The cryptocurrency market recently crossed $2.7 trillion – a new all-time high. Just three years ago, the total value of all cryptocurrencies was just $220 billion, which means that the market grew at an annual rate of 132% during that time. This staggering number is several times higher than popular stock market indices such as Standard & Poor’s 500 and the Nasdaq Composite.
Naturally, cryptocurrency tends to be more volatile. But assuming you have an emergency fund, a well-diversified portfolio, and a few decades until retirement, I think it makes sense to put a small percentage (maybe 5%) of your money into this emerging asset class. Based on this idea, here are two types of cryptocurrencies that seem to reward long-term investments.
Ethereum (CRYPTO: ETH) It is a programmable blockchain. Developers can publish code on the network to create smart contracts, a fancy name for computer programs that start automatically when certain conditions are met. These smart contracts enable the creation of decentralized applications (dApps) such as social networks, video games, and decentralized finance (DeFi) services.
In all cases, these products do not require regulatory oversight. Therefore, you can use the DeFi app to lend, borrow or hold cryptocurrency without going through a traditional bank. By eliminating the middleman, DeFi services have the potential to lower costs and expand access to the financial system.
This is great, but there is a problem. The Ethereum blockchain currently supports just 30 transactions per second (TPS), well below 76,000 TPS. Visa It can be dealt with in theory. This means that, in its current form, Ethereum lacks the scalability to support the widespread adoption of DeFi services.
To solve this problem, the network is in the middle of an upgrade process. In early 2022, Ethereum will switch consensus mechanisms, moving from power-intensive Proof of Work to green Proof of Stake, a methodology that allocates mining power based on the validator’s stake in the network. Later in the year, 64 stray chains will be added to the Ethereum core blockchain, boosting its throughput. To be clear, these parts are additional blockchains that will spread the mass database over more infrastructure, reducing network congestion.
Once all is said and done, Ethereum will theoretically support 100,000 transactions per second, supporting the widespread adoption of dApps and DeFi services.
so what? dApps and DeFi services require computing power, and that costs money. Therefore, users have to pay transaction fees to access these products, which means they have to purchase cryptocurrency. If the Ethereum ecosystem of apps and services sees widespread adoption, the resulting demand for the cryptocurrency should drive its price even higher. This is why Ethereum seems like a smart long-term investment.
dotted (CRYPTO: DOT) It is similar to Ethereum 2.0. The platform consists of the underlying blockchain, known as the relay chain, as well as permanent side chains (parachains) and dynamic side chains (parathreads). Each of these side chains is connected to the migration chain, which itself is responsible for securing and regulating the entire ecosystem.
what is the point? Parachains (or parathreads) serve the same purpose as Shard chains in Ethereum 2.0, meaning they can support a range of smart contracts, DeFi services, and dApps while enabling data transfer between different internal networks. Moreover, Polkadot also supports bridging, which means that the relay chain can interact with external block chains such as Bitcoin or Ethereum.
As a caveat, parachinas are not yet activated, so this functionality is somewhat theoretical. However, the first parachain slots will be auctioned on November 11, 2021, an event that will allow blockchain project developers to bid for slots in the relay chain. This means Polkadot is on the brink of a massive upgrade. Initially, the platform will support 20 pieces per block, but gradually it will reach 100 pieces per block over time. At this point, creator Gavin Wood believes that Polkadot will support 1 million TPS, which means its throughput could exceed that of any other blockchain, even Ethereum 2.0.
However, there is still one other variable to consider: how quickly transactions are completed. TPS refers to throughput, while termination refers to how quickly transaction data is permanently added to the blockchain. Transactions on Ethereum 2.0 will reach their conclusion in about six minutes, but the Polkadot consensus mechanism will support the ending in 12 to 60 seconds. In short, Polkadot promises all the functionality of Ethereum 2.0 but with more processing power and faster termination. That’s why this cryptocurrency could be a smart buy right now.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.