There has been some negative news coming out recently concerning the Ethereum crypto.
These are news related partly to the current bear market, which shows no sign of reversing, and partly related to the recent move to Proof-of-Stake (PoS).
Crypto news: the influence of the bear market and PoS on Ethereum
In reality, the phase of ETH’s price decline seems to have ended in June.
By “bear market” we mean a downward phase, and from the annual low of $800 on 18 June, the price has not fallen below this threshold since.
Previously there had been two major phases of decline, one that began after the absolute all-time highs of 10 November 2021 (nearly $4,900) and ended in late January at about $2,200, and another that began in early April and ended precisely on 18 June .
Since then a long phase of lateralization began, which is still ongoing, marked by an ascend to almost $2,000 in mid-August, and two following phases of decline to $1,080 on 10 November.
So while it can be said that Ethereum’s bear market actually ended at the end of June, it cannot be ignored that there has not yet been a reversal of the trend, and the lateralization phase around $1,200 is nothing more than the consequence of the bear market of the first half of the year.
The problems of the shift to PoS
The replacement of Proof of Work (PoW) with Proof of Stake in mid-September brought several benefits, but it also introduced two new features that can have negative effects.
The first problem is that a few validator nodes with lots of ETH in staking are accumulating significant power. In addition, the development of Ethereum is actually entrusted to a not particularly large team that decides and almost imposes its decisions on the entire community.
This is why yesterday Paxful founder Ray Youssef announced that ETH has been removed from their marketplace.
We finally kicked #ethereum off our marketplace. 11.6m humans safer. Integrity over revenue 🤝🏽 Who is next ? pic.twitter.com/JTJXa5RYJ8
— Ray Youssef (@raypaxful) December 21, 2022
According to Youssef, Ethereum is not decentralized because it is controlled by a small group of people, so much so that one day it might be necessary to get their permission to use it.
He also said that the main problem is precisely the shift from PoW to PoS, because PoW is the innovation that makes Bitcoin “honest money.” Instead PoS would make ETH essentially a digital form of fiat money.
The second problem is that PoS provides returns generated by mere financial investments. Although these are not fixed returns, or promised and guaranteed returns, there is a risk that staking will be interpreted as an investment activity that generates returns.
In fact, those who stake their ETH with a validator node get a percentage of the ETH collected by the node in return for validating the blocks.
Truth be told, the latest changes to the Ethereum protocol have reduced the rewards for validators, as a portion of the fees paid by users are burned. But that does not detract from the fact that those who put ETH into staking continue to receive purely financial returns.
The problem is that this could fall under the definition of “security,” or “investment contracts,” and investment contracts in many countries can only be offered to the public if accompanied by a prospectus approved by the authorities.
SEC and CFTC
In the US, the government agency that overseas security markets is the Securities and Exchange Commission (SEC), while the one that overseas commodity markets is the Commodity Futures Trading Commission (CFTC).
The CFTC had recently stated that only Bitcoin is definitely a commodity, implying that ETH instead could be considered a security. Then it backtracked, declaring that ETH is also a commodity, but the issue may come up again.
In particular much may depend on the outcome of the SEC’s lawsuit against Ripple, because if XRP was not considered a security then certainly ETH would not be either. That lawsuit, however, has now been going on for two years and does not seem to want to end.
Should ETH be considered a security, its oversight would shift from the CFTC, which is far less strict, to the SEC, which is far more so.
For now, there does not seem to be a high likelihood of this happening, but the situation is still unfolding.
News on decentralization of the Ethereum crypto
The truth is that Ethereum‘s development team, which actually imposes protocol changes on the entire community, is not particularly large. So it may not necessarily truly represent the majority of users.
However, anyone who does not accept the changes can fork the Ethereum protocol and propose a version more in line with their expectations. This has been done several times, most recently just in mid-September when some miners refused to switch to PoS and launched Ethereum PoW.
It is worth mentioning, however, that no Ethereum fork has ever been very successful, not even Ethereum Classic which retained the original version of the protocol when the Ethereum development team decided to make some highly contested changes several years ago.
However, if the Ethereum development team makes some glaring mistakes in the future, unprecedented scenarios could open up for this protocol, with some alternative fork having a better chance of success.
The bottom line is that PoS works, and so far it has produced virtually no real significant problems. The doubts are more about the future evolution of the project, and not about the current state of affairs.