The general Cryptocurrency market fell to around $800 billion. But investors and traders are banking on Ether's potential. By the way, are you too trading on Ethereum? You can trade safely with a Crypto trading app. Click here to read more.  

Ethereum might be the second best in terms of overall market capitalization. But in terms of technology usage, they are next to none among the major Cryptos. Therefore, a general question might crop up, why will Ether Take over Blockchain in the year 2023? The article will try to get into the discussion to understand the issue. 

What Is Ethereum?

This section is mainly for new readers who need a better idea of Ether. Ethereum is a decentralized global software platform. It is backed by the Blockchain. Among Cryptocurrency investors and enthusiasts, it is known as the native Cryptocurrency of Ether. 

The Blockchain backs ether. Here, the records and transactions are done in a distributed ledger. This denotes the information is spread across a wide network of computers. Once you record the information, it can not be changed; it becomes immutable. 

Why Will Ether Take Over The Blockchain In The Year 2023

As discussed above, the Cryptocurrency world is falling in its overall market value. Ether is also following the same trend. But why do you think that there is a wave of possibility with Ether? There are constructive reasons to back the point of discussion. Let us try to understand this here. 

If you are an Ether enthusiast, the value of the digital currency in the year 2015 was around a mere 1.35 USD. After that, ether underwent a meteoric rise and reached 4444.53 USD by the year 2021! Therefore there is no doubt that the investors benefited from the rise. Though Cryptocurrency experienced a fall in its value over time, it somehow held the promise and trust among investors. 

Ether VS Bitcoin

To understand things in perspective, we need to have a general discussion comparing both Cryptocurrencies, Bitcoin and Ether. Bitcoin is the highest in terms of market capitalization. On the other hand, Ethereum has second place after Bitcoin.

During the drier period, both the Cryptocurrencies, Ether and Bitcoin, observed a fall right from the wake of the year 2022. Both have been deteriorating. While Bitcoin fell by around 71.05% in its value, Ethereum also met the same fate; it fell to 61.01%. You could well understand the connection. 

The Shift To Proof Of Stake

Many investors backed Ether and placed it before its rival, Bitcoin. There are reasons for it. First, Ethereum went through a merger. The developers did it to increase the speed of transactions and lower the cost.

Ethereum shifted itself from the Proof of work to Proof-of-Stake. Proof of work is a highly energy-consuming process. Moreover, Proof-of-work involves complex computation.

But Proof of stake is much more energy efficient. According to expectation, the Ethereum platform or Ether will be able to successfully cut down more than 99% of the consumed energy. This is important from the point of view of understanding things. 

Consequent to the shift in technology, Ethereum will be able to achieve decreased prices and increased speed. Thus, Ethereum is all set to find itself in an advantageous position compared to that Bitcoin. Therefore, Ethereum can unleash a wave of positivity so far as the current developments are concerned.  

Etherending

There is no doubt about the fact that Ether is full of promise as it has received a complete shift in its mining technology. The shift from the proof-of-work to the proof-of-stake can increase not only the speed of transactions but also lower the cost. These advantages propel the ether lovers strongly back the coin as the news is near at hand.

According to CoinDesk data, the world’s largest cryptocurrency briefly plunged from $22,738 to below $21,500 at 2:30 am ET before recovering slightly to just under $22,000.

Ethereum plunged from $1,808 to $1,728 at the same time before a muted rebound. By 3:05 am ET, it stood at $1,733.

Binance Coin, Cardano, and Solana also fell, though the cause of the widespread crypto drop was not immediately clear.

On Tuesday, Bitcoin and Ether ended in the red, though Ether is up more than 100% since mid-June amid investor preparation for a significant upgrade in the Ethereum network.

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But don't worry. Keep reading because we've created this guide to help you understand the key difference between Bitcoin and Ethereum. After reading this guide, you'll be able to make an informed decision about which cryptocurrency is right for you.

Different Use Cases Of Bitcoin And Ethereum

Wondering what the use cases of both projects are? Let's take a look now:

Bitcoin's Use Cases

Bitcoin was created as a peer-to-peer electronic cash system. Its use cases include:

1. P2P Payments

You can use Bitcoin to make fast and convenient P2P payments. All you need is the recipient's Bitcoin address. You can learn more in this thorough guide.

2. Store Of Value

Bitcoin is often referred to as "digital gold" due to its scarcity and the government's inability to manipulate it. This makes it an excellent store of value for long-term investment.

3. Borderless Transactions

The beauty of Bitcoin is that it knows no borders. Whether you're sending money to a friend in another country or paying for goods and services online, you can use Bitcoin to make borderless transactions with ease. 

