Is Ethereum the future of the Internet?

Interest in the ethereum blockchain has skyrocketed over the past year as developers have turned to it to create a wave of decentralized funding projects, known as DeFi, and unique digital tokens called NFTs. .

The rise of new apps like these – among the first to run on a public blockchain – has already created what supporters claim to be a powerful network effect, as growing activity leads more and more developers to ethereum. This could make it the platform of choice for what has become Web 3.0, where a series of decentralized applications could one day challenge Big Tech’s offerings.

“60 to 70% of the industry runs on Ethereum. It’s very sticky, ”said Sandeep Nailwal, co-founder of Polygon, one of the many companies that operate on Ethereum.

As a result, the price of Ethereum’s currency, known as eth, which is used to pay for the computing power needed to run the blockchain, has increased nine-fold. At around $ 350 billion, tokens in circulation on Ethereum are now worth over 40% as much as all the bitcoins involved, more than double the proportion of a year ago.

But fundamental questions remain as to whether Ethereum, which is far behind with a complex set of technical upgrades, will be able to compete with more agile rivals, and whether a consensus will emerge on its long-term role in the future. as the crypto world evolves.

“There is no shared narrative in the Ethereum ecosystem,” said Avichal Garg of Electric Capital, an investment firm in San Francisco. “Is it a commodity like oil, digital gold, better bitcoin?” ”

Until the investment world decides on an answer, the price of Ethereum tokens is likely to be volatile, he and others have warned.

The eth price rally was fueled by two hopes. One is that Ethereum has entered a new phase in which the number of tokens in circulation will increase much more slowly than in the past, if not decrease. For financial speculators, this raised the possibility that its tokens would look more like bitcoin.

The supply of tokens has already been reduced following a change last month in the way transactions are validated on the network. Some of the eth tokens that were previously paid in fees to miners who validated transactions are now destroyed or “burned”.

Another big step could come at the end of this year or early next year, when the blockchain must move away from its current ‘proof of work’ system, which relies on miners engaging their power. calculation in the network in exchange for rewards.

Instead, it will be based on ‘proof of stake’, in which validators participate by depositing a portion of their ethnic holdings. In addition to the environmental benefits that flow from the reduction in treatment demands, this decision has major monetary implications.

A proof of stake chain was launched to run in parallel at the end of last year. Some 6 percent of the eth supply has already been deposited there by holders to support transactions, earning holders an annual return of up to 5 percent – an early sign, according to the bulls, of the amount of eth which will be withdrawn from circulation once the full transition is complete.

Until now, eth was considered the crypto equivalent of oil, said Ninos Mansor at Arrington XRP Capital, a crypto investment firm – a commodity that is consumed to fuel the digital economy but where there is no no supply limit. But a sharp reduction in the supply of tokens could change that, making it more attractive to investors interested in a deflationary asset, he added.

Unlike bitcoin, however, ethereum was not based on a clear monetary vision or with a higher cap on the number of tokens that can be created. Vitalik Buterin, founder and senior evangelist of Ethereum, has only said that it will adapt to all of its users’ needs. This left open the possibility of further changes in the way tokens are created, and therefore the long-term supply of eth, Mansor said.

The second hope behind this year’s price spike is that Ethereum will be a central part of the infrastructure due to its function of “smart contracts,” software code that runs automatically when certain conditions are met and allows decentralized peer-to-peer financing projects, for example.

However, the capacity of the network is severely limited, and a series of proposals to relieve the pressure are years behind schedule.

The maximum network capacity of only around 15 transactions per second has meant that at peak times the so-called “gas” charges to use it have been raised to high levels, eliminating all transactions except the largest transactions. . This is one of the reasons financial apps have played a much bigger role on the network this year, according to Buterin.

Meanwhile, new blockchains with greater processing capacity, including Avalanche, Solana, and Cardano, have emerged.

“What you see globally is a rush to scale – and there aren’t many that are scalable,” said Emin Gün Sirer, founder of Avalanche, who revealed the last week they raised $ 230 million from a recent token sale. .

The new blockchains have received strong support but have yet to prove their worth. The price of tokens on the Solana blockchain has more than quadrupled since early August as it has become the platform for selling new NFT collections such as the Degenerate Ape Academy. But a technical outage earlier this month resulted in a 17-hour network outage.

While Ethereum’s limitations have opened an opening for new blockchains, supporters of the network say its early lead in smart contracts will be unassailable.