If you had only invested $ 5,000 in Ethereum (CRYPTO: ETH) at the start of the year, your investment would be worth over $ 22,360 as of August 28. Its namesake network is advancing well beyond the field of one-dimensional money transfers as Bitcoin (CRYPTO: BTC) or even smart contracts. Instead, it is rapidly evolving into a cyber organism where decentralized digital infrastructures and markets thrive on this network.
The long-awaited “turnaround”, where Ether’s market cap exceeds Bitcoin’s, could occur in a few years at this rate of development. Let’s take a look at how Ethereum is rapidly reshaping the future of tech.
The great revolution of NFT
Non-fungible tokens (NFTs) are certificates of ownership of digital assets such as artwork, music, and videos traded on the blockchain. Users can buy and sell them in marketplaces like opensea.io, which recently surpassed $ 1 billion in monthly trading volume. The Ethereum network generates separate identifiers for NFTs, which guarantees their uniqueness. At the same time, the smart contract functionality automatically transfers the ownership of the unique ID of the NFT from the seller to the buyer upon receipt of the buyer’s ETH, so that the seller cannot simply pick up the ETH and the deposit. NFTs could fetch as little as 0.01 ETH or millions of dollars.
At this point, readers are probably wondering what is the point of paying such a high price for a digital image that anyone can freely copy, paste, and save (without proving their rightful owner). The answer lies in its tax treatment. Depending on the situation, DFTs are either classified as intangible assets Where collectibles by the IRS, just like ordinary artwork. Let’s say an average investor, Holly, buys an NFT for 3 ETH on opensea.io. Three years later, an appraiser values his NFT at 9 ETH. If her NFt is classified as an intangible asset, then she could donate it to a charity and write off her full market value 9 ETH (worth $ 30,530.07 today) against her ordinary income, generally over a few years. So if she is employed, she will get a pretty big check from the IRS after she files her taxes.
This new development has polarized taxpayers. Critics say the move is akin to cheating and puts people unfamiliar with cryptocurrencies or NFTs at a disadvantage. Meanwhile, supporters wonder if there is really anything immoral if, for the sake of argument, Holly donated her NFT to a homeless veterans fund for relief. tax so she can catch up on her student loans. The charity could then sell the NFT on opensea.io and get a lump sum from ETH to fund its operations.
This is a very controversial topic, and I’ll let the readers decide which side has the best ethics here. But be aware that even if everything is set up correctly, investors could still undergo an unnecessary IRS audit. So make sure you have a good accountant and / or tax expert by your side. Ultimately, Ethereum provides a gateway to this lucrative market. And since the fundamental trading unit for NFTs is Ether, investors could open up to compound gains if the value of their NFTs and ETH rises in the foreseeable future.
The creation of a decentralized world
The rise of cryptocurrencies has led to the rise of infrastructure that only exists in cyberspace – decentralized applications (dapps). They cover all industries including, but not limited to finance, gaming, online casinos, decentralized exchanges (DEX), social media, insurance, and healthcare. But their main commonality is that there is no central development team or staff behind any of the apps.
Difficult to grasp? Here is an example. Let’s say a Russian car owner, Anya, purchases a decentralized auto insurance product from John, who is based in the United States. Smart contracts ensure that monthly premiums are deducted from Anya’s ETH portfolio to the insurer. A year later, Anya has a car accident for which she is not responsible. It can then tokenize images of the accident and the police report in NFTs for verification.
However, she doesn’t want to reveal her personal details to a stranger online. It therefore then broadcasts the NFTs via a new generation zk-SNARK network, which allows blockchain participants to validate large pockets of information. without know what it really is. Then John receives the encrypted tokens along with a decrypted message indicating that their authenticity has been validated by stakeholders. The smart contract then automatically executes John’s insurance payment to Anya, so he can’t just refuse to pay and force poor Anya to go to the United States to sue him and rekindle the tensions of the era of the cold war.
There are over 3,000 dapps spread across 16 major blockchains, and 2,835 of them are based on the Ethereum network. They have a total of around 100,000 daily active users. But make no mistake, this is by no means a small feat. The total volume of smart contracts on these apps reached $ 734.8 million in the past 24 hours.
The emergence of a new dawn
By the end of 2022, Ethereum will transition from a Proof of Work (PoW) network to a Proof of Stake (PoS) network, which could reduce its power consumption by more than 99% from levels current. In this setup, token holders, not miners, validate transactions by promising their ETH for locking in a staking pool. So not only can investors benefit from the capital appreciation of their tokens, but they also receive small “interest” payments in return for placing their ETHs and validating transactions.
Interest can then be “rolled back” into the pool, resulting in compound returns. It’s as if bondholders were compounding their returns by buying more of the underlying bonds with their semi-annual coupon payments. However, staking technology has advanced enough to allow instant reinvestment leading to continuous compounding (instead of twice a year with bonds) resulting in more payoffs.
Additionally, future protocol upgrades could allow users who don’t have enough ETH to pool their tokens for a commission instead. In addition to this, the Ethereum network is paramount for the adoption of blockchain-to-blockchain integration, which would allow users to put their ETH to validate transactions on other blockchains for more rewards. Overall, due to its pivotal role in building NFTs and dapps, and its potential for innovation after transitioning to a PoS network, Ethereum is the # 1 cryptocurrency investment of the year.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.