Ethereum's Use Cases

Ethereum was created as a decentralised platform that runs smart contracts. Its use cases include:

1. Decentralised Applications (dApps)

dApps are applications that run on the Ethereum network. They are often compared to traditional apps, but they are more secure and decentralised.

2. Initial Coin Offerings (ICOs)

ICOs are a popular way to raise funds for blockchain projects. They involve selling tokens in exchange for Ether.

3. Smart Contracts

A smart contract is a self-executing contract that you can use to automate transactions or create decentralised applications. This type of contract is based on a set of predetermined conditions, which are then enforced by the code of the contract. 

4. Decentralised Finance (DeFi)

DeFi is a growing sector that refers to the use of blockchain technology to provide financial services. This includes lending, borrowing, and trading platforms.

5. Tokenisation

You can use Ethereum to tokenise assets such as real estate or art. This allows for fractional ownership and more liquidity.

As you can see, both Bitcoin and Ethereum have different use cases. While Bitcoin is mostly used as a store of value or for P2P payments, Ethereum is used for a variety of purposes including dApps, ICOs, smart contracts, and DeFi.

How Immutable Are Bitcoin and Ethereum?

Another key difference between Bitcoin and Ethereum is immutability. Immutability refers to the ability of a blockchain to resist changes to its data.

Bitcoin is considered to be immutable because it is incredibly difficult to change the data on the Bitcoin blockchain. This is because Bitcoin is powered by proof-of-work (PoW), which makes it very secure.

Ethereum is also considered to be immutable. However, there have been some instances where the Ethereum network has been forked to fix critical issues. For example, the DAO hack occurred in 2016 and led to a hard fork of the Ethereum network.Nonetheless, Ethereum's immutability is still debated by some in the crypto community.

What Is The Difference Between Bitcoin And Ethereum Mining?

Another key difference between Bitcoin and Ethereum is mining. Mining is the process of adding transaction records to a blockchain. Miners are rewarded for their work with crypto tokens.

Bitcoin mining is done using specialised ASIC chips. These chips are designed specifically for mining Bitcoin and are very efficient. Ethereum mining, on the other hand, you can do using GPUs. This makes it more accessible to hobbyists and small-scale miners.

What Is The Difference Between Bitcoin And Ethereum Blocks?

A block is a group of transactions that have been verified and added to a blockchain. Each block contains a unique hash, which links it to the previous block.

The main difference between Bitcoin and Ethereum blocks is their size. Bitcoin blocks are limited to 1 MB in size, while Ethereum blocks can be up to 2 MB in size. This is due to the different ways that each blockchain handles data.

What Is The Difference Between Bitcoin and Ethereum Transactions?

Bitcoin and Ethereum transactions are similar in that you need to verify both to add to the blockchain. However, there are some key differences between the two.

The main difference is that Ethereum transactions can contain data, while Bitcoin transactions cannot. This is due to the different designs of each blockchain. Ethereum's design allows for more flexibility, which has led to its popularity for dApps and smart contracts.

What Are the Pros And Cons Of Bitcoin And Ethereum?

Now that you know the key differences between Bitcoin and Ethereum, let's take a look at the pros and cons of each.

Bitcoin Pros

Ready to learn about the many pros of bitcoin? Let's look at them now:

1. Security

If security is your top priority, then Bitcoin is the better choice. Since Bitcoin uses a proof-of-work algorithm, it is much more difficult to hack than Ethereum. Ethereum's proof-of-stake algorithm makes it more vulnerable to attacks since hackers can simply buy up a large amount of ETH and then attempt to 51% attack the network.

While this has yet to happen, it is a very real possibility. In contrast, the proof-of-work algorithm used by Bitcoin makes 51% of attacks much more difficult and expensive to carry out.

2. Store Of Value

Bitcoin is often referred to as digital gold because it has many of the same properties as gold. It is scarce and durable, which makes it a good store of value. Unlike fiat currencies, which central banks can print, there is a limited supply of Bitcoin. This scarcity, combined with its usefulness as a medium of exchange, makes Bitcoin a very appealing investment.

In addition, Bitcoin is much more durable than paper money. You can store it securely offline in a digital wallet, making it an ideal asset for long-term investing. Thus, due to its scarcity and utility, Bitcoin is often compared to gold and other precious metals.

3. Censorship Resistant

Bitcoin is censorship resistant because it is decentralised. No government or financial institution can censor or block transactions. This allows people to use Bitcoin without fear of censure from their government or financial institution. Bitcoin is also resilient to attacks by censors.

