Ethereum Continues To Grow, But Developmental Risks And Challenges Lie Ahead

January 5, 2021 12:23 PM
Ethereum coin

Ethereum coin




The top 10 is seeing marginal changes this morning on either side of unchanged. Ethereum (ETH) continues to consolidate around the psychologically significant USD 1,000 while bitcoin (BTC) has regained some ground lost in its Monday sell-off. 

Crypto Story of the Day

Ethereum continues to experience frenzied buying with spot volumes exceeding BTC’s throughout the day yesterday and making new multi-year highs above USD 1,000. Few have highlighted the development risks and challenges that lie ahead for the ethereum protocol.

ETH, along with BTC and other cryptocurrencies, has enjoyed increased mainstreaming. This mainstreaming has included ETH becoming part - along with BTC, BCH, and LTC - of PayPal’s crypto offering, the planned launch of CME ETH futures, and Visa’s work with the ethereum-based USDC stablecoin.

Ethereum’s proponents have also highlighted the perceived increased usage of the network. For example, weekly active addresses on the network have reached 2.2 million in mid-December, a record previously topped in December/January 2017. Similarly, the number of transactions on the network made record highs in September when some DeFi tokens saw parabolic gains. Average fees to transact on the network also peaked this summer at the height of the DeFi craze. Total capital locked in various DeFi trading venues is also setting new records, topping USD 17.7 billion yesterday due to inflows of new capital and the appreciation of locked assets. 

Most recently, ETH kicked off its transition to proof-of-stake (PoS) with the launch of the Ethereum 2.0 Deposit Contract in November and the Beacon Chain in December, both viewed as key technical achievements on the path towards PoS. Ahead of ETH’s rally and as it gained pace, several high-profile figures in the crypto space made exaggerated endorsements of the asset. For example, Tyler Winklevoss tweeted ‘The price of ether [ETH] right now is $735. This is 51% off of its all-time-high, which is like buying [BTC] at 14k. What a steal.’ 

Ethereum’s technical roadmap is several years away from completion. The transition to Ethereum 2.0 has also been described as a must, as the network could not sustain the transaction volume of widespread and mainstream usage with current capacities. That isn’t to say that permissionless networks stop changing at some point in the future, but rather that ethereum needs substantial upgrades to perform most of the tasks Vitalik Buterin described 6 years ago. 

The upgrade also tests new technical grounds and as such likely introduces new technical risk (with past precedent, like the DAO hack) in the near term. As a result, we find it disingenuous for respected members of the crypto community to give simplistic predictions about the asset while they are most likely aware of the risks and very tricky development path the protocol has ahead of it. We feel that such statements are representative of broader sentiment that largely ignores the challenges that lay ahead for ethereum.    

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