Crypto Investors May Be Ignoring 'Technical Red Flags' Associated With Common Network Upgrades

April 19, 2021 03:15 PM
Ethereum coin

Ethereum coin




Crypto was broadly rallying this morning after a sharp weekend sell-off that saw BTC trade below USD 50,000 for moments on Saturday evening. Mass liquidations of BTC futures lead to chaotic trading, with the futures curve experiencing a brief period of backwardation.

Crypto Story of the Day

The Ontario Securities Commission has approved the launch of 3 Ethereum (ETH)-backed ETFs. This step in the mainstreaming of ETH coincides with largely overlooked technical challenges faced by the network, specifically those risks associated with ETH’s move towards proof-of-stake.

Regulators have approved Purpose Investments’ Purpose Ether ETF, CI Global Asset Management’s CI Galaxy Ethereum ETF, and Evolve ETFs’ ETHER ETF for launch. Purpose Investments CEO Som Seif explained that “[w]hile [BTC] tends to get a lot of attention as it was the first major cryptocurrency, what [ETH] and the Ethereum ecosystem represent is one of the most exciting new technology visions today in society.”

The approvals coincide with Ethereum’s Berlin upgrade, implemented on Thursday, which caused technical issues for users of the Open Ethereum (OE) software while interacting with the network. OE, which allows users to run an Ethereum node and is relied upon by services such as Etherscan, fell out of sync with the rest of the Ethereum network for several hours after the Berlin upgrade. 

The OE software is used by about 13.5% of node operators, with the episode leading Coinbase and Bitstamp to pause ETH and ERC-20 token deposits and withdrawals. Coinbase described investigating a “potential issue with the recent network upgrade.” OE released a "hotfix for berlin consensus error" about 5 hours after the issue arose, while most services using that software resumed normal services within 9 hours or so. 

OE has yet to release a post-mortem on the issue and it remains unclear why the problem occurred. The Berlin upgrade would have been tested on Ethereum testnets designed to capture bugs, similar to previous code introductions. Given the relatively short timespan of the issue and high overall variance, on-chain data doesn’t show a definitive impact on metrics, such as the number of hourly transactions on the network, during the period in question. However, those relying on OE would’ve had their ability to use the Ethereum blockchain halted during the incident. 

Google search data over the past week shows the Berlin upgrade as having received significant attention. Despite the technical challenge, ETH would go on to make all-time highs on Thursday of about USD 2,500. 

Earlier this month, the Stellar network suffered technical issues that caused exchanges to halt withdrawals. We described that episode as showcasing a propensity for crypto investors to ignore technical red flags. Similarly, ETH’s achievement of new all-time highs coinciding with a major technical issue suggests that the risks associated with common network upgrades are wholly misunderstood. 

ETH faces years of frequent upgrades as it moves towards a complete overhaul and switch to proof-of-stake, while past introductions of new code have consistently led to technical issues, including chain splits. Despite improving opportunities for investors to gain exposure to ETH via products such as the aforementioned ETFs, appreciation for the fact that the network’s continued upgrading will rely on experimental and untested tech, and the risks that presents, is lacking.

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