For more than a decade, one of the pervading views on the world of cryptocurrency has been a “Wild West” mindset. Wonks have declared crypto to be the future of finance, while newcomers continue to approach it with skepticism.
But what would it take for the “Wild West” view to dissipate? One possibility is that the Ethereum blockchain’s mergewhich transitioned it from proof-of-work to proof-of-stake, would bring some much-needed clarity to crypto.
However, while the Merge may be one of the earliest steps, additional efforts will be needed to tame the Wild West.
Regulations are the key to taming the Wild West
Most people see cryptocurrency as “wild” because of the lack of oversight in the space. Thus, regulations would change the industry dramatically, and Europe is taking steps in this direction. Earlier this year, the European Union established new laws requiring crypto-related firms to secure a license and put safeguards in place for customers. Without compliance, companies won’t be allowed to issue or sell digital tokens in the EU.
At this point, cryptocurrency has been around for more than a decade, but little has been done as far as regulation. In the US, the various regulatory agencies are vying for control over the crypto market. In particular, the two key agencies sparring for dominance are the Commodity Futures Trading Commission and the Securities and Exchange Commission.
The primary question is whether cryptocurrencies should be declared commodities or securities, with the former requiring less regulation under the CFTC’s authority and the latter requiring more under the SEC. the debate over classification continues for now.
What about Ethereum’s Merge?
While applying regulations to the world of crypto will go a long way toward taming the Wild West, Ethereum’s Merge could also have an impact. The Merge transformed Ethereum from proof-of-work to proof-of-stake by combining the blockchain’s Mainnet with the Beacon Chain.
The shift to proof-of-stake has been widely publicized, with one of the most-touted benefits being a dramatic reduction in the amount of electricity consumed with every ether transaction. Bitcoin, the original cryptocurrency, follows a proof-of-work protocol, which means vast amounts of computing power are required to complete transactions on the blockchain. Powerful mining rigs solve complex mathematical problems, rewarding their owners with newly minted bitcoins.
On the other hand, proof-of-stake blockchains operate through staking, which requires users to lock up a certain number of their tokens for the privilege of receiving more tokens. After the transition to proof-of-stake, ether will require users to stake at least 32 of their tokens in order to validate transactions and earn a fee in tokens for their interest.
The Ethereum blockchain randomly chooses staked users to validate each transaction, giving the priority to the users who have staked the most ether tokens and earning them some additional tokens in the process. Users who stake their cryptocurrency make their tokens available for use in the proof-of-stake process and typically earn what amounts to interest on what is essentially a deposit (although the technical vocabulary terms used are different).
Will the Merge affect the Wild West?
Most writers covering the Merge emphasize the benefits of the PoS transition, but there are risks too. For example, one of the benefits of proof-of-stake blockchains is that they enable users to essentially earn interest on their staked tokens, but a key issue with this is that most cryptocurrency prices are highly volatile.
Staked tokens are unavailable for trade, and some cryptocurrencies have lockup periods that prevent users from trading their staked tokens for a period of time. As a result, users who stake tokens are unable to sell them if an attractive selling price is reached or cut their losses if the price plunges with no sign of coming back anytime soon.
Ethereum users who stake their ether at the time of the Merge are locking their tokens up for six months to a year. Additionally, there is a fee for staking tokens, although it’s usually less than what users earn from staking.
Once all the dust has settled, the Merge probably won’t have any major impact on the “Wild West” nature of cryptocurrency. Of course, it will remain the world’s second-biggest cryptocurrency by market capitalization, so its impact on the overall market is significant.
Making the most of the gold rush
One of the greatest challenges and greatest benefits is the volatile nature of cryptocurrency. On one hand, the volatility offers the opportunity for crypto investors to build sizable wealth by buying and selling tokens at the right times. The adage “buy low, sell high” applies to cryptocurrency just as much as it does to other investments.
However, the extreme volatility means it can be nearly impossible to know when it’s the best time to buy or sell tokens of any particular cryptocurrency. In 2022, cryptocurrency has become highly correlated with US stocks, especially tech stocks, so traders who understand what creates an exceptional environment for buying and selling stocks can do quite well if they learn to read the signals.
Unfortunately, uncertainty continues to rule the market, so it’s even easier to lose vast amounts of wealth than it is to build significant wealth by trading cryptocurrency. Thus, innovative new crypto ecosystems like those created by Seasonal Tokens and Solariumwhich touts itself as the world’s fastest blockchain, are quite welcome.
Unlike many other blockchains, the Seasonal Tokens blockchain appears to have been created largely for investors, and it’s totally unique. The ecosystem contains four tokens: Spring, Summer, Autumn and Winter.
Of course, all tokens are impacted by macro factors like inflation and interest rates, just as other cryptocurrencies are. However, the developers behind Seasonal Tokens claim investors can trade them with a bit more certainty than with other cryptocurrencies because they are designed to rise and fall in predictable, preset patterns based on their relationships with each other.
Ethereum’s Merge has highlighted the significant differences between proof-of-work and proof-of-stake protocols. Many people may think that PoS is better than PoW because it is more energy efficient, but a deeper study of both reveals that they are just different with risks and benefits to each.
As things stand now, it appears that PoW blockchains like Bitcoin, Dogecoin, Litecoin, Monero, and Seasonal Tokens will always have a place in the crypto world. However, there’s no denying that PoS blockchains like Ethereum, Solana, Avalanche, and Polkadot have utility too.
For this reason, it’s critical that investors take the time to understand the basics of the technology behind each cryptocurrency they intend to invest in and the market dynamics that affect its price before buying any tokens.
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