If you’ve followed my recent work on cryptocurrencies, you’ll know that I’ve grown skeptical about their near-term prospects. Admittedly, most of that has to do with the sector’s fallout. These are emotional assets and when they’re done, they are done. But there’s also a fundamental argument against digital assets. Therefore, you might think I’m here to take down Ethereum Classic (CCC:ETC-USD).
Well, I don’t mean to disappoint, but I’m going to take an abrupt turn with the ETC coin. To be clear, this doesn’t mean that I’m going to go all-in on Ethereum Classic. True, I own some ETC, but it’s hardly what you would call my favorite crypto. Nevertheless, with everyone pushing toward decentralized efficiencies, ETC is an old school investment. But that might give it the edge over the competition.
First, let’s hash out some key background information. While Ethereum (CCC:ETH-USD) drives most of the headlines, Ethereum Classic is actually the original legacy blockchain of the Ethereum project. Indeed, ETC was set to change the crypto paradigm, with a decentralized autonomous organization (DAO) ultimately raising $150 million in an initial coin offering to support the effort.
Unfortunately, this new protocol suffered a major hack. Proponents debated bitterly about how to resolve the situation. In the end, Ethereum’s creators started a new chain to cancel out the hack’s effects. But those that felt creating a hard fork to essentially erase the past contradicted Ethereum’s core decentralized immutability ethos.
The dissenting but ideologically pure chain became Ethereum Classic. Interestingly, the underlying ETC protocol is proof-of-work (PoW) rather than proof-of-stake (PoS). According to CoinMarketCap, the legacy blockchain has no plans to convert to a PoS mining algorithm.
And should this remain true, it could be the decisive reason why ETC would be a better investment than ETH.
PoS Could Surprisingly Catapult Ethereum Classic
Again, let me clarify: I’m not saying that Ethereum Classic will outperform or replace ETH as a guarantee. Nor am I saying this to deliberately get a rise out of the audience. Rather, I’m noticing some dynamics that few people in the mainstream media or even the crypto space want to discuss.
While Ethereum decisively owns the number two slot in terms of crypto market capitalization, its dramatic popularity is causing the blockchain to have similar problems with Bitcoin (CCC:BTC-USD); namely, a lack of efficiency. With the Ethereum network incredibly crowded now, transactions take much time — that is, unless you want to pay up.
A driving force behind the so-called Ethereum 2.0 is to make the bidding process involved in the network’s transaction management more efficient, transparent and ultimately cheaper. Certainly, the PoS protocol contributes to the overall narrative of efficiency. But this argument only looks at one side of the ledger: the consumer side, or end-user side. It does not consider the miners or network contributors.
In a decentralized economy, the trust mechanism shifts from consolidated entities of authority to a distributed network of individual contributors. Everybody can be a network contributor, which is one appealing component of decentralization. However, for their contributions, rational actors want to be paid.
The irony, though, is that highly efficient blockchains are not profitable for network contributors. However, inefficient, energy-intensive blockchains, such as those that use PoW protocols, can be quite lucrative. Yes, with PoW, you have to pay to play. But the payoff, especially during a booming bull market, is astonishing.
That’s part of the reason why many ETH miners and contributors are up in arms about Ethereum 2.0. The implied efficiencies means fewer inefficiencies to profitably exploit. But with Ethereum Classic maintaining its PoW protocol, ETC could attract new contributors while ETH languishes.
ETC Might Just Address the Crypto Conundrum
The above point is so critical that it bears repeating through an analogy. As a writer, I’m in the media business. Every editor at any media organization wants their content creators to be good at what they do, perhaps great if they are capable. But you will never find an editor who asks for perfect writers.
Why? If everyone wrote perfect pieces with perfect grammar and compelling style, then every editor would be out of a job. It’s the dirty little secret of my business (well, at least one of them). The right number of flaws is necessary so that companies can hire editors to fix them. No problems mean no editing means no jobs.
Thus, Ethereum 2.0 is becoming the equivalent of perfect writers. It has editors (i.e. crypto miners) up in arms because they will basically have nothing to do anymore. You see, managing inefficiencies was the individual network contributor’s job. But a more efficient protocol will take away this economic incentive.
However, Ethereum Classic seems to have right answer: don’t do anything. As long as it maintains its PoW protocol, ETC has plenty of inefficiencies for miners and contributors to manage. Granted, this is a very risky idea but the economic fundamentals of this “old dog” is more attractive than the ETH offshoot.
On the date of publication, Josh Enomoto held a LONG position in ETC, ETH and BTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.