. However, as Ethereum embarks on its latest journey from a proof-of-work (PoW) protocol to proof of stake (PoS), its past might come back to haunt it.

The Origin of Ethereum Classic

Those who are brand new to cryptocurrencies, may not realize that the Ethereum of today is not actually the original architecture. Instead, that honor belongs to Ethereum Classic. Unfortunately, exploitation of the original platform’s smart contract software resulted in a debate about how to rectify the matter.

On one side, the original Ethereum project’s contributors and early supporters wanted to keep the network untouched. Though blemished due to the exploited flaw, a split (known as a hard fork) of the blockchain would contradict the spirit of the underlying technology being an immutable consensus-based platform.

On the other hand, not addressing the breach would essentially excuse the perpetrators. Eventually, the two sides could not come to an agreement, resulting in a split. The new architecture with the altered history became the Ethereum we all know today. The original Ethereum became Ethereum Classic.

Very quickly, the newly branded Ethereum garnered outside investor confidence while the original Ethereum Classic languished in the shadows. Indeed, during this year’s crypto rally, ETH had already broken prior all-time records within February. In contrast, ETC had to wait until the first half of April to enjoy much excitement.

But from then on, Ethereum Classic posted mind-blowing gains. Better yet, some claim it’s possible that ETC could win out in the profitability game in the years ahead.

ETC and the Beauty of Proof of Work

Although Ethereum prides itself as the true backbone of the blockchain economy, its popularity came at a price. As more programmers used its network, transactions became incredibly congested and thereby more costly. True, end-users could pay premiums for transactional prioritization but obviously, this led to even greater costs. They could also do nothing, which would then impact their time.

Either way, Ethereum had its own Bitcoin problem — the system became too unwieldy for its own good.

Not surprisingly, the discussion of PoS protocols gained momentum in recent years. Long story short, by making the Ethereum network more transparent and efficient, transactional costs will decline significantly. That should keep end-users happy. But it also only addresses one side of the equation.

For a decentralized platform to function, network nodes must contribute their computing power, capacity or storage to ensure continuous operation. Anyone can become a network node, which is the inherent beauty of the blockchain. It truly democratizes the building of a digital economy through open participation.

But there’s a major challenge: humans are rational actors. Unless you financially incentivize the contribution of said power, capacity or storage, hardly anyone will offer it. That’s because such attributes incur energy, which in turn costs money.

However, by making a blockchain network incredibly efficient via a PoS protocol, a risk exists of disincentivizing network contributors. With less “work” to do, the rewards for providing contributions will be limited. Once these limitations reach a boiling point, a network can fail due to lack of contributor interest.

Theoretically, Ethereum Classic may avoid this economic demand trap by sticking with its PoW protocol. According to Coinmarketcap.com, there are no plans to convert Classic into a PoS protocol. That could be a godsend for ETC.

Structurally, PoW blockchains are inefficient compared to PoS. But this inefficiency effectively gives network contributors a job to do. And the greater the inefficiency, the higher the profitability margin for crypto miners, all other things being equal.

It’s possible, then, though I’m not going to go so far as to say it’s probable, that Ethereum Classic could snake some contributor volume from Ethereum as the latter becomes more efficient but also less profitable.

Not Just About the Tech But Also the Motivation

To be clear, the purpose of the above write-up isn’t to push Ethereum Classic over Ethereum. Nor do I have a crystal ball or even a strong hunch that ETC will outperform ETH. Rather, I’m merely proposing that it’s possible and laying out the foundations for such a scenario.

Frankly, that many might immediately dismiss the notion of ETC’s outperformance over ETH suggests that crypto investors may be focused too much on the blockchain’s underlying technology and potential use cases and not on the economic implications. In reality, the most successful cryptos of the future will probably feature a balance of technical utility and robust economic incentives.

Disclosure: The author held a position in all the cryptocurrencies mentioned above.

Leave a Reply

Your email address will not be published.

Related Articles
Read More

Ethereum Vs. Cardano: A Deep Dive

History and Introduction: Cardano and Ethereum Usually, when we discuss digital currency, we hype up the coins with the larger market capitalization and higher price value. However, the crypto market has few other coins with a comparatively lower market cap but unique features. Yes, there...
Read More

Ethereum Is Going Proof Of Stake: How Long Can It Take?

Although cryptocurrencies represent one of the most groundbreaking innovations in the business and financial sector, no technology is immune to the competitive pressures of progress. Even Bitcoin, which pioneered the very concept of virtual currencies and the blockchain, suffered from technical inefficiencies that were ripe...
Total
0
Share