If one group of people tries to censor Bitcoin, another group can fork the blockchain and create a new, uncensored version of Bitcoin. This makes it difficult for censors to effectively attack Bitcoin. Finally, Bitcoin is private and anonymous. This means that people can use Bitcoin without revealing their identities.

This makes it difficult for sensors to track and target users of Bitcoin. Overall, the decentralised, resilient, and private nature of Bitcoin make it censorship resistant.

Ethereum Pros

Want to know the pros of Ethereum? Let's have a look at them now:

1. Flexibility

Flexibility is one of the key advantages that Ethereum has over Bitcoin. While Bitcoin is primarily a cryptocurrency, Ethereum is a platform that you can use to create decentralised applications (dApps) and smart contracts. This flexibility has led to the widespread adoption of Ethereum by developers and businesses.

Smart contracts in particular have been heralded as a game-changing use case for blockchain technology, and Ethereum is the clear leader in this area. As the blockchain space continues to evolve, Flexibility will likely become even more important for Ethereum.

2. Scalability

Ethereum's blockchain is currently affected by scalability issues. However, developers are currently working on a switch to proof-of-stake (PoS), which should help to improve transaction times and reduce fees. In the meantime, users may have to pay higher fees and wait for long periods to process their transactions.

However, once the switch to PoS is complete, Ethereum should be able to handle many more transactions per second than it can currently. This will be a welcome relief for users who have been frustrated by the slow speeds and high fees.

3. Environmental Impact

As the world becomes increasingly aware of the need to protect the environment, many organisations are looking for ways to reduce their impact. One area that has come under scrutiny is cryptocurrency mining, which consumes a great deal of energy. Ethereum, one of the most popular cryptocurrencies, is currently moving to a new system called Proof of Stake (PoS).

Under PoS, you will no longer need miners to mine new Ethereum tokens. This change will help to reduce Ethereum's environmental impact, as well as make it more energy-efficient. In addition, Ethereum's move to PoS may encourage other cryptocurrencies to adopt similar systems, further reducing the impact of mining on the environment.

Want To Learn More About The Difference Between Bitcoin And Ethereum?

So, what’s the difference between Bitcoin and Ethereum? In short, Bitcoin is a store of value or digital gold, whereas Ethereum is a platform that allows for the development of decentralised applications.

If you want to learn more about investing in Bitcoin or investing in Ethereum, be sure to check out our blog where we explore these investing strategy topics in-depth. Thanks for reading!

At 1:47 am ET on Thursday, the price of Bitcoin was down 8.76% to $26,848.20, according to Coin Metrics. Meanwhile, Ethereum dropped over 13% to $1,832.33.

Crypto dropped alongside stocks after the Bureau of Labor Statistics reported consumer prices for April were up 8.3%. This figure came in somewhat higher than predictions by economists polled by Dow Jones and spooked investors. As such, many investors exited risk assets, including crypto. 

“The concern now for crypto asset investors is when the slide will end,” said Simon Peters, a crypto market analyst at trading platform eToro.

“The market is caught in the wider adversity of investment markets that are battling to decide where comfortable levels are in the wake of interest rate hikes designed to quell soaring inflation around the Western world.”

This is the second occasion this week on which Bitcoin has tumbled into the $29,000 range. Analysts have called $30,000 a key level for the cryptocurrency by market cap.

However, the days of blockchain maturation are still early—and Ethereum is facing significant scalability issues, including network congestion resulting in slow and expensive transactions.

One of the main causes that lead to congestion on Ethereum is decentralised applications, also known as DApps. These applications could vary from games to crypto exchanges to social platforms. Ethereum boasts over 67,000 daily active users on its blockchain, with more than 269,000 transactions in a typical 24-hour period in early 2022.

Moreover, the Ethereum blockchain is home to some of the largest non-fungible token (NFT) marketplaces. The most popular NFT marketplace, OpenSea, has more than 1.4 million users with nearly $23 billion in transactions.

It’s important to note that the Ethereum Foundation has been working on some technical upgrades to the blockchain, also known as forks. These updates are expected to help Ethereum’s scalability issues such as high transaction fees and network congestion, which result in the very slow and expensive process of transferring Ethereum’s native asset, ETH.

Ethereum’s Biggest Problem

In the context of Ethereum’s scalability hurdles, a major problem is Ethereum’s operating mechanism, known as Proof-of-Work (PoW). The model allows miners to solve complex math puzzles to verify a transaction on the distributed ledger and get a fixed amount of ETH as a reward (users need an Ethereum wallet to collect this reward). PoW is also used by the most popular blockchain, Bitcoin.

