As ethereum gains popularity, it faces a growing need to address risks involved

By Sayujya S, Desk Reporter
  • Follow author on
Ethereum Image
Representational Image

Ethereum, the open source blockchain, has outperformed major digital currency rivals this year thanks to a surge in decentralized finance (DeFi) and the anticipation of a technical adjustment soon, but faces hurdles that could affect its rise.

Ethereum was created by 27 year old Vitalik Buterin who is now the world’s youngest crypto billionaire. With a jump of more than 350 percent in price this year it has the second-largest market capitalization after bitcoin, but perhaps more operational challenges that could prevent it from overtaking its major rival.

Ethereum and Ether

In the crypto world, the terms “ethereum” and “ether” have become synonymous. Technically, ethereum is the blockchain network in which decentralized applications are embedded, while ether is the token or currency that enables or drives the use of these applications.

Ethereum’s market cap on 7th May was $410 billion, second to bitcoin’s at more than $1 trillion, according to data. It hit a record high of $3,610.04 recently. Bitcoin, meanwhile, has risen a more modest 97 percent this year. Since hitting an all-time high of just under $65,000 in mid-April, bitcoin has actually fallen roughly 18 percent.

DeFi

A rise in institutional interest has increased ethereum demand, but supply has been limited. The token’s supply in exchanges in April hit its lowest in nearly two and half years, according to experts.

The reason for ethereum’s rise is DeFi, which refers to peer-to-peer cryptocurrency platforms that facilitate lending outside traditional banking institutions. Many sites run on the ethereum network, using an open-source code with algorithms that set rates in real time based on supply and demand.

Obstacles

DeFi, however, has its problems. Research showed 2 percent-5 percent of transactions on ethereum-based decentralized exchanges failed due to complications such as slippage or insufficient “gas” prices, which are the fees required to successfully conduct a transaction on the ethereum blockchain.

For instance, between April 15 and April 21, roughly 1.1 million transactions were made on Uniswap, a DeFi protocol used for exchanging cryptocurrencies. Of those, 241,262 failed, representing the largest number of transaction failures across the entire ethereum network, data showed.

Ethereum has also been plagued by the network’s inability to scale to meet demand without incurring high transaction fees as well as slow execution of transactions, market participants said.

Planned improvements

Meanwhile, proponents say DeFi sites represent the future of financial services, providing a cheaper, more efficient and accessible way for people and companies to access and offer credit.

The first phase of an upgrade called Ethereum 2.0 launched last year is aimed at addressing the network’s tech issues on speed, efficiency, and scalability.

Moreover, hopes of a technical adjustment called EIP (ethereum improvement proposal) 1559, which is expected to go live in July and is seen reducing the supply of ethereum, has provided a lift for the digital currency. EIP-1559 aims to reduce the volatility of ethereum’s fees by introducing a mechanism to burn some of those transaction fees, which should slow the token’s issuance, analysts said.

Related: A global first: Sotheby’s to accept bitcoin, ether as payment for physical art auction


YOU MAY LIKE