If anyone can summarize what has been happening in the cryptoverse in 2021, the year started off well, and by the middle of the year, it took a bad turn. The market value of Bitcoin (BTC) has dropped by over 50% from an ATH of $64,895.22 (April 14, 2021) to the upper $20K range in June. This has also affected the rest of the cryptocurrency market. While Ethereum (ETH) was trying to hold its position, it still dropped from an ATH of $4,362.35 (May 12, 2021) to price levels just below $2K (late July). A rising star in the cryptoverse, Cardano (ADA), was also not able to maintain its momentum to the upside and took a fall. Cardano came down from an ATH of $2.46 (May 16, 2021) to just over $1 (late July).

There are plenty of TA charts that are making either bold predictions to the upside or dire warnings of falling to the downside. While the traders and analysts are looking at metrics like the MA (Benjamin Cowen, Tone Vays, Michael Van de Poppe) and and on-chain analytics (Willy Woo and Will Clemente), other crypto holders are sticking with the fundamentals (Michael Saylor, Anthony Pompliano, Robert Breedlove). Perhaps looking at the charts from another perspective (Raoul Pal) offers another insight into which direction crypto is moving, based on macro indicators. There is another indicator that could offer some direction for the leading cryptocurrencies that is happening this year… Upgrades.

Tis’ The Season

Software development follows a life cycle. This is necessary in order to maintain the performance of a system due to changing requirements. Nothing stays the same forever, from cars to computers. Since cryptocurrency is based on software, it also needs updates to correct flaws and vulnerabilities. These updates can be as simple as fixing a bug to more complex issues like security loopholes that could allow hackers to compromise a system. Upgrades are a totally new version of a software that introduces new features and improvements. In software engineering jargon in the cryptospace, this would be called a hard fork.

Cryptocurrencies are not just based on a decentralized database called a blockchain. They are actual software programs that run on nodes, which are distributed computer systems found around the world. When performing upgrades, node operators must install the new version of the software to signal their support of the hard fork. Any node that doesn’t upgrade will no longer be able to connect to the blockchain. Instead, they will be on a separate chain that is no longer a part of the main network.

In the cryptoverse or overall cryptocurrency market, three top cryptos are going to have upgrades in 2021. The most hyped about in many circles is the London hard fork for Ethereum which is scheduled for August 4, 2021. Then there is the ongoing Alonzo hard fork in Cardano, which has been divided into phases starting from late May 2021. Bitcoin will also be due for an upgrade for later in 2021 that will activate a new feature called Taproot.

London Brings Deflationary System For Ethereum

Ethereum is about to address issues with transaction fees and non-capped supply of ETH with EIP 1559 (London Hard Fork). This addresses the transaction fees by introducing a base fee for the network. This makes fees more consistent rather than fluctuating to ridiculous levels. Sometimes the network charges more than the amount of ETH that is being sent. Due to that reason, it makes more sense to use the Ethereum blockchain for large value transfers. This is fine for miners who collect their share of the larger transaction fees, but for everyone else, it is less fair.

One group that will benefit from a base fee is retail holders. Sometimes you just want to mint an NFT that doesn’t have to cost an arm and a leg. Other times users just want to send a small amount of ETH to fund another wallet or make a simple payment. The higher transaction fees are due to demand on the Ethereum network. DeFi has been one of the catalysts that are leading to more usage of the Ethereum network, but it is driving prices higher.

Back on March 7, 2021, the average cost of a transaction is $15.53. A few months earlier, on January 17, 2021, the transaction fee was only $5.41. That is a sudden increase of 187%, so it goes to show that as demand increases transaction fees increase as well. If this continues unchecked, then transaction fees can even reach levels close to $100 per transaction. This is why the Ethereum developers had to address the issue, otherwise, fewer people will use Ethereum’s blockchain and this can drive prices down.

Another benefit included in the proposed change is a burning process. During a transaction, a small amount of ETH is “burned” from the fees. This is a token burning mechanism that can control the circulating supply of ETH. In the long run, it leads to a more deflationary money supply. Burned tokens are removed from circulation forever while new tokens are still created. This can be a means to control inflationary pressure in the ETH circulating supply, but it remains to be seen how it overall affects the value of ETH.

Alonzo Paves The Way For Cardano Smart Contracts

The Alonzo hard fork signals the next stage in the Cardano roadmap. This is part of the Goguen phase, which paves the way for smart contracts on the Cardano blockchain. This takes place in multiple phases that are represented by colors. The current phase is called Alonzo Blue, to be followed by Alonzo White and Alonzo Purple. The significance of the upgrade will allow developers to finally build DApps (Decentralized Applications) running on Cardano’s secure and mathematically verifiable network.

The Alonzo Blue phase brings a testnet live at the end of May 2021. It will be open to a select group of partners and developers to test the network. Alonzo White was successfully implemented on July 15, 2021, and will bring in more participants for testing. The final hard fork is Alonzo Purple, which will then open up the testnet to the public. Once these tests are accomplished, smart contracts will finally become available on Cardano’s network.

