The NFT craze has put Ethereum – its blockchain-based computer network backing it – on the map, but the platform is already paying the price for its success.
Ether, the home currency on the network, crossed the $ 3,000 mark for the first time on Sunday and climbed to $ 3,340 on Monday afternoon, fueled by the explosion of NFT, or intangible tokens, and another market called defi, short for decentralized finance. A year ago, he traded at only $ 210.
Ether, the second-most-valued cryptocurrency after bitcoin, has gained momentum, despite the fact that bitcoin’s movement speed has slowed down. Ether is up more than 40% in April, while Bitcoin is down about 2.4%.
Launched in 2015 based on the concepts behind Bitcoin, Ethereum is a platform for developers to build and manage applications much like Android or iOS. Unlike those operating systems owned and controlled by Alphabet Inc.
and apple Inc.,
accordingly, Ethereum is an open source software project, which means that no central party has control.
The increase in on-air activity is due to the recent surge in online activity. In the first four months of 2021, about seven million new Ethereum addresses – or accounts capable of storing ether balances – were created in the first four months of 2021, bringing the total to over 55 million, according to analyst firm IntoTheBlock. According to research firm Messari, the dollar value of transactions on the platform in the first quarter was $ 1.5 trillion, more than in the previous seven quarters combined.
Another seal of approval: The European Investment Bank, a lender owned by member countries of the European Union, last week issued $ 120 million in two-year bonds on the Ethereum network, the first such large-scale release.
“Right now, the value and use of Ethereum has been confirmed,” said Danny Kim, head of revenue for crypto broker SFOX.
However, this success has resulted in network congestion and rising transaction fees that have prompted competitors to enter the market, as well as growing concern about the environmental impact of cryptocurrencies.
For most of its existence, Ethereum has promised more than it made a profit. This has changed over the past year thanks to NFT and defi. NFTs are bitcoin-like tokens with one twist: they are created only one at a time, and they are not fungible like currency tokens. NFT connects to a digital artwork or other real-world item and is sold as a unique digital property.
Since the launch of the National Basketball Association’s Top Shot collectibles six months ago, NFTs have become a cultural phenomenon. The Kings of Leon sold NFTs tied to the release of the album. Twitter Inc.
CEO Jack Dorsey auctioned his first tweet at NFT. Zenith? Digital artist Biple sold the NFT artwork at Christie’s for a record $ 69 million.
According to data tracking site NonFungible, the total value of NFT sales on the Ethereum network jumped to $ 2 billion in the first quarter from $ 94 million in the fourth.
The defi market, meanwhile, includes a wide range of financial services that allow cryptocurrency holders to borrow or lend against their assets. As more and more institutional investors enter the cryptocurrency markets, fueling the growth of bitcoin and the expansion of betting on derivatives, there has been a corresponding demand for borrowing crypto assets.
According to the DeFi Pulse website, the total amount of cryptocurrency stored in defi protocols on Ethereum – a number called the “total locked value” – skyrocketed to $ 68 billion from about $ 900 million a year ago.
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The boom in both the NFT and the defi has coincided with the frenzied market movement in everything from stocks to building materials, prompting new fears that global markets are in a bubble. Many investors speculate that markets have more room to work, thanks to aggressive stimulus from the Federal Reserve, which has pledged to keep interest rates near zero for the foreseeable future.
The growth in markets such as NFT and defi has been “overwhelming,” said Jean-Marie Mognetti, CoinShares’ CEO of Asset Management. “Ethereum as a network is what makes this all possible.”
Despite all the recent hype, Ethereum is a software project that is still under development and the obstacles it faces are significant.
The surge in activity has raised questions about Ethereum’s energy use, given similar concerns about the Bitcoin network. However, the power consumption of Ethereum is much lower than that of Bitcoin.
According to data provider YCharts, the Ethereum network consumes about 568 terahashes per second – a measure of the total computing power on the network. Bitcoin, on the other hand, consumes about 143 million terahashes per second. Moreover, Ethereum is in the middle of an upgrade cycle that will move to an even less power-hungry system.
However, the biggest challenge has remained unchanged since its launch: scalability. The web aims to become the “world computer”, handling the traffic of hundreds of millions of people around the world. The recent surge in traffic has resulted in significant network congestion, resulting in delays in settlement times and skyrocketing transaction fees.
The fee is essentially an access fee, but it goes up or down based on traffic. The average commission hit a record $ 38 in February, according to statistics site BitInfoCharts, and rose again to $ 30 on April 20, making it particularly unattractive for small transactions.
“As you add more users to the platform and increase activity, it increases commission,” said Wilson Vityam, an analyst at research firm Messari. “As you try to grow, the user interface becomes less user-friendly.”
It is for these reasons that Top Shot, the most popular NFT, does not work on the Ethereum network. Dapper Labs, a Vancouver-based startup that built and launches a program with a league and players, has developed its own network called Flow.
Ethereum’s scaling issues made it impractical for Dapper Labs, which the company discovered back in 2017 when it launched CryptoKitties, a game that allows users to create and trade unique animated cats. In fact, it was the first NFT and the first popular application to run on Ethereum. And as soon as it started up, it almost stopped Ethereum.
“24 hours after launch [Ethereum] the network was loaded, ”said Dapper Labs CEO Roham Garegozlaw. “And so it has been since then.”
While Dapper Labs is not specifically committed to having Flow replace Ethereum, there are several other projects that are seeking to take advantage of Ethereum’s challenges. Binance crypto exchange has created its own version of Ethereum called Binance Smartchain. Other competitors include Solana, Cardano, Cosmos, and Polkadot. They all seem attractive right now, but as they grow, they are likely to face the same scaling challenges as Ethereum, according to Mr Vityam. “Solving this problem will not be easy,” he said.
Write to Paul Vigna, [email protected]
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