InvestMacro

By Jean-Philippe Serbera, Sheffield Hallam University 

Cryptocurrencies might still be a very long way from their highs of 2021, but some of the major ones have staged some decent recoveries in the past couple of months. Notably ether (ETH), the second largest cryptocurrency after bitcoin, is trading at almost US$1,700 (£1,463) at the time of writing, having dropped as low as US$876 in mid-June.

Ether, which was created by Canadian/Russian programmer Vitalik Buterin, is the cryptocurrency used for transactions on Ethereum, the leading platform on which developers can applications using blockchain technology.

Blockchains are online ledgers that run without been controlled by any single company. Much of these applications revolve around smart contracts, which are automated contracts that remove the need for intermediaries such as lawyers and are seen as having huge potential for the future.

Ether price (US$)

One of the main catalysts for ether’s rebound has been the Ethereum merge, a huge project to change the way the underlying blockchain operates. Where transactions on Ethereum are currently validated using an energy-intensive system known as proof-of-work (PoW), in which lots of very powerful computers compete to solve complex mathematical puzzles, from around September 15 it will shift to a new system known as proof of stake (PoS).

PoS basically means that transactions on the blockchain will be validated not by all these computations but by a network of investors whose commitment is demonstrated by the fact that they own at least 32 ether (yours for about US$54,000).

The idea is that this gives them an economic incentive to enhance the security of the network, and are therefore very unlikely to try and sabotage it. Whereas bitcoin transactions all depend on PoW, lots of newer cryptocurrencies use PoS, including Ethereum rivals such as Solana and Cardano.

Going green

When the Ethereum merge takes place, power consumption on the blockchain will be reduced by 99%. Since it is currently the most used blockchain in terms of transactions, this will save a huge amount of electricity each year, corresponding to Chile’s power consumption.

As a result of the merge, some analysts expect ether to overtake bitcoin as the leading crypto in terms of the total value of all the coins (in crypto circles this is referred to as the “flippening”). Ether is currently worth just over US$204 billion, while bitcoin is worth US$396 billion.

Bitcoin vs ether

Until now, cryptocurrencies and bitcoin in particular have suffered from a bad reputation. Bitcoin was initially conceived with the egalitarian goal of allowing investors access to a financial system with no need for banks and with money that isn’t controlled by countries. It has been championed for its ability to enable billions of people without bank accounts to transact online, and to facilitate things like microfinance and ultra-cheap cross-border trading.

Yet bitcoin has come to be associated with environmental degradation and criminal activities. The mainstream media has endlessly linked the leading cryptocurrency – and by extension the whole space – with money laundering, online drug dealing, Ponzi schemes and exchange hacking.

Netflix documentaries have further reinforced this negative public image. Recent scandals in the crypto world, such as the fall of Ethereum rival Luna and the bankruptcy of Celsius and other crypto lenders, have not helped either.

One major consequence has been that major financial institutions like investment banks and pension funds have been cautious of ploughing money into this space, despite the leap forward in technology that blockchains represent.

But if the most widely adopted crypto platform successfully shifts to PoW in the coming days, many believe that this will overcome the biggest institutional objection and see much more money flowing into the space (there are already early signs, such as Fidelity’s new crypto fund for retail investors). This is likely to accelerate the global regulatory framework that would minimise undesirable activities.

By closing down the environmental objections to crypto, other advantages to ether are likely to come to the fore. The merge will offer a return to investors in the form of rewards in exchange for locking up their money for a period of time (“staking”).

Although you need to stake 32 ether to become one of the network’s validators, numerous companies have set up systems to enable smaller investors to pool their money so that they can participate. For example, Binance, the world’s largest crypto exchange, offers investors 6% annual percentage yield for pooled staking on ether.

Staking will therefore create a win-win situation with guaranteed returns and a very liquid system that makes it easy for people to move their money in and out of ether. This will further enhance the appeal of ether and PoS cryptos in general.

This could help to accentuate other positives around crypto, another of which is humanitarian donations. When Russia invaded Ukraine, for instance, the Ukrainian government called for donations in bitcoin and ether to support its efforts against invaders. This quickly attracted substantial amounts of money.

Tonga was similarly successful with a campaign after its volcanic eruption earlier this year. By being able to cross borders easily and cheaply, cryptocurrencies are the ideal vehicle for international donations.

