Ethereum: Is it a victim of its own success? [Video]

It's no longer cheap - and it’s not as fast as it used to be - so has Ethereum shot itself in the foot?

Transactions on Ethereum use two concepts unique to the platform: gas (Ether) and gas price.

Because of the sudden rise in the price of ether and the gas that powers it, many users can’t complete their transactions - they’re no longer viable.

Projects that formerly relied on Ethereum for information certification, process traceability, or the creation of NFT sets have migrated to other blockchain networks because of the unaffordability.

How did it come to this?

It's hard to overstate the importance of Ethereum as a 21st-century technical invention.

Its adaptability across a broad variety of applications, from digital ledgers, smart contracts, and a broad range of financial transactions, has made it a key driver of digital transformation. 

However, Ethereum's speed and cost have soared in the last several years. Transacting via the network may now take hours, and the cost per transaction (also known as gas costs) can be as much as $40.00 (or more).

Because of Ethereum-based NFTs taking over the art and music industry in a big way, demand will only grow, pushing up gas costs further and transaction processing times even more.

This raises the question, should companies abandon Ethereum in favor of another transaction processing system?

Although Ethereum's demand far exceeded expectations, it doesn't imply it can't continue to beat other cryptocurrencies in the commercial world. 

In general, people get the impression that Ethereum, and by extension public blockchains, are less safe or more susceptible than, say, a private network. Due to its open-source nature and worldwide validation, Ethereum has shown itself to be very safe and is significantly less hackable than a cloud server.

There are some key issues with Ethereum, though; how we can make it operate fast, be scalable, and, most importantly, cost-efficient.

The underlying issue with Ethereum is its inability to scale because of a lack of bandwidth.

There is no way that Ethereum's creators could have predicted the levels of demand when they originally set the groundwork for what is now the biggest public blockchain technology. 

When use is at its highest, Ethereum completes over 1.4 million transactions in a single day. Compared to the Visa network for card payments, which processes over 65,000 transactions a second, Ethereum's current market cap is a hard cap. The network's theoretical maximum daily transaction volume is limited to around 2,592,000 transactions.

With Ethereum, it's not only about high gas costs — it's also about price instability. Demand for the gas network determines the current gas price.

As a result, depending on the time of day or the date, the amount of transactions traveling through the network changes dramatically. As a result, estimating transaction costs and forecasting total cash flow is almost impossible.

Let's say you're running a credit card cashback program and you're processing your transactions using Ethereum. Each purchase will have two transactions: one where you charge the store 10% of the purchase, and another where 10% is credited back to the customer's account. Those transactions may cost anywhere from $0.20 to $40.00, depending on the time of day. This has a significant influence on your company's profitability.

What's the point of holding on to Ethereum?

Despite the drawbacks, Ethereum is the logical choice for many use cases. It is possible to build, implement and run an Ethereum blockchain solution for an indefinite period with little to no risk of fraud and no interference from third parties.

In practical use cases, Ethereum outperforms other non-blockchain alternatives.

The smart contract is at the heart of Ethereum's corporate version — bits of code that run automatically when certain conditions are satisfied. For our cashback example, it implies that whenever a consumer completes a purchase, a requirement is completed, and the store is automatically charged 10% and they compensate the customer with cashback.

There would be no easy way to automate this procedure using a cloud-based private ledger.

For any type of permissions network, you'd need to hire a costly team of engineers and specialists or pay a hefty charge to a major software business to construct it. Alternatively, you could just pick a solid and well-established software solution that may not have all the features you need.

Importantly, Ethereum has automated the whole ecosystem, so you don't have to handle it yourself. Inherently more secure than any private network, Ethereum is a tried-and-true open public network. It also has a lot more potential. Depending on how it's formed, its usage parameters are unlimited.

Because of its pliability and adaptability, Ethereum has run into several problems. Once known as "excellent for micro-transactions," that's no longer the case since the network is being used by so many people for a wide variety of impossible-to-finance projects both big and small.
If Ethereum had not performed as expected, the gas costs would have gradually decreased as companies and enterprises sought alternatives.

The opposite is true - Ethereum's worth is still clear to a wide range of organizations.

For future-proofing the network, there are primarily two schools of thinking. 

The developer community has expressed worries regarding Ethereum 2.0's security and scalability, among other things. With 3,000 transactions per second on the testnet, Ethereum 2.0 is on track to surpass Ethereum 1.0's 15 transactions per second, but it still falls short of that Visa marker of 65,000 transactions per second.

Layer 2 solutions are the focus of the second school of thinking. By managing transactions outside of the Ethereum main chain, these solutions aim to address shortcomings with stock Ethereum while still making use of everything that it offers. Many of Ethereum's issues may be addressed with these solutions, including gas costs, speed, and scalability.

This is a major enhancement to the protocol that promises to improve capacity while also lowering gas costs. There are approximately 20,000 validators on the 'Medalla Testnet,' who are taking part in Ethereum 2.0's beta testing at the moment. Although Ethereum's core network was supposed to have gone online last year, there have been several delays and failures.

Numerous Layer 2 solutions are readily accessible for companies. Any organization considering a Layer 2 solution must first determine precisely what it hopes to accomplish with it. Ethereum can be made to function effectively and seamlessly for every use case with the latest Layer 2 solutions.

Ethereum is, without a doubt, a game-changer. No other technology offers such a comprehensive set of capabilities. There is a growing need for innovative methods to use blockchain technology as it develops across numerous businesses, especially in the financial services sector.

As a result, the industry will use Layer 2 solutions to fill in all the current holes and provide a more stable foundation for future applications.

It looks like the future of Ethereum will be a balance of costs and utility - there is no magic bullet - but we would do well to avoid those feet.

 

---