However, the PoW working mechanism consumes a significant amount of energy. The reason is that miners need to utilise powerful hardware to solve the blockchain’s puzzles, leading to unhealthy competition. According to Digiconomist’s analysis, Ethereum consumes an estimated 112 Terrawatts of electricity per hour.

As an alternative to PoW, the Proof-of-Stake (PoS) model allows a network of validators to stake the blockchain’s native asset in exchange for updating the blockchain with new transactions while earning rewards. PoS requires much less energy than the PoW mechanism, which helps to reduce the carbon footprint of the emerging technology.

Ethereum is planning to transition to PoS, through its upcoming Ethereum 2.0 upgrade. The upgraded version of the blockchain is expected to use approximately 99.95% less energy than the PoW working mechanism. It’s also easier to facilitate much faster transactions with the PoS consensus mechanism, which is expected to alleviate Ethereum’s scalability burden.

Chief Investment Officer of Bitwise Asset Management, Matt Hougan, believes that Ethereum’s transition to PoS is “a really big deal.” Hougan says, “I think non-crypto natives are becoming aware of the merge for the first time. There really wasn't much discussion of the merge outside of crypto channels until a few weeks ago,” Hougan told Fortune. “Now that the mainstream media is picking up on it, and institutional investors are hearing about it, people are realising what a big deal it is.”

Hougan says there are, however, some risks with Ethereum’s “very high stakes technological upgrade”.

The PoS model is less secure than PoW since there is no physical computational base to confirm transactions. In simple terms, PoS presents higher scalability while removing an extra layer of security.  With the rise of crypto, many investors have jumped into the industry. An estimated 55% of all active Bitcoin investors started to invest in 2021, for example.

Last year, the number of crypto users in the world, according to Crypto.com’s report, surpassed 295 million—and is predicted to reach the 1 billion mark by December 2022. 

Part of the reason for such a boost was crypto’s 2021 bull market. Both digital assets and traditional securities such as stocks noted significant gains. TSLA stock rose 55% in 2021, for example.

Yet digital assets have also become increasingly accessible. There are many approved cryptocurrency exchanges in the United States, but many stock trading apps have also added support for digital assets. Still, most stock apps don’t support a wide range of crypto assets or transfers outside of those stock trading platforms, which limits the use of those cryptocurrencies.

The Rise Of Ethereum Competition

While Ethereum users await the long-anticipated transition to 2.0, competitors have swooped in. These blockchains were built with PoS or other mechanisms from the start, able to provide cheap, fast transactions immediately upon product launch.

Yet this doesn’t mean they’re perfect. Here are Ethereum’s biggest rivals:

Solana (SOL)

Launched in March 2020, Solana was created to support DApps and smart contracts. The blockchain uses a combination of PoS and Proof-of-History (PoH) mechanisms for a faster and more reliable functionality with lower fees, according to its whitepaper.

Solana’s combination of PoS and PoH allows it to process tens of thousands of transactions per second while Ethereum typically processes only 15 per second. Further, more than 5,000 projects are underway for Solana with around 1,000 developers. Solana is also the network with the highest staked value at the time of writing. Solana’s total staked value is over $44.5 billion.

Terra (LUNA)

One of the biggest rivals to Ethereum is Terra with its native utility token, LUNA and its USD-pegged stablecoin, TerraUSD (UST). Terra was founded in 2018 with the aim to offer price stability with Bitcoin’s censorship resistance. Terra mainly focuses on algorithmic stablecoins with a fast-growing financial applications network.
Terra is the third-largest network in terms of staked value. Earlier this month, Terra flipped Ethereum to become the second-largest blockchain for a few days. Terra’s total staked value is over $33.3 billion at the time of writing.

Avalanche (AVAX)

Ava Labs created the Avalanche, a smart contract-based blockchain in 2020. It’s one of the most popular PoS operators with over $10 billion in total value locked (TVL). Moreover, its native utility token, AVAX, is the 10th largest crypto with a market cap of more than $24 billion. Furthermore, two of the most important issues that Avalanche is trying to fix are congestion and low fees. The blockchain can process around 6,500 transactions per second, much higher than Ethereum.

So Who Wins The Layer-1 Blockchain Race?

It’s clear that Ethereum is the most popular on the list and there are some notable mainstream names such as billionaire investor Mark Cuban publicly supporting it. However, Ethereum is poised to make a huge move toward PoS since its utility is much higher than what PoW can offer.

“We’re seeing a rush where there’s a lot of different blockchains that are competing,” Mark Cuban told CNBC Make it. “When they start to put smart contracts to work, that’s when we’ll start to see things really level out. It’s going to come down to applications and integrations.”

