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In the second half of the year, Bitcoin activates Taproot, Ethereum London hard forks, and Cardano launches smart contracts.
Original Title: “The Crypto World Ushers in an Upgrade Season-The Future of Bitcoin, Ethereum and Cardano”
Written by: ChinaDeFi
If someone can summarize what happened in the crypto industry in 2021, it means that the year started well, but by the middle of the year, things got worse. The market value of Bitcoin (BTC) has fallen by more than 50% from US$64,895.22 (April 14, 2021) to the US$20,000 range in June. This also affects other parts of the cryptocurrency market. Although Ethereum (ETH) tried to maintain its position, its ATH fell from US$4,362.35 (May 12, 2021) to slightly less than US$2,000 (at the end of July). As a rising star in the crypto industry, Cardano (ADA) also failed to maintain its upward momentum and fell. Cardano’s ATH dropped from US$2.46 (May 16, 2021) to slightly above US$1 (Late July).
There are many TA charts that either make bold predictions for the upswing or give terrible warnings for the downside. Traders and analysts are paying attention to indicators such as MA and on-chain analysis, while other cryptocurrency holders are sticking to the fundamentals. Perhaps looking at the chart from another angle can provide another insight based on macro indicators to understand the development direction of cryptocurrency. There is another indicator that can provide some direction for the major cryptocurrencies that are happening this year…upgrades.
Software development follows a life cycle. Due to changes in requirements, this is necessary in order to maintain the performance of the system. From cars to computers, nothing is permanent. Since cryptocurrency is software-based, it also needs to be updated to correct flaws and vulnerabilities. These updates can be as simple as fixing a bug to solve more complex problems. Upgrade refers to a brand new version of the software that introduces new features and improvements. In software engineering terminology in the crypto space, this will be referred to as a hard fork.
Cryptocurrency is not just based on a decentralized database blockchain. They are actual software programs running on nodes, which are distributed computer systems distributed all over the world. During the upgrade, the node operator must install a new version of the software to show support for the hard fork. Any node that does not upgrade will no longer be able to connect to the blockchain. Instead, they will be on a separate chain that is no longer part of the main network.
In the crypto field or the entire cryptocurrency market, the three top cryptocurrencies will be upgraded in 2021. The most watched in many circles is the Ethereum London hard fork scheduled for August 4, 2021. Then there is Cardano’s ongoing Alonzo hard fork, which will be carried out in phases starting in late May 2021. Bitcoin will also be upgraded later in 2021, when a new feature called Taproot will be activated.
London hard fork brings deflationary system to Ethereum
Ethereum is about to use EIP-1559 (London hard fork) to solve the problem of transaction fees and unlimited supply of ETH. This solves the transaction cost problem by introducing basic fees to the network. This makes the fees more stable, rather than fluctuating to ridiculous levels. The network charges more than the amount of ETH sent. For this reason, it makes more sense to use the Ethereum blockchain for large transfers. This is a good thing for miners who get a share of the high transaction fees, but it is not so fair for everyone else.
Retail investors will benefit from the basic fees. Maybe the user just wants to cast a non-expensive NFT. Other times, users only want to send a small amount of ETH to fund another wallet or make simple payments. Higher transaction fees are due to the demand for the Ethereum network. DeFi has been one of the catalysts leading to more use of the Ethereum network, but it is pushing up prices.
Back on March 7, 2021, the average cost of each transaction was $15.53. A few months ago, on January 17, 2021, the transaction fee was only $5.41. This is a sudden increase of 187%, which shows that as demand increases, transaction costs also increase. If this situation continues, transaction fees can even reach a level of close to $100 per transaction. This is why Ethereum developers must solve this problem, otherwise, fewer people will use Ethereum’s blockchain, which may drive down the price.
Another benefit of the proposed changes is the combustion process. During the transaction, a small portion of ETH will be “burned” from the fee. This is a token burning mechanism that can control the circulating supply of ETH. In the long run, this will lead to greater deflation of the money supply. Burnt tokens will be removed from circulation forever, and new tokens will still be created. This may be a means to control inflationary pressure in the circulating supply of ETH, but how it affects the value of ETH as a whole remains to be seen.
Alonzo paves the way for Cardano smart contracts
Alonzo’s hard fork marks the next phase of Cardano’s roadmap. This is part of the Goguen phase, paving the way for smart contracts on the Cardano blockchain. This happens in multiple stages, represented by colors. The current stage is called _Alonzo Blue_, followed by _Alonzo White_ and _Alonzo Purple_. The significance of this upgrade is that developers can finally build DApps on Cardano’s secure and mathematically verifiable network.
