Will the next web be built on Ethereum?

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Is Ethereum the Future of the Internet?

Interest in the Ethereum blockchain has increased over the past year as developers set out to create a wave of decentralized financial projects known as DeFi and unique digital tokens called NFTs.

The emergence of new applications like this one – among the first to run on a public blockchain – has already created a powerful network effect that backers claim as increased activity brings more and more developers to Ethereum. That could make it the platform of choice for what became known as Web 3.0, where a number of decentralized apps could one day challenge Big Tech’s offerings.

“Sixty to 70 percent of the industry runs on Ethereum. It’s very sticky, ”said Sandeep Nailwal, co-founder of Polygon, one of a growing number of companies operating on Ethereum.

As a result, the price of the Ethereum currency, known as eth, which is used to pay for the computing power needed to run the blockchain, has increased nine times. At around $ 350 billion, the outstanding tokens on Ethereum are now worth more than 40 percent as much as all bitcoins issued, more than twice as much as a year ago.

However, fundamental questions remain as to whether Ethereum, which is well behind schedule with a complex set of tech upgrades, will be able to compete with more nimble rivals, and whether there is consensus on its as the crypto world evolves long-term role will develop.

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

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

The Eth Price rally was fueled by two hopes. One is that Ethereum has entered a new phase where the number of tokens in circulation will grow or even shrink much more slowly than in the past. For financial speculators, this has increased the possibility that their tokens will become more like Bitcoin.

The supply of tokens has already been reduced after the way in which transactions are validated on the network were changed last month. Some of the Eth tokens that were previously paid as fees to miners who validate transactions are now being destroyed or “burned”.

Another big step could be late this year or early next year if the blockchain is to move away from its current “proof of work” system, which relies on miners putting their computing power into the network in exchange for rewards.

Instead, it will be based on a “Proof of Stake” that validators take part in by depositing part of their eth holdings. Along with the environmental benefits of reducing processing needs, the move has a large financial impact.

Line graph of the number of tokens in circulation (m) showing that the growth of Ethereum will slow down

At the same time, a proof-of-stake chain was started at the end of last year. About 6 percent of the Eth supply has already been deposited there by the owners to back up transactions, which gives the owners an annual return of up to 5 percent – an early indication of how much Eth will be withdrawn from the bulls’ circulation once the full transition is complete.

So far, Eth has been viewed as the crypto equivalent of oil, said Ninos Mansor of Arrington XRP Capital, a crypto investment firm – a commodity consumed to boost the digital economy but with no supply limit. But a sharp reduction in the supply of tokens could change that and make it more attractive to investors interested in a deflationary asset, he added.

However, unlike Bitcoin, Ethereum was not based on a clear monetary vision or a cap on the number of tokens that can be created. Vitalik Buterin, founder and lead evangelist of ethereum, just said that it will adapt to the needs of its users. This left open the possibility of further changes in the creation of tokens and thus the long-term supply of eth, said Mansor.

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

Bar chart of Sales Value on the Ethereum Network ($ Mn) showing the launch of NFTs

However, the capacity of the network is severely limited and a number of proposals for relief are years behind schedule.

The maximum capacity of the network of only around 15 transactions per second has meant that at peak times the so-called “gas” charges for usage have been raised to a high level, which has pushed all transactions down to the highest values. That’s one reason financial applications are playing a much bigger role on the network this year, according to Buterin.

In the meantime, newer blockchains with greater processing capacity have emerged, including Avalanche, Solana and Cardano.

“What you’re seeing around the world is a rush to scale – and there aren’t that many that are scalable,” said Emin Gün Sirer, founder of Avalanche, who announced last week that a recent token sale made it US $ 230 million -Dollars collected.

The new blockchains received strong support, but have yet to prove themselves. The price of tokens on the Solana blockchain has more than quadrupled since early August as it became the platform for selling new collections of NFTs like the Degenerate Ape Academy. But a technical glitch last week caused the network to be down for 17 hours.

While Ethereum’s restrictions have opened an opening to newer blockchains, the network’s supporters claim its early leadership on smart contracts will be invulnerable.

Hopes rest heavily on the large number of developers who are already building applications with their technology. Solidity, the programming language of the blockchain, has become just as much a part of life for crypto developers as Javascript has become for web developers, said Nailwal, the co-founder of Polygon.

To attract more developers, most of the new blockchains are running their applications in “Ethereum virtual machines,” creating bridges back to the Ethereum blockchain and maintaining demand for eth to secure transactions in their applications.

Other mechanisms that are beginning to relieve the bottleneck in transaction processing are so-called “layer two” networks such as polygons. These run on Ethereum and take on some of the load, for example by acting as aggregators that process transactions on their own networks before they are bundled into a single transaction and stored on the Ethereum blockchain.

According to proponents, today’s Layer 2 networks contain the seeds of a broader technology industry that is slowly taking shape, with Ethereum at its core. “We believe it will be a multi-chain world – but on Ethereum,” said Nailwal.

“There should be room for all applications at some point,” said Dan Finlay of Metamask, which offers wallets on Ethereum and has more than 10 million users. But he added, “We are still at a stage where many scaling strategies are being tried out at the same time. I don’t think any of them have been validated yet. “

Ethereum itself has since made a number of changes to its own network. The planned switch to Proof of Stake has become the biggest technical hurdle, but only one step in a series that could take years to implement.

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Another involves “sharding” the network – dividing it into 64 separate but connected ledgers, which reduces the load on each node in the network by eliminating the need to validate every transaction. Buterin says he is also working on other changes to the underlying protocol to reduce the load on the nodes and is optimistic that some of these initiatives will significantly increase capacity within two years.

“The currency’s success will depend on Ethereum opening up more,” said Jack O’Holleran, CEO of Skale, a network based on Ethereum. “It will be the global settlement layer” for decentralized applications of all kinds, he and others predict.

But with Ethereum’s long-term role still controversial, investors like Garg warn that cryptocurrency markets may be overdue for a reversal that will return the Bitcoin vault to undisputed dominance.

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