Ethereum (ETH +1.82%) has a lot going for it -- it's made some investors a bundle and it's an innovative utility coin. Investors who put money into Ethereum when it was introduced six years ago could be sitting on more than $1 million worth of profits today from an initial $1,000 investment. The coin also is the first programmable money in the world, storing instructions on the blockchain that self-execute when certain conditions are met, also known as smart contracts.
Ethereum is a major step forward from cryptocurrencies such as Bitcoin (BTC +0.88%), which only allow users to send money to one another. But more importantly, innovations are coming for Ethereum. Let's look at how this revolutionary coin might make a worthy addition to investors' portfolios.
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A big step forward
Ethereum is about to undergo a significant transformation that fixes a mounting challenge for cryptocurrencies like Bitcoin -- environmental sustainability. By the end of 2022, the Ethereum network will transition into one based on proof of stake (PoS) instead of proof of work (PoW). This means the network will no longer need miners using ever-more computing power to solve sophisticated, algorithmic puzzles to validate transactions on the blockchain ledger and create new coins. To put that into context, the global Bitcoin network now consumes as much energy as 23 coal-fired power plants -- and is growing day by day.
In theory, under the PoS regime, anyone will be able to validate transactions based on how many Ethereum -- their stake -- they own. The minimum requirement for staking is 32 ETH, or about $80,000. Under this setup, validators collect a network fee for their efforts, which is kind of like interest -- say 6% a year in the form of new tokens. In addition, the network also has the potential to expand to a delegated PoS network, where those who do not meet the minimum staking threshold can "delegate" their ETH to a staking pool for a fee to take part in validations. This move toward an eco-friendly model is a major bullish catalyst for Ethereum.
Growing recognition
Some of the biggest companies in the world are using Ethereum. For example, ING Group, a Dutch multinational bank with more than $1.1 trillion in assets, uses Ethereum to settle payments, bilateral lines of credit, and trading documents. In addition, TD Ameritrade, part of discount broker Charles Schwab Corp., is using Ethereum to facilitate smart contract future trades.
In another case, French video game titan Ubisoft Entertainment SA is using Ethereum as the basis for in-game purchases. Finally, JPMorgan Chase & Co. is looking to integrate its own digital coin (the JPM coin) with smart contracts via Ethereum.
The next revolution
It may not be obvious at first, but programmable money like Ethereum has the potential to revolutionize the way we conduct financial transactions. Right now, smart contracts are limited to the internal data on a blockchain, or the shared ledger of all transactions in a network. However, the rise of so-called oracle tokens like ChainLink is a major game-changer. ChainLink allows smart contracts to execute based on real-world API, or the link between computer programs and computers. This will free parties from the confines of the blockchain, letting them use just about anything -- futures data, stock prices, weather events, breaking news, economic indicators or video game achievements -- as reference points to settle Ethereum transactions.
The only problem with Ethereum is that, unlike Bitcoin, the coin does not have a supply ceiling. There now are more than 116.9 million ETH in circulation, with an annual rate of increase of about 4% a year as the supply of tokens rises. On Aug. 4, Ethereum developers unveiled five Ethereum Improvement Proposals (EIPs) -- one of which was to reduce the mining reward so the rate of increase falls to about 3% a year. Because of its widespread adoption and revolutionary potential, capital inflows into Ethereum should surpass the lowered benchmark for the supply increase.
This development, along with the move to an environmentally sustainable model helps make Ethereum the leading cryptocurrencies to invest in for the long term.
