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Opinion Ethereum’s big breakthrough shows crypto has hope — but a long way to go

A collection of ethereum tokens. (Chris Ratcliffe/Bloomberg)

It has now been almost 14 years since bitcoin, the first decentralized cryptocurrency, launched in January 2009. Ever since, we have had a lively debate between early adopters proclaiming that crypto was the future, and skeptics (including me) pointing out that crypto had a lot of disadvantages compared to good old-fashioned money and the array of institutions dedicated to moving it around.

Even if you are not deeply versed in the intricacies of various cryptocurrencies, you are probably aware of some of these problems: Unlike money, crypto still has to persuade people other than enthusiasts to use it. It has to persuade governments to leave it alone. Transactions are pricey and cumbersome. And one of the most cited drawbacks is crypto’s environmental impact; the “mining” infrastructure for some of the most popular cryptocurrencies is estimated to consume more electricity than many countries.

On Thursday, ethereum, the second biggest cryptocurrency platform, moved to put that last concern to rest, undergoing a gut renovation of its architecture. The tricky feat (known as “the merge” for technical reasons that need not concern us) has radically reduced the amount of electricity needed to process transactions; by one estimate, ethereum’s energy usage and carbon footprint have now fallen by 99.9 percent.

This sort of evidence for optimism mixed into continuous proof for pessimism is exactly why we’re still arguing about crypto 14 years later — far longer than your typical Ponzi scheme or collectibles craze. If the crypto boom was pure speculative fever, then surely that fever should have broken by now.

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Instead, crypto’s possibilities continue to tantalize. Even if it doesn’t ever replace national currencies (though it might still be too early to count that out), cryptocurrencies could yet become the backbone of money transfer networks that sit on top of the blockchain, the way the banking system rests on traditional currencies. Or crypto could become the digital equivalent of gold, a hedge against inflation and other disasters.

Plus, crypto has non-monetary uses, too, such as “smart contracts,” which self-execute without an intermediary once predetermined conditions are met. Among other things, this function can be used to create NFTs, a sort of electronic deed granting rights over a digital asset such as a picture or a music file. Last spring saw quite a craze for NFTs, some of which sold for millions of dollars.

Yet the pessimists can also justly point out that for all the hype, crypto remains essentially a hobby. It is, to be sure, a hobby that has made its early adopters a lot of money, but the same can be said of Beanie Babies, which soared on a mixture of enthusiasm and speculation, then crashed when the market ran out of new collectors. Crypto booms have so far crashed each time it becomes clear the long-awaited takeoff is not yet in the offing. As of this writing, both bitcoin and ethereum are down almost 70 percent from their November 2021 peaks.

Everything new has growing pains, of course; in 1998, economist Paul Krugman famously predicted that the internet’s effect on the economy would be no greater than that of the fax machine. And it is a good sign for crypto that ethereum is able to adapt as problems become apparent and architects work to overcome them. The question is, are they solving the problems that most matter to the future of crypto?

I’m in the camp that thinks much larger problems than environmental impact remain. Transaction costs are high, and transaction speeds are slow compared to traditional payment processing networks. Crypto boosters tout the idea of cheaper, faster processing layers atop the base blockchain, but it’s not clear to me why those second and third layers will be more attractive to consumers, or business users, than ordinary banks.

Moreover, if cryptocurrencies and the networks that trade them do become competitive with traditional currencies and financial institutions, governments may well decide to stamp out the challenger — or at least to regulate it more heavily so tax collectors and law enforcement can track the flow of bitcoin and ether as easily as euros and dollars. Compliance would raise costs for users and, of course, curtail the healthy flow of illicit cryptocurrency exchanges.

And even if you think that the profligate use of electricity was, in fact, one of the main barriers to broader adoption, the market still has the final word. Alas, since the completion of ethereum’s paradigm-shifting merge, the price of its core currency has actually fallen.

I won’t say that crypto can’t overcome those hurdles; cryptocurrencies have already proven far more resilient than I expected. But I will say that they have an awfully long way to go, and as yet, no very clear road map to get there.