Although these so-called “Ethereum Killers” have been created with Ethereum’s scalability issues in mind, they still lack Ethereum’s decentralisation. Many of them offer much more centralised networks with lower transaction fees and higher transaction speeds. Another downfall is that the centralised design of these networks results in various outages.

It’s too early to say whether Ethereum could be replaced with all the support it gets from the community. If Ethereum can successfully pull off its upgrade to 2.0 and improve scalability, it will be difficult to see its user base go elsewhere.

About the author: Shane Neagle is Editor In Chief at The Tokenist.

Bitcoin was down 1.8% to trade at $48,310. Earlier in the week, the price of bitcoin had surged, passing $49,000 but failing to reach the key level of $50,000. Furthermore, bitcoin is currently down around 30% from its all-time high of roughly $68,000, which it hit in November.

Meanwhile, ethereum, the second-largest crypto by market cap, dropped 2.6% and was trading at $3,917. 

It appears that investors are instead moving their focus to smaller crypto assets, with cryptocurrencies such as ripple, cardano, polkadot, dogecoin, and shiba inu increasing by 1 to 5%. 

Speaking to Yahoo Finance, Kalkine Group CEO Kunal Sawhney said, “Cryptocurrencies have remained turbulent in the recent past with the most populous crypto-asset bitcoin continuing to hover below the mark of $50,000.”

"The persisting uncertainty in financial markets have severely dismantled the growth prospects for most risky assets including some of the tech stocks and cryptocurrencies," Sawhney added.

The record-breaking surge comes amid an ongoing cryptocurrency rally that has been attributed to hedging risks from inflation. Analysts predict there will be a further rise in the coming weeks. 

This latest surge trumps the previous record high, which was set last month when the cryptocurrency reached nearly $67,700. Just five years ago, a single bitcoin was worth approximately $700. This year alone, bitcoin is up by over 130%, while ethereum is also up by an impressive 550%. The rise comes despite concerns surrounding cryptocurrencies by some critics. 

Explaining the rising popularity of crypto, Wilfred Daye, the head of the trading platform Securitize Capital, said: “Inflation is a major consideration for investors today, and the younger generation of investors often favours cryptocurrency as a hedge over gold. In fact, while gold has slid throughout the year, bitcoin and ethereum have more than doubled. Retail investors have played a major role in fuelling this shift and institutional investors are increasingly following suit.”

Arguably, the move is a very good one for PayPal. PayPal’s crypto play seems to have brought more users and higher transaction volumes to its platform. More users than ever before are moving to crypto, particularly younger people and millennials internationally. It has served PayPal well to get in there early.

This move was also great for Bitcoin. It certainly brought them media attention. It also helps the world see how Bitcoin – and crypto – can be made user-friendly and safe in a multitude of uses. It makes a statement to the world that Bitcoin is good, works and has use cases. PayPal’s acceptance of Bitcoin and crypto spells out in big letters to any critic claiming crypto is just for scams or crime that Bitcoin is ok.

Yet, in many ways, this move benefits PayPal more than it does Bitcoin. Bitcoin already has its users, anyone who really wanted to buy Bitcoin by now already will have done so. PayPal however has been rather static. Crypto is a new offering for its users and a new way to attract both more users and more transactions. There isn’t really a reason to check Paypal’s app on a daily or frequent basis, unless users are making a transaction. Accepting crypto means that the amount of times its users check the app – and its transaction volume – has gone up!

PayPal has around 350 million users and 26 million merchants. At the time PayPal started to accept Bitcoin transactions, in October last year, the market cap of PayPal – approximately $250 billion – was roughly the same as that of Bitcoin – approximately $240 billion. Now, PayPal’s has gone up to around $280 billion. Bitcoin, however, is currently hovering around $750 billion and has gone far past that previously. PayPal is, in many ways, replaceable. Sure, PayPal has many users and has first user advantage for the service it offers (and strong backers) but, in theory, PayPal could be replaced by another similar app with a better user experience, cooler marketing and a better brand to appeal to a bigger and younger audience. On the other hand, it’s hard to imagine that Bitcoin could ever be fully replaced. For sure, there are thousands of other cryptocurrencies, but they are simply not the same, for many reasons. Bitcoin has first mover advantage, is trust, safe, secure, has a great ecosystem of loyal (and highly skilled) supporters and developers, a big user base and is developing rapidly as well as other differentiating factors.

PayPal’s acceptance of Bitcoin and crypto spells out in big letters to any critic claiming crypto is just for scams or crime that Bitcoin is ok.