Lingering uncertainties

All that said, it is uncertain how the Ethereum blockchain will function after the merge in terms of transaction speeds and costs. One major problem with Ethereum in the past has been that transactions have been ludicrously expensive, sometimes running to thousands of US dollars at peak times in 2021.

The developers of the Ethereum Foundation do not expect the merge to make a big difference in these respects (currently “gas” fees are averaging between US$1 and US$4 per transaction depending on which platform you are using). Much more important is likely to be another shift in ethereum’s journey to “Ethereum 2.0” known as sharding, which is due to happen in 2023.

We will also have to wait and see how smooth the merge is. Synchronisation and update bugs could see problems such as validators disconnected from the blockchain. Negative stories like these could see investors staying away for fear of instability.

But on the whole, while the merge will not be a miraculous event, it could help improve the image of cryptocurrencies and attract institutional and retail investors. At a time when sustainable investing is increasingly high priority, the ether merge and its attractive returns have the potential to put ether at the top of the list.

About the Author:

Jean-Philippe Serbera, Senior Lecturer in Banking And Financial Markets, Sheffield Hallam University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By Scott Ruoti, University of Tennessee 

Proof-of-stake is a mechanism for achieving consensus on a blockchain. Blockchain is a technology that records transactions that can’t be deleted or altered. It’s a decentralized database, or ledger, that is under no one person or organization’s control. Since no one controls the database, consensus mechanisms, such as proof-of-stake, are needed to coordinate the operation of blockchain-based systems.

While Bitcoin popularized the technology, blockchain is now a part of many different systems, enabling interesting applications such as decentralized finance platforms and non-fungible tokens, or NFTs.

The first widely commercialized blockchain consensus mechanism was proof-of-work, which enables users to reach consensus by solving complex mathematical problems. For solving these problems, users are commonly provided stake in the system. This process, dubbed mining, requires large amounts of computing power. Proof-of-stake is an alternative that consumes far less energy.

At its core, blockchain technology provides three important properties:

1. Decentralized governance and operation – the people using the system get to collectively decide how to govern and operate the system.
2. Verifiable state – anyone using the system can validate the correctness of the system, with each user being able to ensure that the system is currently working as expected and has been since its inception.
3. Resilience to data loss – even if some users lose their copy of system data, whether through negligence or cyberattack, that data can be recovered from other users in a verifiable manner.

The first property, decentralized governance and operation, is the property that controls how much energy is needed to run a blockchain system.

Voting in blockchain systems

Blockchain systems use voting to decentralize governance and operation. While the exact mechanisms for how voting and consensus are achieved differ in each blockchain system, at a high level, blockchain systems allow each user to vote on how the system should work, and whether any given operation – accepting a new block into the chain, for example – should be approved.

Traditionally, voting requires that the identity of the people casting ballots can be known and verified to ensure that only eligible people vote and do so only once. Some blockchain systems allow users to present a digital ID to prove their identity, enabling voting with negligible energy usage.

However, in most blockchain systems, users are anonymous and have no digital ID that can prove their identity. What, then, stops an individual from pretending to be many individuals and casting many votes? There are several different approaches, but the most used is proof-of-work.

In proof-of-work, users get votes based on the amount of computational power they have in proportion to other users. They demonstrate their ownership of this computational power by solving difficult mathematical problems. If one user can solve twice as many problems as another user, they have twice the computational power as other users and get twice as many votes.

However, solving these mathematical problems is extremely energy intensive, leading to complaints that proof-of-work is not sustainable.

Proof-of-stake

To address the energy consumption of proof-of-work, another way to validate users is needed. Proof-of-stake is one such method. In proof-of-stake, users validate their identities by demonstrating ownership of some asset on the blockchain. For example, in Bitcoin, this would be ownership of bitcoins, and in Ethereum, it is ownership of Ether.

Though this does require users to temporarily lock their assets in the blockchain for a period of time, it is far more efficient because it requires negligible energy expenditure. By the company’s estimation, moving from proof-of-work to proof-of-stake will reduce Ethereum’s energy consumption by 99.95%.

Ethereum’s ‘Merge’

This improved energy efficiency is why many blockchain systems intend to transition away from proof-of-work to proof-of-stake. Ethereum plans to make this change during the week of Sept. 15, 2022. This is known as the Merge. During this merge, operations will shift from being voted on using proof-of-work to being voted on using proof-of-stake. At the completion of the merge, only proof-of-stake will be used to vote on transactions.

The hope is that this will set up Ethereum to be sustainable for the foreseeable future.

