Ethereum Now A Victim Of Its Own Success
Probably the largest public blockchain network, in terms of utility and offered services diversification, Ethereum has come to a point where many supporters had to scratch their heads for a second, analogizing whether or not the popular DLT platform was indeed a choice they wouldn’t regret.
Now, if you’re in the scene for quite some time, you shall recall a relevant point in time, when one of the first Ethereum-powered sub-cultures managed to bring the broader network to its knees, due to bottlenecks involved with the enormous amount of transactions during the non-fungible tokens boom back in 2017/18.
The reason behind the current skepticism is not far from the CryptoKitties era, with the difference that we now have tens of thousands of different projects, services, tools, and dapps build on Ethereum, with some of them claiming a decent amount of the network’s computing resources in exchange for millions of pending or even canceled regular transactions that wouldn’t meet the miners’ criteria for forwarding.
Sure, from a business perspective, one could say that the more services built on Ethereum, suggest the more users for the homonymous blockchain, and therefore more positive outcomes in terms of profitability.
Yet, to completely comprehend why Ethereum is forking its own eyes out, we should dive into the PoW consensus mechanism, the current spread of users, as well as dapp popularity.
Just Getting Started? Try: A Beginner’s Guide To Ethereum And Its Applications (pt. 1)
Proof-Of-Work (PoW) Is Meant To Fail During Excessive Usage
This one should come as a natural, but here’s a grandma-level explanation of how PoW architecture works to ease your thought process:
User A wants to send user B an X amount of ETH.
For this transaction to be promoted and broadcasted to the broader Ethereum network, we have miners, or in modern terms, and without romantic fishing rods, ‘mining facilities’.
Mining facilities competitively perform complex computations, to solve mathematical problems as generated by the PoW consensus mechanism.
Essentially when a mining facility manages to confirm and promote a block of transactions, it is rewarded with some ETH, as a token of appreciation for the processing power, it brought to the table.
In PoW, mining is unavoidable, considering otherwise anyone could promote any transaction, even false ones, without any barriers.
So, what if the paradigm cited above changes into something like:
User A wants to send user B an X amount of ETH at the same time user C is trying to send user D an X*10 amount of ETH.
In that case, the mining facility will choose to prioritize user C’s quote, considering the larger the amount spent during the respective transaction, the more ETH will be distributed as loot to miners.
That’s it. That’s practically the whole issue with Ethereum at the moment. Unfortunately, that issue alone, although might seem irrelevant with a naked eye, could kill an entire network, even if it grew to become a giant of the likes of Ethereum.
PoS Is Anything But A Solution To The Problem
Vitalik and most of the core Ethereum community and devs are agreed upon the upgrade of Ethereum to Ethereum 2.0, where instead of PoW and miners, we’d have PoS and validators.
That sounds like a Robinhood scenario, only it’s not. Far from it, PoS will allow anyone staking 32 or more ETH to become a ‘validator’ aka someone that can be responsible for promoting, and broadcasting legit transactions while seizing illicit transactions from being registered on-chain.
Unlike miners, who can choose what to promote now and what to promote at a later time, validators can choose what to promote and what to not promote, meaning that you won’t be able to play with your gas fees options, but submit to the median gas price as proposed by the majority of the stakeholders.
In PoW, you can choose to pay $1 or $1000 in gas fees to promote a transaction, considering the less you pay, the longer you’d have to wait till your transaction is promoted.
In contrast, PoS means, that a fixed ‘near-stable’ gas fee will be applied to all transactions, and so everyone would have to pay eg. $10 regardless of the nature of the transaction or the urgency of the user submitting it.
In any case, the Ethereum blockchain, which was supposedly built to empower everyday people and help users ditch centralized economic authoritarian gloves, is now keen on doing the same, in an “As long as rich guys are fine with it, we’re fine with it” fashion.
Ethereum Forking Its Own Eyes
We’re now in 2020, and Ethereum is undeniably the leading platform to start a blockchain business, a dapp, a DeFi service or tool, or even an NFT publisher. It offers clean-cut documentation for total newbies, and it has an active and positive community that will help you onboard with no sweat.
Some of these projects, including but not limited to MakerDAO (MKR), Uniswap, yield farming protocols such as yearn.finance (YFI), and more, managed to attract billions of dollars worth of ETH in a short period.
That because, instead of CryptoKitties noobs, these platforms involve high-level financiers with PhDs in macroeconomics, price discrimination, and psychological marketing.
Re-assuring for old folks, messed up for me.
Grayscale Snatches Over 80% Of All Ethereum Mined In 2020
According to a recent post firstly appeared on Reddit, Grayscale Investments, one of the scene’s leading digital asset management companies has been confirmed to have bought near 50% of all Ether minted so far in the year.
That would be 1.1% of all ETH currently in circulation, or 756,539 ETH as cited by the original post.
If you’re unfamiliar with Greyscale, besides business intelligence, the popular crypto-focused firm provides institutional investors with a variety of investment funds targeting the crypto industry.
Over $2.7bn worth of digital assets is being managed by Grayscale, of which $234mn attribute for the Ethereum Trust. At the same time, the company manages a $2.3bn Bitcoin Trust, as well as other digital currencies such as Bitcoin Cash (BCH), ZCash (ZEC), Ripple (XRP), and more.
