Is Ethereum the future of the internet?
Interest in the Ethereum blockchain has skyrocketed over the past year as developers have turned to it to create a wave of decentralized finance projects, known as DeFi, and unique digital tokens. called NFTs.
The rise of new apps like these – among the first running on a public blockchain – has already created what proponents claim is a powerful network effect, as growing activity brings more and more developers to Ethereum. . That could make it the platform of choice for what has become Web 3.0, where a series of decentralized applications could one day challenge Big Tech’s offerings.
“Sixty to 70% of the industry runs on Ethereum. It’s very sticky,” said Sandeep Nailwal, co-founder of Polygon, one of many companies that operate on top of Ethereum.
As a result, the price of Ethereum currency, known as ether or eth, which is used to pay for the computing power needed to run the blockchain, has increased ninefold. At around $350 billion, the tokens in circulation on Ethereum are now worth more than 40% of all bitcoins in circulation, more than double the proportion from a year ago.
But there remain fundamental questions about whether Ethereum, which is far behind with a complex set of technical upgrades, will be able to compete with more nimble rivals, and whether a consensus will emerge on its long-term role in future. as the world of crypto evolves.
“There is no shared narrative in the Ethereum ecosystem,” said Avichal Garg of Electric Capital, an investment firm in San Francisco. “Is a commodity like oil, digital gold, better bitcoin?”
Until the investment world decides on a response, the price of Ethereum tokens is likely to be volatile, he and others have warned.
The eth price rally was fueled by two hopefuls. The first is that Ethereum has entered a new phase in which the number of tokens in circulation will increase much more slowly than in the past, or even decrease. For financial speculators, this raised the possibility that its tokens might look more like bitcoin.
The token supply has already been reduced following a change last month in the way transactions are validated on the network. Some of the eth tokens that were previously paid in fees to miners who validate transactions are now destroyed or “burned”.
Another milestone could come late this year or early next year, when the blockchain is expected to move away from its current “proof-of-work” system, which relies on miners pledging their power. computing on the network in exchange for rewards.
Instead, it will be based on “proof of stake,” which validators participate in by depositing a portion of their eth holdings. Along with the environmental benefits that come from reduced treatment requirements, this decision has big monetary implications.
A proof-of-stake chain was launched to run in parallel late last year. Some 6% of eth supply has already been deposited there by holders to back transactions, earning holders an annual return of up to 5% – an early sign, according to the bulls, of the amount of eth which will be withdrawn from circulation once the full transition is complete.
Until now, eth was considered the crypto equivalent of oil, said Ninos Mansor of Arrington XRP Capital, a crypto investment firm — a commodity that is consumed to power the digital economy but where supply is n is not capped. But a sharp reduction in token supply could change that, making it more attractive to investors interested in a deflationary asset, he added.
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Unlike bitcoin, however, Ethereum was not founded on a clear monetary vision or with a higher cap on the number of tokens that could be created. Vitalik Buterin, founder and main evangelist of Ethereum, only said that it will adapt to all the needs of its users. This left open the possibility of further changes to how tokens are created, and therefore the long-term supply of eth, Mansor said.
The second hope behind this year’s price surge is that Ethereum will be a central part of the infrastructure due to its “smart contracts” feature, software code that runs automatically when certain conditions are met and allows peer-to-peer decentralized finance projects, for example.
Yet the network’s capacity is severely limited and a series of proposals to relieve the pressure are years behind schedule.
The network’s peak capacity of only around 15 transactions per second has meant that at peak times the so-called “gas” charges for using it have been bid up to high levels, eliminating all but the most important. That’s one of the reasons why financial apps ended up playing a much bigger role on the network this year, according to Buterin.
Meanwhile, new blockchains with greater processing capacity, including Avalanche, Solana, and Cardano, have sprung up.
“What you’re seeing globally is a rush for scale – and there aren’t many that are scalable,” said Avalanche founder Emin Gün Sirer, who revealed last week that he had raised $230 million through a recent token sale. .
The new blockchains have been strongly supported but have yet to prove themselves. The price of tokens on the Solana blockchain has more than quadrupled since early August as it became the sales platform for new NFT collections like the Degenerate Ape Academy. But a technical outage earlier this month resulted in a 5pm network outage.
While Ethereum’s limits paved the way for new blockchains, proponents of the network say its early lead in smart contracts will be unassailable.
To attract more developers, most new blockchains allow them to run their applications in “Ethereum virtual machines”, creating bridges to the Ethereum blockchain and maintaining the demand for eth to secure transactions in their applications.
Other mechanisms that are beginning to relieve the transaction processing bottleneck include so-called “layer two” networks like Polygon. These operate on top of Ethereum and take some of the pressure off, for example by acting as aggregators that process transactions on their own networks before aggregating and hosting them on the Ethereum blockchain as a single transaction.
According to proponents, today’s layer two networks contain the seeds of a larger tech industry that is beginning to take shape, with Ethereum at its heart. “We believe it will be a multi-chain world – but on Ethereum,” Nailwal said.
“There should eventually be room for all apps,” said Dan Finlay at Metamask, which offers wallets on Ethereum and claims more than 10 million users. But he added: “We are still at a stage where many scaling strategies are being tried at the same time. I don’t think any of them have been validated yet.
Ethereum itself, meanwhile, has embarked on a series of changes to its own network. The planned move to proof-of-stake has become the biggest technical hurdle, but is just one step in a series that could take years to unfold.
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Another is to “split” the network – dividing it into 64 separate but linked ledgers, thereby reducing the pressure on each node in the network by no longer requiring it to validate every transaction. Buterin says he is also working on other changes to the underlying protocol to reduce the load on nodes, and is optimistic that within two years some of these initiatives will have significantly increased capacity.
“The currency’s success will depend on Ethereum opening up,” said Jack O’Holleran, CEO of Skale, a network that operates on top of Ethereum. “It will become the global settlement layer” for decentralized applications of all kinds, they and others predict.
But with Ethereum’s long-term role still a matter of debate, warn investors like Garg, cryptocurrency markets could be overdue for a reversal that will see the Bitcoin vault return to unchallenged dominance.