These upgrades are highly anticipated because of what they aim to deliver. Cardano has not had a fully functioning main network or commercial application that is being used for production purposes. Many are still experimental, or trial runs, with a few exceptions (e.g. Cardano wallets). Critics state that it is overvalued, but these upgrades can finally prove if there is utility in Cardano’s blockchain. Charles Hoskinson (Cardano founder) likes to point out that Cardano is based on peer reviews and strong development from an engineering and scientific foundation. We will see if Cardano’s smart contract platform is a truly viable competitor to Ethereum and other blockchains. If it does prove its point, then the value of its native token ADA will go to the upside.

Taproot Brings More Privacy To Bitcoin

Former CIA operative and whistleblower Edward Snowden has emphasized that Bitcoin while appearing to be a good P2P (peer-to-peer) payment system, lacks privacy. While criminals and some politicians think Bitcoin anonymizes users, it is the opposite. Bitcoin is actually pseudonymous like most other cryptocurrencies. They record transactions that can be traced back to an identity via a public address. Bitcoin was designed to be transparent, which means it does not hide transactions but exposes them to the public. That can be good for transparency purposes but not for confidential transactions conducted by large institutions for regulatory purposes and individuals who want more privacy and security.

The problem here is that it may be appropriate to have the public view a transaction like buying a cup of coffee. It becomes more of an issue if everyone can see your account balance, which could invite harmful intents from bad actors. This would be true for high-net-worth individuals and companies. A public address can also expose the true identity of anyone since they can be traced to digital exchanges where a public address is attached to an account holder’s true identity (based on KYC/AML regulation).

To address this issue, the Bitcoin core development community has proposed Taproot as a solution. Taproot is a privacy upgrade that will keep certain details of a transaction hidden from the public. It makes use of an algorithm called Schnorr signatures, which combines the public keys and their signatures into just one new signature. This was proposed in BIP 340 and 341. This feature will extend to other protocols like the Lightning Network (Layer 2 payment solution for the Bitcoin network). Another benefit is that it combines user details and reduces space, thus lowering transaction costs.

These are not the only improvements coming from the Bitcoin upgrade. This also opens up Bitcoin to its own implementation of smart contracts using Tapscript (BIP 342). The implementation of Schnorr signatures can also allow more transactions to fit inside a block since it reduces the transaction signatures to just one signature. That saves space to allow more transactions to fit inside a block, just like the SegWit protocol.

Synopsis

Many eyes right now are watching the smart contract war that is emerging with platforms like Ethereum and Cardano. They also have competition from Binance Smart Chain and the Polkadot ecosystem, to name a few. It is becoming a question of which smart contract is the best among investors. Ethereum has a proven track record, since most smart contract transactions have been successfully processed on the Ethereum blockchain. It is just a matter of scaling and cost. The best smart contract would have to be the one that can process the most number of transactions faster and at the lowest cost.

Some miners are also against the Ethereum upgrade proposal for obvious reasons. They will earn less due to the adjustment in transaction fees. It really does not matter at this point since Ethereum is moving away from mining towards ETH 2.0 PoS (Proof-of-Stake). A difficulty bomb will then be activated to make it more difficult to mine, forcing nodes to adopt staking from mining. It will go ahead as planned despite the miner’s objections. It is possible to fork away from the main network, but it will require supporters. Miners can even launch a 51% attack, but that would really make them look bad to the rest of the community, and it doesn’t benefit them since the network can fork away from their attack. So far, there is a huge support for staking and the implementation of EIP 1559 in the Ethereum community.

Bitcoin upgrades at this point may be necessary if it has any way of improving scaling and privacy. For the typical Bitcoin user, it may not matter. HODLers are treating Bitcoin more as a store of value rather than a privacy token. That is the purpose of Monero, after all. Privacy features are ideal, especially for those who want to cover their tracks from any scrutiny. Yet this is the very reason regulators don’t like cryptocurrency. They want to be able to track the movement of cryptocurrency to go after money launderers. At the same time, you can argue that people have a right to privacy regarding the movement of their funds, so yes to privacy features. Either way, this remains a topic for debate as regulations continue to develop around cryptocurrency.

What these upgrades could signal will affect the market considerably. If the effects of the upgrades are successful, then we will see price action to the upside. A market indicator that determines continued liquidity is the network effect that these cryptocurrencies have created. They will have strong support despite bearish sentiments due to the size of their community. The belief among HODLers is strong, especially among Bitcoin holders. As long as the community remains, then the likelihood of any of these cryptocurrencies going to $0 is not imminent.

First Published in The Capital — 7/20/21

(Cover Image Photo Credit: cottonbro)

Disclaimer: This is not financial advice. The information provided is for reference and educational purposes only. Please do your own research always to verify facts.