Ether struggles as its network suffers a setback

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Ether, the second largest cryptocurrency, has come under pressure and could face more hurdles due to delays in an overhaul of the underlying blockchain network.

A major change in the


ether

Blockchain was expected in June. It aims to reduce network traffic congestion and reduce high transaction fees, which would be a significant development in the cryptocurrency world.

Bitcoin
is bigger, but Ethereum is the leading network for “smart contracts” and decentralized finance or DeFi. It underpins a range of crypto trading and lending activity. It is also commonly used as the basis for non-fungible tokens, or NFTs, and stablecoins – tokens that aim to be like digital dollars with a fixed value. Delays in overtaking could jeopardize this dominance.

Ethereum is transitioning to a Proof of Stake, or POS, a consensus mechanism for processing transactions, with the goal of eliminating reliance on its current Proof of Work, or POW, system. The upgrade should significantly reduce the processing power — and power consumption — required to validate blocks of transactions using POW, the protocol that Bitcoin uses.

Developers also plan to create “shards” outside of the blockchain to handle greater diversity and higher transaction throughput. All of this should also help Ethereum grow and reduce the high transaction fees that network operators are now receiving.

But the Ethereum transition or “merger” could now be delayed until the fall, according to a core developer, Tim Beiko. “It won’t be June, but probably in the few months after that,” he said tweeted on Tuesday. “No firm date yet, but we are definitely in the final chapter of PoW on Ethereum.”

The news appears to have put pressure on the Ether token. It traded around $3,200 on Monday and fell to $2,980 on Tuesday. Since then it has traded around $3,000.

The merge setback isn’t the only factor putting pressure on the ether. The Federal Reserve appears to be raising interest rates relatively quickly and reducing the huge portfolio of bonds it has amassed over the years to prop up the economy. As a result, bitcoin, other cryptos, and so-called risk assets have all tumbled.

According to some analysts, Ether could still get a boost from the transition.

“While this is likely a setback, Beiko has left the door open for a merger date in Q3, meaning the ETH merger could still serve as a significant catalyst into 2022,” said Sean Farrell, head of digital asset strategy at Fundstrat Global Advisors, in a note on Thursday.

According to Gavin Wood, an Ethereum co-founder who now powers the Polkadot blockchain, sharding the network could increase transaction volume by 64 times the current rate. “Then you can do it 64 times cheaper,” he said in an interview. “This is an important technological development for the protocol.”

But the longer it takes, the more competing DeFi networks and their native tokens could benefit, including major contenders like Avalanche and Solana.

Non-Ethereum DeFi volume has surged. Of the $210 billion now sitting in various DeFi networks, Ethereum accounts for 55%, up from 73% a year ago, according to website DeFi Llama. This in turn has fueled demand for some of the tokens used as currencies on these alternative networks.

Avalanche’s AVAX token is now worth $20.6 billion, up from around $600 million a year ago. Solana has grown from a market cap of $6.9 billion to $33.9 billion over the past year.

“The recent merger delay and any further changes in the expected date for the upgrade may serve to strengthen the case for cheaper and faster alternative networks,” said Stephane Ouellette, head of FRNT Financial, a crypto derivatives company, in a notice on Thursday.

Ethereum still has a large lead in DeFi due to the high number of platforms, apps, and services running on its network, along with large amounts of cryptos locked in smart contracts locked on its blockchain. The shift to POS should also slow growth in the supply of Ether tokens and potentially help support prices.

Still, the transition to POS will not be like flipping a light switch.

“They’re trying to get the underlying technology right and simplify, but I caution that because of that simplification, where we’re moving to isn’t the crucial point — it’s a point along the way,” Holz says.

Even after switching from Ethereum to POS, it will take some time for the transaction volume to adjust. “After the POS, they still need to roll out smart contract capabilities on each shard and communication between shards,” says Wood. “All of this must happen before any significant amount of traffic can reasonably be considered to be moving across.”

Write to Daren Fonda at [email protected]

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