About the Author:

Scott Ruoti, Assistant Professor of Computer Science, University of Tennessee

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By Nadia Smaili, Université du Québec à Montréal (UQAM) and Audrey de Rancourt-Raymond, Université du Québec à Montréal (UQAM) 

The metaverse is a virtual online world that people can access in a variety of ways, including through virtual and augmented reality. It offers people an interactive social experience where users are represented by avatars. Users can teleport through different virtual social worlds, participate in events and make transactions using cryptocurrencies.

By 2026, it is predicted that 25 per cent of people will spend at least one hour a day in the metaverse. There, they’ll be able to participate in activities such as working and shopping, and 30 per cent of firms will have their products and services ready for the metaverse.

The metaverse — which includes blockchains and cryptocurrencies — is still in its early stages. As its possibilities expand, it’s important to consider the potential threats and dangers as the metaverse introduces risks related to legislation, property, control, fraud, privacy threats, ethics and security.

As researchers interested in forensic accounting and digital fraud, we have attempted to identify the risks that are unique to the metaverse.

Opportunity or threat?

The metaverse appears to be a foray into developing new models of conducting business online. And as such, can we anticipate the related risks? Are current laws applicable to the metaverse? How are we protected from fraud in the metaverse?

While the metaverse offers new opportunities for firms and customers, as a nascent technology, it comes with multiple risks.

Breaches in ethics are possible. For example, do firms consider whether their code of ethics has been updated to account for expansion into the metaverse? How do customers and employees behave in the metaverse? Is sensitive information protected?

Legal issues will relate to intellectual property rights, the regulation of virtual assets, privacy and gambling. Firms considering using the metaverse should anticipate intellectual property rights, in particular those related to terms of service agreements and end-user license agreements.

Metaverse fraud risks

The metaverse can bring many fraud risks, such as market manipulation, cyber breaches and attacks, privacy breaches, money laundering, corporate espionage and identity theft.

Unlike traditional social media platforms, users have no guarantee that the data they share is only shared with those they choose to share it with in the metaverse. That means user identities can be tracked and revealed

As one researcher explains: “We cannot just turn off who can follow our avatars in the metaverse as we can do in the traditional social media.”

Personal information, such as biometric data, can be collected through the metaverse and in turn used for marketing purposes. Organizations using the metaverse need to ensure data is anonymized and users cannot be identifiable.

The rapid development of the metaverse has also brought risks related to cryptocurrencies, which are already subjected to very little official regulation. Scams could potentially flourish in the metaverse — and at worse, become normalized as a metaverse experience.

Preventing fraud

Risks in the metaverse can be mitigated by corporations and governments implementing controls that ensure users and administrators are protected. These are steps that can be taken to deter, prevent and detect fraud in the metaverse.

In our research on identifying potential fraud in the metaverse, we identified two sets of actions: macro, which take place at the government level, and micro, which affect corporations.

At the government level:

• Specific regulation is needed for the metaverse, possibly in the form of a new Metaverse Act that encompasses metaverse transactions and actions;
• Increased oversight by government bodies, such as financial authorities;
• Establishment of an international and global authority to oversee the metaverse;
• Co-operation with businesses to share information that will reduce risks and prevent malicious use and unethical behaviour and misinformation in the metaverse;
• Regulatory bodies should require or encourage organizations to disclose how they mitigate metaverse risks, what resources they have, and how they protect users from identity theft, misinformation, cyber threats and privacy breaches.

At the level of individual corporations or organizations active in the metaverse, here are some steps that can be taken:

• Adopt a comprehensive internal approach within different departments (for example auditing, marketing and finance departments) to identify weaknesses when processes are implemented in the metaverse;
• Implement measures that regulate avatar behaviour on different platforms to ensure users conform to community standards;
• Employment of artificial intelligence to combat fraud and scams;
• Update codes of ethics and whistleblowing programs to protect whistleblowers and facilitate whistleblowing channels;
• Ensure that an adequate program is in place to mitigate and respond to metaverse threats.

Boards of directors, governance bodies and management should be trained and able to co-ordinate efforts to combat the emergence and the expansion of crime in the metaverse. Training and education are the first steps in establishing an efficient metaverse anti-fraud program.

About the Author:

Nadia Smaili, Professor in Accounting (forensic accounting), Université du Québec à Montréal (UQAM) and Audrey de Rancourt-Raymond, Assistant researcher, Université du Québec à Montréal (UQAM)

This article is republished from The Conversation under a Creative Commons license. Read the original article.