It’s not yet known how much Bitcoin and crypto holders will use PayPal to pay with Bitcoin. Generally, most Bitcoin holders want to hold on to the digital currency for the long term, in the belief that it will go up in value. Bitcoin tends to be seen as a nest egg rather than a spending pot.

PayPal’s public endorsement of Bitcoin is great. But it doesn’t change as much as one would think, either for Bitcoin, or PayPal, or traditional banking. Any merchant or user accepting Bitcoin via the app won’t actually receive Bitcoin. The digital currency will be converted in same time to their choice of fiat currency, meaning that as far as they’re concerned, they receive fiat. Had PayPal enabled its merchants to accept and hold money in Bitcoin, and to make other payments in Bitcoin, that might be a slightly different story.

PayPal has indicated they are keen to work closely with regulators and governments to ensure legal compliance in their crypto offering. This will also be true of the many other payment firms looking to accept crypto or already that have a crypto offering. This will potentially help regulators come up with ways to make it easier for other crypto related offerings to get regulated and thus be accepted and used in traditional finance. Other payments firms may also follow Paypal’s lead, making crypto the norm rather than the exception in the roster of offerings expected of traditional finance.

So is PayPal’s acceptance of Bitcoin likely to drastically change anything for traditional banking? No, probably not. The move helps win over some new users for PayPal, ups its transaction volume and increases visits to its app. This in turn could help PayPal come up with new ways to monetise its platform. It’s helped prove the legitimacy of Bitcoin, and more broadly crypto, and is another message to traditional finance that accepting crypto will become far more mainstream soon. Even if traditional banks start allowing their users to accept crypto transactions, most likely they will be cashed out into fiat in live time, just as is happening now with PayPal. Will this move be the one that makes traditional banks open up Bitcoin custody offerings to all their clients? No. Not yet, at least.

Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption by Erica Stanford is published by Kogan Page, priced £14.99, available online and from all good bookshops.

The move marks the first international of PayPal’s crypto product, which was first launched last October in the US. Its crypto feature allows customers to buy or sell bitcoin, bitcoin cash, ethereum, or litecoin with just £1. Additionally, customers are also able to track real-time crypto prices and access educational content on the market. 

The extension of the service to the UK will rely on the New York regulated digital currency company Paxos and PayPal has confirmed that it has engaged with all relevant British regulators to launch its crypto service. 

Despite ongoing concerns regarding crypto’s volatility, consumer protection and the potential for money laundering issues, many major companies including Tesla, Mastercard, and Facebook have been opening up to crypto in recent months. PayPal is one of the many large finance firms choosing to embrace the unregulated world of crypto. The move by the online payments giants comes as Bitcoin hit $50,000 on Sunday, reaching a more than 3-month high. 

As the popularity of Decentralised Finance (DeFi) proliferates, blockchain developers seek to provide new opportunities for investors using a novel structure of finance. Synthetic stocks, which grant users exposure to numerous assets while eliminating traditional barriers to entry, are among the latest forms of such innovation. In essence, synthetic assets refer to the tokenized clone of traditional financial assets. This ‘clone’ rests solely on a blockchain, however. Generally, synthetic assets can represent tech stocks, currencies, commodities, and even precious metals. Since they are blockchain-based, DeFi has become a home to these assets. In fact, the integration of blockchain technology which brings automation and removes the need for intermediaries is what makes synthetic assets so innovative. Courtesy of the blockchain, traders can enjoy exposure to traditional assets without the need to worry about the drawbacks a centralised platform brings. In addition, the decentralised nature of DeFi largely removes the troubles commonly emanated from regulatory bodies. Do Kwon, CEO and co-founder at Terraform Labs, the company behind Mirror Protocol, emphasised the nature of the quickly developing space:

“DeFi is so powerful in unlocking financial services for disenfranchised people around the world. It’s better to move fast and break things.Waiting for fragmented regulatory frameworks to crystallise before innovating is counterintuitive.”

How Synthetic Assets Work

Similar to derivatives in traditional finance, synthetic assets are digital assets with their price pegged to other real-world assets—such as TSLA or AAPL. Also referred to as “synths,” these assets track and provide the returns of traditional assets without requiring access to the real-world asset. 

Since synthetic stocks are derivatives, their value is derived from an underlying asset through smart contracts. Therefore, one can use these assets to trade the movement of price and value of traditional assets.Synthetic assets are typically created in the form of ERC-20 smart contracts that run on the Ethereum blockchain. They are different from options and other forms of traditional derivatives in that they tokenize the relationship between the derivative product and the underlying asset. 

