How Does Ethereum Work?
Based on blockchain technology, ethereum consists of a series of cryptographic, or secure, public records linked together that each are difficult to change because they are stamped with user data, time and date and changes that must be approved by all users.
On the ledger, anyone can create a financial contract or keep debt or ownership registries and eliminate the use of an external recordkeeper or trust officer. They’re called “trustless” transactions because they eliminate the need for trusting the counterparty to the transaction since the contract is self-fulfilling.
Because of its sweeping size and scope, ethereum’s main technical problem has been speed and storage. It has operated at only a few transactions per second, with other crytpo platforms able to carry out hundreds. Users have complained of bottlenecks and the expense of using the platform.
A recent report citing sources close to the project said ethereum developers are discussing an upgrade that could boost the technology’s capabilities. The update, known as “ethereum 1x” is expected to potentially be rolled out in January 2019, and includes changes to help slow the ethereum blockchain’s growth.
For any changes to be made to the platform, there must be a distributed consensus among the software users, but perhaps the update will be welcome if it addresses the ethereum platform’s greatest shortcomings.
Regulatory Concerns About Ethereum
Ether has been dogged by regulatory concerns for a while, as Securities and Exchange Commission officials raised questions about whether ethereum should be regulated as a security. Another dark cloud hanging over all cryptocurrencies has been the ongoing SEC investigation and Department of Justice investigations into bitcoin and other cryptocurrencies.
The altcoin took a hit when Gary Gensler, a former Commodities Futures Trading Commission (CFTC) chairman, said that “there is a strong case that one or both of [Ethereum and Ripple] are noncompliant securities.” The word “noncompliant” raised worries that only registered stockbrokers would be able to deal in ether. At the time, the report sent ether plunging.
Despite getting a boost in June when SEC director of corporate finance William Hinman said ether and the ethereum network are not securities transactions, regulators have yet to implement formal regulations for cryptocurrency. Although the CFTC has said it deems bitcoin a commodity, crypto’s future still remains shrouded in uncertainty with the multiple investigations.
In addition to pressure from regulators, the the steady flow of criticism from banks, brokerages and economists has contributed to crypto’s nosedive this year.
In June, for instance, the Bank of International Settlements – which is made up of 60 central banks that have a lot to lose if crypto were to take over fiat currency’s role – issued a scathing report on crypto’s “shortcomings,” saying it isn’t scalable, doesn’t have stable enough value and there isn’t sufficient trust in the finality of crypto’s payments to replace money.
The BIS criticized the energy-sapping behemoth that is crypto mining, saying as the ledgers grow in size, they won’t be able to process transactions even with the most powerful facilities.
Others have speculated that cryptocurrencies won’t be able to compete with USD or EUR cryptocurrencies once the central banks decide to issue their own digital coins. Those arguments seem to ignore the decentralization aspect of cryptocurrency its proponents favor, as well as the privacy and anonymity crypto provides.
BIS’s criticism may be based on an oversimplified view of the technology that doesn’t take into account the fact that ether and other large cryptocurrencies have evolving open source platforms with developers around the world who want it to work and have something to gain by solving its problems.
The main obstacle for the technology has been that it is difficult for the average person to understand, so until it becomes more broadly accessible, it will struggle with misperceptions.
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