The latest dramatic rise in cryptocurrency prices has come to an abrupt halt. Many coins are down by double figure percentage points with only a handful of cryptocurrencies avoiding the impact of this current sell off. One cryptocurrency that is defying the downward trend is Ethereum. As the media switches their attention to productless tokens with Twitter-happy CEOs, Ether quietly breaks through numerous all time highs with transactions/day on the network exceeding 1,300,000. A first (by some distance) for any blockchain.
Ethereum’s relative lack of media attention should come as some welcome respite. Ethereum, like Bitcoin, is a victim of its own success. Both blockchains have become so popular that their networks are congested, dramatically increasing transaction times and the overall reliability of transfers; any further attention given to Ethereum will only go so far as to demonstrate that this technology is not quite ready. But despite its lack of readiness, Ethereum appears set to dominate headlines as it edges ever closer to supplanting Bitcoin as the top currency by market cap, something that may happen sooner than many had expected.
For all of Ethereum’s failings (and there are failings), its long-term potential to achieve dominance as a global store of value, payment network and smart contract protocol are second to none. Ethereum is on the cusp of another explosion in adoption and price.
Ethereum as a store of value
Many people in this space have previously avoided any references to Ethereum as a store of value. A globally accepted (digital) store of value requires (among other things) stability and security of its protocol, an accomplishment well and truly achieved by Bitcoin. Ethereum on the other hand, has a protocol which is scheduled to go through a number of upgrades, each carrying a small risk of introducing unforeseen bugs.
However, it is in the successful implementation of these upgrades that Ethereum could position itself as a leading store of value. One such upgrade would be the introduction of “Proof of Stake”, a change to Ethereum’s consensus protocol that is likely to take place soon™. Proof of Stake is a green alternative to the electricity consumption of “Proof of Work” and rewards users for staking Ether (instead of mining) to secure the network. Those staking Ether are expected to receive an annualized return of 5-10%, a return that is likely to place upward pressure on the demand for Ether. Proof of Stake is also likely to reward less Ether as the cost of staking is a fraction of the cost of mining. This reduced inflation rate coupled with an ROI for holding and staking the cryptocurrency seems likely to position Ethereum as a legitimate global store of value.
Ethereum as a payment network
On January 4th 2018, Ethereum processed over 1,300,000 transactions in a single day with an average fee of ~$3. Bitcoin’s payment network is considerably less efficient at scale – maxing out at roughly 500,000 transactions/day with fees exceeding $15. Both Bitcoin and Ethereum are working on “off-chain” payment channels with the underlying blockchain acting as a settlement layer, however Bitcoin’s “roadmap” for scaling on-chain transactions is far less aggressive when compared to Ethereum – the first major upgrade (“Sharding”) seemingly poised to launch in the coming months.
Other competing payment networks in the cryptocurrency space include Ripple (XRP) and IOTA. XRP has very low fees (fractions of a cent) whilst IOTA markets itself as zero-fee. Ripple is focused on inter-bank payments and validates transactions using a somewhat centralized set of nodes (risk of censorship among other things) and IOTA has previously experienced 3 days of downtime. The above traits are not exactly inline with the decentralized and censorship resistant vision of blockchain-based payment networks. While IOTA and XRP (plus others) do offer value, Ethereum is the leading decentralized, censorship-resistant payment network that operates at scale with 100% uptime.
Ethereum for applications
Ethereum is the most widely adopted smart contract blockchain available today and forms the basis of an eclectic mix of applications currently under production or already launched. Ethereum dominates the top 100 tokens as the platform of choice for smart contract applications globally, however the question of whether Ethereum can scale is becoming increasingly urgent. Investors have speculated heavily on the impact of Ethereum’s smart contract protocol – anticipating that it may serve to disrupt entire industries – however considerations over the time required to synchronize the blockchain (a validator must download every transaction that has ever be made) and the throughput demand of even the simplest applications (see “CryptoKitties“) have been somewhat ignored. Ethereum is still a work in progress and one that is struggling to scale to meet demand despite investor confidence.
That said, as the introduction of Sharding and Proof of Stake nears and concerns over Ethereum’s ability to scale subside, it would seem inevitable that the value of this blockchain will rapidly grow to surpass Bitcoin.