On the other hand, traditional derivatives are financial contracts that create terms for an asset and its price. This allows DeFi users to leverage synthetic assets in the use of various trading strategies. For instance, hedging, which is a popular strategy in binary options trading, allows users to offset losses and manage risks by taking positions in derivatives. Such strategies are also used in DeFi's world of synthetic assets.

Advantages of Synthetic Assets

Synthetic assets carry a number of unique advantages. While there are no specific citizenship requirements to participate in the stock market, there are certain needs that investors must satisfy. Non-US persons must provide identification documents, pass Know Your Customer (KYC) screening, and comply with a number of laws that are intended to protect US interests. 

However, synthetic assets feasibly provide investors of any location or jurisdiction exposure to the price action of stocks, commodities, and currencies. To trade these tokens, users would hardly need any of the requirements to enter the US equities market. This makes synthetic assets a favourable alternative for foreign investors experiencing barriers to entry. Moreover, synthetic assets are openly tradeable and transferable, meaning anyone can send and receive them using standard crypto wallets. The only need is access to the internet and a bit of technical know-how. Since DeFi is always on, synthetic tokens can be traded 24/7. This is in great contrast to traditional markets, where trading is limited to specific days and specific hours.

In addition, with synthetic assets, there are no central party restrictions or risks. This is in stark contrast to the recent reddit-fueled GME drama when thousands of retail investors were unable to sell select securities due to restrictions imposed by stock brokers such as Robinhood. In such cases, these controlling parties can halt or even execute trades—keeping their primary interest in mind, without prioritising the trader.

Disadvantages of Synthetic Assets

Probably the most noticeable drawback of these tokens is that they never grant ownership of the underlying asset. A trader can earn profit and get exposure to the price of an asset, but this is merely a representation of the actual real-world asset. Therefore, synthetic assets holders do not obtain shareholder rights, votes, or access to dividends (if applicable).In addition, at times, scalability might also become an issue since DeFi is largely in an experimental phase. When minting synthetic assets, users should strive to choose the most suitable blockchain.

Despite being powerful, Ethereum is still prone to scaling issues and network congestion. Though they are typically much faster, transactions can take up to four hours to process via Ethereum, with average transaction fees breaching $20 throughout a number of days in early 2021. This is in stark contrast to the traditional payments world where credit card payments are facilitated seamlessly, showing the adolescent state that blockchain technology continues to remain in.

Lastly, DeFi is very vulnerable to hacks and exploits. Despite disrupting legacy finance, decentralised finance is still in the preliminary stages. In other words, no matter how cautious a project might be, a single breach can lead to the loss of all funds. One recent hacker stole more than $600 million in digital assets—though they were later returned as the “white hat” hacker prioritised the development of the network over his own riches.

Still, all of this is also true with synthetic stocks, which are—after all—a DeFi project.

Popular Synthetic Protocols

The most popular synthetic protocol in terms of total value locked is Synthetix, with over $1.8 billion in total value locked. Synthetix, which is the biggest derivatives protocol on the Ethereum blockchain, was the first project to introduce synthetic assets and bring this innovation to DeFi.

Synthetix reflects assets in the form of “sAssets” on the blockchain. As of now, the platform supports over 30 synths which range from cryptocurrencies, fiat currencies, indexes, and commodities like gold. The project also aims to add synthetic DeFi tokens for popular protocols like Aave, Uniswap, Polkadot, and Compound to its list of offerings.Following Synthetix, the second most popular synthetic asset protocol is Mirror, with over $1.7 billion in TVL. Mirror Protocol, which aims to grant everyone intuitive access to global markets, mirrors traditional assets in the form of “mAssets.”

These mAssets are a representation of the real-world asset that is pegged at a 1:1 ratio. Currently, the protocol reflects 14 real-world stocks on the blockchain. These tokenized assets include mTSLA, mTWTR, mNFLX, mAAPL, mAMZN, mGOOGL, mMSFT, and more. Other more prominent synthetic asset protocols include Uma, DAFI, and DEUS. Each of these projects offers a range of different synths, including stocks, currencies, commodities, and more. 

Conclusion

While there are many advantages to synthetic assets, there are also many downfalls and risks. Perhaps the most likely user of synthetic assets would include an individual who faces significant trouble when trying to access traditional securities through a broker such as Robinhood. For the investors who do not face such barriers to entry, it will likely take some time before the benefits of synthetic assets outweigh their risks—which are not entirely present in the traditional financial realm.

However, Robinhood shares dropped by more than 8% in after-hours trading as the company warned that a slowdown in trading activity would impact revenues in the current quarter. It is also possible that the platform’s investors are apprehensive about whether crypto, renowned for its volatility, can continue to provide financial success for the company. 

