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Ethereum: Death By 1000 Paper Cuts - Seeking Alpha

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Value, Growth At A Reasonable Price, Long-Term Horizon

Contributor Since 2019

Here at the Value Trend, we use trendline analysis to forecast changes in market dynamics and reach fair valuations for companies. We focus on long-term investments with an emphasis on big caps, tech, healthcare, and dividend stocks

Summary

  • Ethereum is an amazing technology, but still flawed in many ways.
  • While ETH developers are trying to remedy this, competing cryptocurrencies are popping up every day that are arguably better.
  • Ethereum can still be successful, but my guess is that other cryptocurrencies will slowly chip away at its market cap.
  • Could Ethereum become the MySpace of cryptocurrencies?
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Thesis Summary

Ethereum (ETH-USD) has convincingly outperformed Bitcoin (BTC-USD) in the last year, but this seems to be changing in the last few weeks, where Bitcoin has outperformed Ethereum. It seems like the world’s second-largest cryptocurrency is losing some of its shine, and this could be due to the fierce competition in the crypto space. There are hundreds if not thousands of crypto coins out there that promise to do just what Ethereum does, only better. If things don’t change quickly, or more specifically if Ethereum doesn’t adapt quickly, it could end up becoming the MySpace of cryptocurrencies.

Ethereum: Quick but Sloppy

Ethereum entered the crypto space back in 2015 at the hands of Vitalik Buterin and quickly rose to become the second-largest in the space. Ethereum, as I’ve mentioned many times before, doesn’t seek to compete with Bitcoin, but rather complement it. Ethereum is an open-source platform that aims to be an environment where decentralized applications can thrive. At its core, Ethereum’s purpose is to power the internet of the future, so to speak. However, to accomplish such a comprehensive task, certain features need to be present. Ethereum offers all of these features, but it struggles to deliver some of them as well as it could, or as well as other cryptocurrencies promise to.

Ethereum is expensive

Perhaps the single best argument that can be made against Ethereum, is that transactions can be really expensive. Transactions on Ethereum require “gas”, which is another way of saying computational effort, and this gas is paid for in Ethereum. The higher the computational effort, the more gas is needed and the more ETH you have to pay per transaction. The other issue with Ether’s gas fees is that they can vary a lot depending on the time.

Ethereum gas price chart

Source. Ethereumprice.org/gas

In the chart above, we can see how Ethereum gas prices have evolved in the last week. Though there does seem to be periods of stability, where the price oscillates at around 100 gwei, we see repeated spikes. On October 1st gas prices nearly reached 800 gwei.

Ironically, it is precisely Ethereum’s popularity that leads to the network congestion (there is limited space for gas on each block) that in turn makes using Ethereum rather unappealing.

Ethereum is slow

On a related note, Ethereum transactions could also be defined as slow. Supposedly, Ethereum can carry out 13 transactions per second. Meanwhile, it is estimated that the demand is close to 1.355 million TPS every day.

Ethereum is slow, compared to payment processors like Visa Inc (V) and Mastercard Incorporated (MA), but it is also slow compared to lots of cryptocurrencies, especially some of the new ones. Of course, the people behind Ethereum are trying to do what they can to remedy this through meaningful updates. However, the biggest thing Etehreum can do in this regard is a move towards Proof-of-Stake, rather than Proof-of-Work, which could prove to be a very difficult task.

Using PoW also had the disadvantage of consuming large amounts of electricity, which has been deemed by many as environmentally unfriendly. PoS offers an alternative to this, though not without costs.

Ethereum is hard to code

Lastly, one of the big innovations of Ethereum was the introduction of smart contracts that can run on the Ethereum network. This means that you can program anything in Ethereum, from finance applications to video games. To do this, smart contracts run on the Ethereum Virtual Machine, and this has to be programmed in a language called Solidity. However, this programming language has its limitations, including inherent security issues and the fact that it is a highly specialized language that not a lot of programmers are familiar with. As I will explain later, this is also an issue Ethereum is trying to address.

Ultimately, Ethereum was a revolutionary creation, way ahead of the game back in 2015, which is partly what helped it gain so much traction. But being a pioneer, also means you have no one to look to and Ethereum is, for the moment, an incomplete version of what it aims to be.

Watch out Ethereum you are not alone

In the last few years, we have seen many more cryptocurrencies like Ethereum pop up. None of these “Ethereum killers" has quite finished the job yet, but many are getting close. These newer cryptocurrencies do have the inherent advantage of having learned from Ethereum’s mistakes. The issues that Ethereum is experiencing, like transaction costs and energy consumption, have been directly tackled in the creation of many of these cryptocurrencies, which puts them in a much better position to do what Ethereum can’t.

Make room for Solana and ADA

Out of all the Ethereum alternatives available, there are two which have gained significant traction in the last year; Solana (SOL-USD) and Cardano (ADA-USD). ADA is currently the fourth-largest cryptocurrency by market cap, while Solana has climbed to seventh place.

Both these cryptocurrencies address the main issues that Ethereum faces. Starting with ADA, which I covered more in-depth here, it was designed using PoS, so energy consumption is negligible. On top of that, ADA uses a dual-layer system, which allows transactions to happen much faster since computations and settlements are done separately. The big catalyst for ADA has been the recently released Alonzo fork, which aims to introduce the use of smart contracts in its network, and even allows for the conversion of ERC20 tokens, meaning users can migrate from Ethereum to Cardano.