The Alonzo Blue phase will be launched on the testnet at the end of May 2021. It will be open to selected partners and developers to test the network. Alonzo White was successfully implemented on July 15, 2021, and more participants will be introduced for testing. The last hard fork is Alonzo Purple, which will open the testnet to the public. Once these tests are completed, the smart contract will finally be available on Cardano’s network.
These upgrades are highly anticipated because their goal is to deliver. Cardano does not yet have a fully functional main network or commercial application for production purposes. Except for a few exceptions (such as Cardano wallet), many are still in the trial phase or trial operation phase. Critics point out that it is overrated, but these upgrades can ultimately prove the usefulness of Cardano’s blockchain. Charles Hoskinson (founder of Cardano) likes to point out that Cardano is based on peer review and strong development from engineering and scientific foundations. We will see whether Cardano’s smart contract platform is a real viable competitor to Ethereum and other blockchains. If it does prove its point, then the value of its native token ADA will rise.
Taproot brings more privacy to Bitcoin
Although Bitcoin seems to be a good P2P (peer-to-peer) payment system, it lacks privacy. Although many people think that Bitcoin will make users anonymous, the reality is quite the opposite. The transactions they record can be traced back to an identity through a public address. Bitcoin is designed to be transparent, which means that it does not hide transactions, but opens transactions to the public. This is conducive to improving transparency, but it is not conducive to confidential transactions conducted by large institutions for regulatory purposes, as well as individuals who want more privacy and security.
The problem here is that it might be appropriate to let the public see a transaction like buying a cup of coffee. If everyone can see your account balance, then the problem is even greater, which may lead to the malicious intent of the bad guys. For high-net-worth individuals and companies, this is indeed the case. Public addresses can also reveal the true identity of anyone, because they can be traced to a digital exchange, where the public address is attached to the true identity of the account holder (based on KYC/AML regulations).
To solve this problem, the Bitcoin Core development community proposed Taproot as a solution. Taproot is a privacy upgrade that will keep certain details of the transaction confidential. It uses an algorithm called Schnorr signature, which combines the public key and its signature into a new signature. This is proposed in BIP-340 and 341. This function will be extended to other protocols, such as the Lightning Network (the second layer payment solution of the Bitcoin network). Another benefit is that it combines user detailed information, reducing space, thereby reducing transaction costs.
These are not the only improvements brought about by the Bitcoin upgrade. This also opened the door for Bitcoin to use Tapscript (BIP-342) to implement smart contracts. The implementation of Schnorr signature can also allow more transactions to be contained in one block, because it reduces transaction signatures to only one signature. Just like the SegWit protocol, this saves space to allow more transactions to fit into a block.
Now, many people are paying attention to the smart contract wars triggered by platforms such as Ethereum and Cardano. They also face competition from the Binance Smart Chain and Polkadot ecosystems. Which smart contract is the best among investors is becoming a problem. Ethereum has a good track record because most smart contract transactions are successfully processed on the Ethereum blockchain. This is just a matter of scale and cost. The best smart contract must be able to process the largest number of transactions faster and at the lowest cost.
Some miners also opposed the Ethereum upgrade proposal for obvious reasons. Due to the adjustment of transaction costs, their income will decrease. This is really not important, because Ethereum is shifting from mining to PoS (Proof of Stake) for ETH 2.0. The difficulty bomb will be activated, making it more difficult to mine, forcing nodes to use mining methods for collateral. Although the miners objected, it will continue as planned. Forking from the main network is possible, but this requires supporters. Miners can even launch 51% attacks, but it really makes them look bad in front of other members of the community, and it’s not good for them because the network can fork from their attacks. So far, the Ethereum community has provided great support for the implementation of staking and EIP-1559.
If Bitcoin has any way to increase scale and privacy, then Bitcoin’s current upgrade may be necessary. For the typical Bitcoin user, this may not be important. HODLers see Bitcoin more as a store of value than a privacy token. After all, this is the purpose of Monroe. The privacy function is ideal, especially for those who want to hide their whereabouts from any scrutiny. However, this is exactly why regulators do not like cryptocurrencies. They hope to be able to track the movement of cryptocurrencies in order to track money launderers. At the same time, you can argue that people have the right to privacy in the flow of funds, so the privacy function is affirmative. In any case, with the continuous introduction of regulations on cryptocurrencies, this is still a topic to be discussed.
The possible signals from these upgrades will have a considerable impact on the market. If the effect of the upgrade is successful, then we will see the price move upward. The market indicator that determines continued liquidity is the network effect created by these cryptocurrencies. Despite the bearish sentiment due to the size of their community, they will still receive strong support. The belief of HODLers is very strong, especially for Bitcoin holders. As long as the community still exists, the possibility of any of these cryptocurrencies becoming $0 will not happen immediately.
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