Robinhood’s revenue surged by over 131% in the period from $244 million a year ago, nearing the high range of the trading platform’s prediction of $546 million to $574 million. The company saw revenue from crypto trading reach $233 million, over half of all the transaction-based revenue of $451 million for the second quarter. In the first quarter, crypto’s share of revenue rose to over 51% from 17%. By contrast, the company’s crypto-based revenue sat at just $5 million In the second quarter of 2020. 

Robinhood introduced crypto trading in 2018. It has ballooned in the past few years, with the trading platform offering seven different digital coins, including bitcoin, litecoin, and ethereum. 

Over time, and certainly in the past year, with the drastic increase in value, cryptocurrency has changed in many people’s minds from a salacious method of money laundering to becoming a serious contender for investment. More and more novice investors are dipping their toes in the metaphoric water and even large brands (Starbucks, Amazon, PayPal, to name a few) are starting to accept cryptocurrency as a form of payment. As more money is being converted into cryptocurrency, these types of assets are becoming more prevalent in insolvent estates. So, what does that mean for creditors of companies or bankrupts who have invested in cryptocurrency?

Because cryptocurrency is decentralised i.e., it’s not tied to a country’s currency, nor is it regulated — it is viewed as an easy method of defrauding people. However, that is not necessarily the case. All transactions are public knowledge, meaning ownership can be verified and traced. Because there isn’t one controlling body, everyone is accountable to everyone. This transparency is a security feature in itself as it is difficult to hide in plain sight, as it were.

There is, however, a hurdle of learning new terminologies and understanding a new process. As a result, many people shy away from dealing with it. This can seem daunting and is certainly a barrier to entry for some. However, it isn’t a reason to ignore what could potentially be an immensely fruitful asset pot. Professionals must now start to change their perspective on cryptocurrency, particularly in relation to company investments in insolvency estates, and adapt processes to enable us to deal with cryptocurrency more effectively. Gone are the days of solely dealing with traditional assets.

So, how should a cryptocurrency be dealt with in an insolvent estate?

First, how can we identify that the company has cryptocurrency? There are various indicators to look out for to help identify whether the estate may have a cryptocurrency, such as:

• Transfers to exchanges as indicated in the company bank statements
• Finding a USB key within the books and records of the company
• Running everyday keyword searches such as “crypto” or “bitcoin” against the electronic records
• Identifying seed phrases written down within the company records
• Asking the directors

Once it becomes apparent that the company holds cryptocurrency as an investment, the insolvency practitioner (IP) will need to take steps to secure and preserve their investment. Just like with any other asset, the IP will need to act quickly to ensure the cryptocurrency is secured correctly. Identifying and locating the key is a critical step, but the IP shouldn’t assume that someone else doesn’t have a copy of the key. A prudent IP should transfer the cryptocurrency into a secure wallet of their own (on behalf of the estate) or to an agent. Under the new FCA legislation, cryptocurrency held on someone else’s behalf must be held by an approved agent, who could secure the assets properly, holding the assets offline and obtaining appropriate insurance.

However, what if it's discovered that the company entered into a cryptocurrency transaction, but the asset isn't held within its wallet? Just with the dissipation of physical assets or cash, the transfer of cryptocurrency away from the estate could be considered an antecedent transaction. Further investigation would be required, as with any other claim, to review whether the IP can substantiate a claim to an evidential standard to be successful in clawing back the assets for the benefit of the estate.

How can cryptocurrency be realised once it has been successfully recovered?

It is important to note that much like fiat currency, all exchanges have their own conversion rate. Because there is no interbank offer rate, there is no standard for what that conversion rate is. As we have seen in the last year, the rate has fluctuated drastically, much to the investors’ delight. In order to mitigate any criticisms and ensure the best price is being achieved for the asset, it would be prudent to compare exchanges and conversion rates. Alternatively, another option would be to place the cryptocurrency into an auction, which has an element of protection for the IP from any potential criticism as the value is simply the highest bid, rather than an exchange.

Given the increase in use and popularity of cryptocurrency, it is likely we will continue to see a huge investment shift towards it, particularly now with the backing of so many blue-chip companies. It is not the fraudsters’ friend, as it can sometimes be thought, and is traceable if you have the skills and know-how in dealing with it. IPs need to embrace the move toward cryptocurrency as a more prevalent asset class and look to expand their training and understanding of the toolkits available to them, whether that is through normal recovery action of an asset or the tracing of assets leading to a claim for the benefit of the estate.