Had you invested just $5,000 in Ethereum (ETH 3.40%) at the beginning of the year, your investment would be worth more than $22,360 as of Aug. 28. Its namesake network is advancing far beyond the realm of making uni-dimensional monetary transfers like Bitcoin (CRYPTO: BTC) or even smart contracts. Instead, it is rapidly evolving into a cyberorganism where decentralized digital infrastructures and marketplaces alike are developing on this network. 

The much anticipated "flippening," where Ether's market cap surpasses that of Bitcoin, may happen within a few years at this rate of development. Let's take a look at how Ethereum is rapidly reshaping the future of technology. 

A logo of Ethereum overlooking a cityscape.

Image source: Getty Images.

The great NFTs revolution 

Non-fungible tokens (NFTs) are certificates of ownership for digital assets such as artwork, music, and videos traded over the blockchain. Users can buy and sell them on marketplaces like opensea.io, which recently surpassed $1 billion in monthly trading volume. The Ethereum network generates distinct IDs for NFTs, which guarantees their uniqueness. At the same time, smart contract functionality automatically transfers ownership of the NFT's unique ID from the seller to the buyer upon receipt of the buyer's ETH, so the seller cannot just grab the ETH and bail. NFTs could fetch as little as 0.01 ETH or millions of dollars. 

At this point, readers are probably wondering what's the point of paying such a high price for a digital image that anyone can freely copy, paste, and save (but not prove that they are the rightful owner of). The answer lies in its tax treatment. Depending on the situation, NFTs are either classified as intangible capital assets or collectibles by the IRS, just like regular artwork. Let's say an average investor, Holly, purchases an NFT for 3 ETH on opensea.io. Three years later, an appraiser values her NFT at 9 ETH. If her NFT is classified as an intangible capital asset, she could then donate it to a charity and write off its full market value of 9 ETH (worth $30,530.07 today) against her ordinary income, usually over the course of a few yearsSo if she is employed, she will get a pretty fat check back from the IRS after she files her taxes. 

This new development has polarized taxpayers. Critics claim that the move is akin to cheating and disadvantages individuals who don't know about cryptocurrencies or NFTs. Meanwhile, supporters ponder if there's really anything immoral if, for the sake of argument, Holly donated her NFT to a homeless veterans fund to get a tax break so that she could catch up on her student loans. The charity could then sell the NFT on opensea.io and get a lump sum of ETH to fund its operations. 

It's a very controversial topic, and I'll let readers decide which side has the better ethics here. But do know that even if everything is set up correctly, investors could still subject themselves to a needless IRS audit. So make sure to have a good accountant and/or tax attorney at your side. At the end of the day, Ethereum provides a gateway to this lucrative market. And since the fundamental trading unit for NFTs is Ether, investors could open themselves for compounded gains if both the value of their NFTs and ETH increase in the foreseeable future. 

The creation of a decentralized world

The rise of cryptocurrencies has led to the rise of infrastructure that solely exists in cyberspace -- decentralized apps (dapps). They span all sectors, including but not limited to finance, games, online casinos, decentralized exchanges (DEX), social networks, insurance, and healthcare. But their key commonality is that there is no central development team or staff behind any of the apps. 

Hard to grasp? Here is an example. Let's say that a Russian car ower, Anya, purchases a decentralized car insurance product from John, who's based in the U.S. Smart contracts ensure that each month, premiums are deducted from Anya's ETH wallet to the insurer. One year later, Anya gets into a car accident for which she is not at fault. She can then tokenize pictures of the accident and the police report into NFTs for verification.

However, she does not want to reveal her personal details to an online stranger. So she then broadcasts the NFTs through a next-generation zk-SNARK network, which allows blockchain participants to validate large pockets of information without knowing what it actually is. Afterwards, John receives the encrypted tokens along with a decrypted message that their authenticity has been validated by stakeholders. The smart contract then automatically executes John's insurance payout to Anya, so he can't just simply refuse to pay and force poor Anya to fly all the way to the U.S. to sue him and revive Cold War era tensions. 

There are more than 3,000 dapps spread across 16 major blockchains, and 2,835 of them are based on the Ethereum network. They have a total of around 100,000 daily active users. But don't be mistaken, this is by no means a small feat. The total volume of smart contracts across these apps has reached a stunning $734.8 million in the past 24 hours. 

The emergence of a new dawn

By the end of 2022, Ethereum will transition from a proof-of-work (PoW) to a proof-of-stake (PoS) network, which could reduce its energy consumption by over 99% from current levels. Under this setup, token holders, not miners, validate transactions by pledging their ETH for lockup in a staking pool. So not only can stakers benefit from capital appreciation of their tokens, but they also receive small "interest" payments in consideration for staking their ETH and validating transactions. 

The interest can then be "re-staked" back into the pool, leading to compounding returns. It's analogous to bondholders compounding their returns by buying more of the underlying bonds with their semi-annual coupon payments. However, the technology for staking has advanced far enough to allow for instant reinvestment -- leading to continuous compounding (instead of twice per year with bonds), which results in more gains. 

What's more, future protocol upgrades could allow users who don't have enough ETH to stake their tokens into a pool for a commission instead. On top of that, the Ethereum network is prime for the adoption of blockchain-of-blockchain integration, which would enable users to stake their ETH to validate transactions on other blockchains for more rewards. Overall, due to its critical role in creating NFTs and dapps, and its innovative potential after transitioning into a PoS network, Ethereum is the top cryptocurrency investment of the year.