How Proof of Stake Converts Ether to a Reasonable Investment

For several years, the cryptocurrency investment market has showed enormous growth. Thousands of companies have launched their own cryptocurrency as a way of funding their business. These so called utility tokens don’t always hold the best interest of both parties.

In the beginning there were companies like the Ethereum Foundation. They would launch a token with which users could use to pay for transaction fees on the network. The fees would go to the miners that support the security of the network. These miners could then sell the token back to the users to pay for the costs they are accruing to secure the network. At its core this could be understood as a fair business structure for the miners, users and Ethereum foundation… except for the fact that users didn’t realize that they were donating to the Ethereum foundation instead of investing in it.

When investors buy stock they buy the rights of future dividends. By estimating the future dividends of a company, investors have a way to value its stock. This is why start-ups without any revenue often receive multi-million (or even billion) valuations. Investors are betting on the potential return of a company, postured against the relative risk of that companies failure.

With the current Proof of Work (PoW) consensus, the amount of computing power that someone contributes to the Ethereum network is in line with the amount of voting rights he or she has. In this way, holders of Ether tokens neither get paid through transaction fees nor have voting rights on the network.

Then, why do people invest in Ether?

In 2017 the Ethereum Foundation announced that it will begin conversion towards Proof of Stake (PoS). This gives holders of the Ether token certain entitlements in respect to transaction fees and voting rights. When this will happen is still unknown. Details about the Ethereum PoS can be found on the Ethereum PoS FAQ page.

The change from PoW to PoS has obvious benefits for investors in Ether. This makes Ether a reasonable investment if you compare it to other utility tokens.

In the next article I will explain why nearly all utility tokens are bad investments and why companies that issue them are scamming the market.

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