Ethereum's profits are not enough to ensure its safety

This article was originally posted on the HARD FORK blog and was translated and shared by InfoQ Chinese as authorized by the original author David Canellis.

As the second largest cryptocurrency market capitalization, a major change is being planned. Ethereum is about to launch a new consensus algorithm that is expected to address platform scalability and transaction throughput bottlenecks, but a new industry report claims that this algorithm may not work.

At present, Ethereum is very similar to Bitcoin, because anyone can contribute to the legitimacy of the transaction (ie Proof-of-Work, abbreviated as PoW) by contributing computing power to join the network.

How the network chooses and rewards those who make the blockchain safe and trustworthy, and the Ethereum developers have been working hard to improve.

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Ethereum holders will be able to use the weight of their balance to vote to pass or reject the transaction (ie Proof-of-Stake, abbreviated as PoS). If the verifier tries to “heart-to-heart” with the system in dishonest ways, then as a punishment, they will lose all the tokens.

Compared with Bitcoin's proof of work, it is believed that Ethereum's approach is more energy efficient, and supporters of this consensus style will say it is more "equality."

In light of this, digital asset research firm Delphi Digital conducted an extensive survey of Ethereum's proposal. Since it has been shared with HARD FORK, let's take a closer look at the main gains of this survey.

No more token sales to make a profit

The success of the new Ethereum comes down to the correct incentive for holders to lock their cryptocurrencies, essentially using their value as a way to verify the influence of the deal. This process is called "staking."

But let cryptocurrency enthusiasts "store" their digital value to keep the network healthy, just a small part of the picture.

The initial coin offerings (ICO) are important because start-ups based on Ethereum tokens need to maintain their own growth. As token issuers, these companies typically retain a significant percentage of them sold to retail investors through cryptocurrency exchanges.

The entire ecosystem of blockchain startups has deployed a platform with cryptocurrency as the core component. In order to survive in a bear market, companies behind these products have been selling their digital assets to pay for development and maintenance, but this has not always worked.

In 2019, token sales (ICO) was almost outdated. Researchers at Delphi Digital pointed out that in the second half of 2018, sales of new tokens have fallen sharply, and that their disappearance has led to a lack of basic buying pressure in the Ethereum market.

In general, because the ICOs available for purchase based on Ethereum are much less, the willingness of retail investors to purchase Ethereum is not so high, because participation in ICO is actually the main use case for cryptocurrency.

This effect was magnified by the existing projects sold in Ethereum to fund their development work. Delphi researchers believe this is an important factor in the overall price decline in Ethereum.

Delphi uses rigorously validated data on the chain and analyzes 54 of the largest token sales in ICO history from 2016 to the present.

Delphi found that ICO raised a total of 16.25 million Ethereum, of which 9.66 million Ethereum has been transferred to the standard cryptocurrency exchange.

At current value, this is equivalent to $1.3 billion, but in the heyday of the cryptocurrency market, the value of 9.66 million Ethereum exceeded $13 billion.

Delphi wrote: "We also isolate the amount of Ethereum that was ultimately sent to the exchange address because we have reason to assume that the Ethercoin sent to the exchange has been liquidated. We have been able to evaluate the Ethereum sent to the exchange, The depth has 8' hops. For example, if a project sends Ethereum from their vault to a consultant, then the consultant sends it to a friend, who then sends it to an exchange, which means 3' hop ', and so on. Most of the transfer to the exchange has a depth of 4 to 5 hops, so we think 8 hops is enough."

The researchers highlighted this turning point: While the number of Ethereum clearing on exchanges has increased, it is dwarfed by any new funds flowing in through token sales, a phenomenon that occurred in June 2018. This period also marked a historic 76% decline in the price of Ethereum.

Ethereum ecosystem needs to reward participants correctly

There are other market pressures that may inhibit Ethereum prices. One of them is the software update process, which is necessary for the smooth and secure transfer of the equity certificate. These are called bifurcations and fall into two categories: soft forks and hard forks.

In general, the fork will trigger a sell-off in the market. The biggest drop occurred after the “Homestead” fork in March 2016, when the price of Ethereum fell from $12.50 in mid-April to $8, a drop of more than 35%.

According to Delphi, “The latest hard fork before last week, the Byzantine hard fork, caused a significant reduction in losses of 30 days (less than 1%), which may be attributed to a reduction in block rewards (5 Ethereum) Reduced to 3) and the “hysteria” surrounding the cryptographic assets in the fourth quarter of 2017.

On average, the Ethereum fell by about 8% in the week after the hard fork. With the latest upgrade (Constantinople hard fork), the post-fork performance of the Ethereum is quite close to its historical average, down 6%. Thereafter, the index bounces back to a similar level before the fork.

Delphi Digital also expressed concerns about the feasibility of the current Ethereum roadmap, especially how the rewards for participating in the network are structured.

“One of our biggest concerns about Ethereum's long-term viability is the verifier's net rate of return. Using the current model, after considering the cost of mortgages, we believe that the yield risk of the verifier is still too low to appeal to the public. "The joy," Delphi explained. "With an annual return on Ethanol of less than 3-4%, considering the risk-reward trade-offs of other investment institutions, it is likely to prevent those who can ensure network security."

Delphi Digital emphasized to HARD FORK that the “deposit process” proposed to Ethereum holders allows them to participate in online transactions as a one-way transaction. This means that once users deposit their tokens and are counted in the same amount of Ethereum for mortgage purposes, they will not be able to withdraw their funds until the second phase of the consensus shift.

A Delphi spokesperson pointed out, "This basically means that as an early verifier, your money will be locked for about two years, which may be risky."

Although the ICO is no longer speculated, the market sentiment is improving.

All of these challenges have arisen when the Ethereum market sentiment has actually turned positive. Delphi's analysis found that the existence of Ethereum in the spirit of the community era is closely related to ICO's interest, but this situation is changing.

Delphi claims, “The number of ICO tweets has been declining for most of the past 12 months. On the contrary, for the Ethereum, the more bullish sign is that the market confidence in Ethereum is going through 2017. The most enduring period of optimism in the year."

This is definitely a thing worth considering. A related study cited by Delphi found that the daily average sentiment index is a “very strong indicator” of the Ethereum price trend, which has historically created a miracle for its market value.

Analysts wrote: "From January 2019, Ethereum's daily average sentiment index began to become positive, and has remained strong since then. The long-term positive daily average sentiment index, the last time we observed is From March to April 2018, the market value of Ethereum doubled from $36 billion to $84 billion."

Despite this, Delphi Digital warned: "The Ethereum Framework Proposal Proposal (in its current form) may not be as successful as other development teams hoped."

Delphi said to HARD FORK: "Our view is that their existing planned economy may not be enough to motivate users to invest in Ethereum to protect the security of the network."

“The various scenarios we have shown in the report clearly indicate that the current proposed rate of return for verification transactions may not be high enough,” the report continues to mention, “although we have reason to assume that certain investors, such as Ethereum Co-founder Vitalik Buterin invests regardless of the state of the economy. But we don't think this is the surest way to achieve long-term, sustainable development."

Delphi Digital proposed an alternative in the report to properly motivate cryptocurrency enthusiasts to keep the network secure (hint: this requires higher network costs!). The report is now available for public release and is linked as follows: https://www.delphidigital.io/ethereum

Original link: https://thenextweb.com/hardfork/2019/03/07/ethereum-economic-model-blockchain/

(Source: blockchain outpost)

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