Is Ethereum’s Bomb about to Explode?
Ethereum’s software is set for an update in October. But this is no ordinary update – participants are in a race against the clock against a “difficulty bomb,” with six ethereum improvement proposals (EIPs) vying to alter the project’s code before severe consequences set in 2019.
Ethereum is currently transitioning from a Proof of Work cryptocurrency (meaning computational power is necessary to produce new coins, process transactions, and ensure the ecosystem functions as designed) to a Proof of Stake protocol (marked by a decrease in necessary computational power and offering rewards to miners based on their ether balance) as part of a necessary switch to ensure the system is scalable and decentralized in the future.
That Proof of Stake protocol, called Casper, is a work-in-progress. Until it is finished, participants in the Ethereum blockchain must determine how to delay the difficulty bomb – code that necessitates a steadily increasing amount of computer power to mine blocks and unlock rewards – that is already in place. Failing to do so would risk an “ice age,” where the blockchain is effectively frozen and no more blocks can be formed in it.
Ironically, the difficulty bomb was originally meant to ease the transition from proof-of-work to proof-of-stake. But delaying the bomb and reconfiguring how ether rewards are released (a part of ensuring incentives align within a properly-secured blockchain) is creating its own set of problems. Altering the code means blocks will be easier for miners to find; rewards will need to be decreased proportionally with the delay to ensure ether is produced at the same rate.
Ethereum lacks a hard cap like Bitcoin’s 21 million units, meaning blockchain participants differ in opinion about how much to reduce (or, as touted by some participants, increase) supply. Because Ethereum is a decentralized network, there is even debate about how to vote on proposals – voting via the number of coins owned has been criticized as too informal.
While this is not the first time participants have been confronted with the impending difficulty bomb, it has become increasingly difficult to reach common ground with policy between miners and investors. Lane Rettig, an Ethereum developer, explained to CoinDesk that postponing the bomb “isn’t particularly controversial” – the issuance problem, however, is, and the problems are very difficult to decouple from each other. “You can’t have one without the other,” said Rettig.
Proposals for potential solutions vary in approach – EIP 1240 seeks to remove the bomb completely; EIP 1276 looks to remove the bomb and lower issuance to two ether per block from the current three. Other proposals seek to just reduce the reward, to one or two ether. What is clear is that multiple opposing viewpoints will need to be considered to reach a solution and that the time crunch means someone will have to budge.
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Financial analyst and market blogger with expertise in equity research, fundamental analysis, and macroeconomic trends. I regularly publish coverage on individual stocks, ETFs, and sector developments — combining rigorous financial analysis with clear, engaging writing for a broad investment audience.
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Technical Analysis (Indicators)
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