While the Alonzo fork went on as planned, it is yet to be seen when the exactly real utility will come from it. For now, there are an estimated 26 fully deployed smart contracts on the network Johnny Lyu, CEO of crypto exchange KuCoin estimates that it could take up to two years for DApps to be fully operational on the Cardano network.

With that said, an encouraging metric that supports the increased popularity of Cardano is GitHub Commands per Month. Data from Outlier Ventures suggests that Cardano has seen the most developer activity in 2020-21 followed by Ethereum. Solana, my next topic of discussion, ranked 8th.

Solana has seen a very fast appreciation in 2021, going from as little as $2 to nearly $200 at its peak. Why is this exactly?

Like Cardano, Solana presents itself as one of the best alternatives to Ethereum. Its biggest draw might be the fact that it can theoretically process 50,000 transactions per second, which is twice more than Visa and many times more than Ethereum. Solana is also PoS and implements Proof-of-History, which is part of what helps it be so fast. Solana can also be programmed in more typical languages, which makes it more easily accessible and some might argue “democratic”.

Other worthy mentions: Polkadot and Atom

While ADA and Solana could one day replace Ethereum, other cryptocurrencies could completely reshape how we think about cryptos. Polkadot (DOT-USD) and Atomic Coin (ATOM-USD) are both examples of this.

Both these coins tackle a fundamental problem in the crypto space; interoperability. Crypto investors have been discussing the merits of Ethereum, ADA, and many other cryptocurrencies to try to determine which is the best one. In other words, to try to pick the winner. But what if a winner wasn’t needed? Polkadot and Atom aim to create an environment where blockchains can coexist and operate amongst each other.

This seems, on the surface, like a great idea, and it opens up the door to using many more cryptocurrencies and even creating unique interactions between different chains. Each chain can be leveraged for its unique abilities, and they can even be combined in ways that we can’t even think of now.

What does the future hold?

What I’m trying to say is that Ethereum has, at the very least, a challenging road ahead. For starters, Ethereum will have to undergo some significant changes if it wants to be the host of Dapps around the world. In Ethereum’s defense, its developers are indeed working to address all of the problems mentioned above.

Ethereum is undergoing a very significant upgrade to what has been dubbed Ethereum 2.0. There are many ways Ethereum 2.0 will be different from its current iteration, so I’ll try to sum up the most relevant points.

Firstly, Ethereum 2.0 will work on a PoS protocol. This should help the cryptocurrency be more energy-efficient and carry out transactions faster, which will also be achieved through sharding, breaking up the chain into smaller “shards”. However, a lot of questions remain on just how successful this move will be. For starters, this involves getting rid of miners, by introducing a difficulty bomb, which means that the mining reward will decrease substantially in coming years. PoS has been deemed by many as the superior way forward for cryptocurrencies, but this is a contentious point. Without PoW, there is no concrete “value”, by which I mean cost of mining, which defines the value of the currency. Furthermore, the power of the network could become concentrated in a few big players who are staking most of the Ethereum.

By switching to PoS, could Ethereum be forgoing its greatest selling point? The fact is, that PoS systems have been around for a few years now, and none of them has been as successful as Ethereum yet. While it is arguably better for the environment, some might see PoS as a downgrade to Ethereum. Without mining rewards, you lose the whole "industry" that supports/justifies the value of the coin. Like gold, Bitcoin and Ethereum are expensive, to an extent, because they are hard to obtain. Also, in theory, PoS is less safe than a completely decentralized PoW cryptocurrency.

The other thing Ethereum is doing to become more appealing is trying to move from the above-mentioned Ethereum Virtual Machine to eWASM. WASM stands for Web Assembly, and it was created by the World Wide Web Consortium (W3C). Its advantage is that it can execute in modern browsers and, due to its simple binary nature, it is easy and fast to execute. Ethereum is trying to introduce this into its ecosystem through eWASM which should be faster and more flexible.

Ethereum has some very smart people behind it looking to make the right moves, but will this be enough? Ethereum 2.0 is expected to be fully operational by 2022-2023, by which point it may be too late. Many of the Ethereum alternatives mentioned above are already offering superior speeds and lower costs.

Ultimately, even if Ethereum does succeed in being one of the most relevant cryptocurrencies, it doesn’t mean its price and market cap will continue to increase. If projects like Polkadot and Atom succeed, then what the future holds is a much more fragmented and diverse cryptocurrency ecosystem. Ethereum is currently priced for success because it is the undisputed king of Dapps and smart contracts. But what if all these Dapps start spreading into more concentrated and “niche” blockchains? Ethereum would stop being the leader, and its price could quickly come down.

That’s not to say Ethereum’s glory days are over. I could be wrong, and even if this assessment is right, Ethereum could continue to grow as interest in blockchain technology continues to soar. However, it does seem like other lesser-known options could offer a better risk-reward profile, as these cryptocurrencies could slowly chip away at Ethereum’s market cap.

Hence, death by a thousand paper cuts.

This article was written by

The Value Trend profile picture.

Here at the Value Trend, we use trendline analysis to forecast changes in market dynamics and reach fair va...

Value, Growth At A Reasonable Price, Long-Term Horizon

Contributor Since 2019

Here at the Value Trend, we use trendline analysis to forecast changes in market dynamics and reach fair valuations for companies. We focus on long-term investments with an emphasis on big caps, tech, healthcare, and dividend stocks

Disclosure: I/we have a beneficial long position in the shares of ETH-USD, ADA-USD, SOL-USD, BTC-USD, DOT-USD, ATOM-USD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.