The post provides data suggesting Grayscale was aggressively stacking ETH since the very beginning of the year.
Inflows to Grayscale’s Ethereum Trust reached $110mn only in the first quarter of 2020, outperforming the inflows of the past two years combined which make up a decent $95,8mn, yet nowhere near analogous to the recent acquisitions.
DeFi Boom Attracts Academic Investors Who Are Fine With Extreme Gas Fees
From yield farming to crypto loans, old folks are keen on locking up their investments in crypto ventures that promise nothing more than a 2% to 5% annual return.
Sounds crazy right? Talk that to YFI, which managed to jump from $3 in early July to $35,000 apiece just last week.
Academic investors find re-assuring protocols pleasing even if the interest rate reminds that of an old banking system and not at all crypto levels, where you’d typically see daily fluctuations in the range of 10%-20%.
Considering these investors are throwing in some decades of millions in terms of USD, their 5% should be still compensating enough while paying for extraordinary gas fees that can be as high as $3,000 per transaction is not scaring them away since they’re used to pay cuts of 2%-10% outside crypto.
On the opposite, these guys are pumping the median gas fees’ rate up by the minute, practically making Ethereum unsustainable for non-millionaires.
Not a crypto whale and just wanna spend some regular cash? Wanna buy an NFT, or interact with a smart contract? Sure, you can do it, as long as you are willing to pay $90 in gas fees for a digital asset that’s valued at $10 😀
While I’d trust most bright minds would sleep this off, waiting till the fees have been regulated back to at least ‘near-normal levels’, two-digit IQ processors that tend to FOMO are keen on paying the same fees as millionaires to feel ‘they’re still active in the game’ even if the current rates would sink their wallet in the next 10 transactions.
CDP Whales The Only Reason Ethereum Jumped From $89 To $480 In Less Than Half A Year
I can’t spill the whole reasoning behind this, but it is most likely a convenience for CDP whales, seeing ETH fall to 30% of the original value it had during the collateralization process required to generate new DAI (the most popular Ethereum stablecoin) through MakerDAO.
Read our previous article on the matter to get a better idea of how CDPs work and it shall clear things up.
In a nutshell, throwing collateralized ETH to 1/3 of its initial value enables an auction curated by MakerDAO. During the auction, anyone can claim undervalued collateralized ETH by bidding a sum of DAI to unlock collateralized ETH.
You should be able to tell by now, not everyone is ethically driven to bid 99.99 for something that has a subjective value of 100, hence, more than $34mn worth of ETH were claimed by a bot, virtually for free since it was programmed to bid 0 DAI while trying to unlock ETH worth of ~$89 at that time. Make sure there’s no biding competition and it’s a GG.
Considering no-one was aware of MakerDAO’s liquidation protocol, and if they were, no one seems willing to pay enormous fees (at that time near $13/move) to bid, giving the bot a clean-cut loot box.
NFTs: The Most Suffered Ethereum Sub-Culture Is The One That Deserves A Better Platform
Last, but certainly not least acknowledging this was the catalyst that put me through compiling this article, my main concern is the fact no whales, neither traders nor the Ethereum Foundation itself gave a rat’s ass about real business models relying on Ethereum’s integrity.
People involved in the NFT scene were hurt the most during the first lockdown wave, as well as now when minting a piece of art could cost you anything between $90 and $225, depending on the platform and/or wallet(s) you’re using.
A. You can’t start as a new crypto-artist, but must put a sort of collateral to mint your first thing and rely on making your money back when and if it’s sold, meaning you’re either a pro or go home.
B. Your non-fungible token must cost more than the value of ETH you spent during the minting process, meaning that you practically can’t print shit that you wanna sell for $10 or less, or even distribute for free (eg. VIP event tickets, etc.).
C. No one will buy digital collectibles at this period, thanks to a bunch of folks that simply want to make numbers behind a computer screen.
That’s not a network issue, neither a problem with Ethereum, but rather a problem with the ethics of newcomers, who don’t realize how important and expanded the Ethereum network is.
Old, and outdated whales that can’t even grasp there are movements, VR sub-cultures, and SMEs running inside the Ethereum. People who once again, see everyone else as plain mathematics.
I’ll be honest here. I love Ethereum and its community from the bottom of my heart for many breathtaking things, but using it strictly as a for-profit mechanism is not one of them and will never be.
Under different circumstances, I’d say we’ve lost this one suggesting we should swiftly move to an Ethereum alternative like Waves, Near Protocol, or even EOS and Tron as many panicking Etherpreneurs do as you read this.
Yet, I am confident that this is just a period that shall act as a checkpoint for future references when it comes to building anti-greed safety protocols.
I have faith in the tens of thousands of small and medium-size decentralized business possible only thanks to Ethereum doing the right thing, avoiding being a part of this pump and dump massacre that benefits no one, especially not the network, in the sake of brutal profitability.
In the end, what’s the purpose of joining the Ethereum if you’re one of these folks?
Please let me know your personal experience with Ethereum and its current gas fees rate in the comments section below, or feel free to hit me via Twitter.