This Wednesday Bitcoin price reached $18,488 on Coinbase. Most probably Bitcoin will reach a new ATH this time. Crypto Twitter is going crazy to speculate how soon it’ll reach $20,000. Bitcoin has very low historical trading duration above $18,000. Crypto market is very speculative but it is important to note that the market capitalization of Bitcoin reached ATH when it moved above $330B. Market capitalization is an important indicator besides price. Bitcoin looks bullish. Very bullish. But what about the number two crypto Ethereum? Ethereum has moved in tandem with Bitcoin this year. It crossed $490 for the first time since July 2019. Ethereum has given 158%+ YTD return vs. Bitcoin’s 109%+ YTD return and it is far below its ATH. Ethereum ATH was approximately $1,448 three years back during the 2017 bull run. Will Ethereum break out big?
“Remembering a narrative alters it.” - Gregory Benford, Shipstar
Ever-changing Ethereum narrative
Vitalik Buterin published the whitepaper of Ethereum in 2013. The primary motto of Ethereum was to build applications. Bitcoin never had a scripting language and there was no community consensus to include any such feature. Bitcoin was envisioned by Satoshi as a peer-to-peer currency only. Vitalik launched Ethereum blockchain along with some cofounders in the year of 2015 after successful crowdfunding in 2014. The blockchain’s Ethereum Virtual Machine (EVM) brought the ability to execute turing-complete scripts and run DAPPs or decentralized applications. The rest is history. Ethereum established itself as the second-largest cryptocurrency as per market capitalization very fast.
Numerous projects started to launch their tokens on Ethereum. Then the Initial Coin Offering (ICO) boom happened in 2017. The retail investors jumped into the green crypto investment sector. Due to the smart contract compatibility, Ethereum became the preferred method for fundraising. The ICO boom became over very soon due to various scams and failure of the startups. ICO is no longer a preferred method to raise funds for crypto projects. Ethereum suddenly looked weak. Decentralized applications or DAPPs came to rescue Ethereum and soon it became the favourite blockchain for the developers to build applications. Ethereum innovated its use case. 'Prediction Market' was Ethereum’s original use case mentioned in its white paper. Augur, a prediction market, was one of the first projects to be conceived on Ethereum in 2015 with angel investments from Vitalik Buterin. Augur finally became live in 2018 after 2 years of beta. A decentralized platform betting on real-world predictions with complete on-chain transparency was an innovation. Augur did well initially but the growth slowed down due to numerous issues. Augur V2 was launched recently. The players like Poly Market, Omen joined the exciting prediction game and expanded the market. This year, all decentralized prediction markets were on fire with the US presidential election on-chain betting. The growth of the prediction market has been really amazing. Talking about Ethereum and not discussing DeFi is an incomplete discussion. DeFi or decentralized finance is Ethereum’s hottest use case now. The term was really non-existent a few years back but it is talk of the town today. Elimination of third party or middleman and censorship-free peer to peer lending/borrowing activity of DeFi caught the attention of the world. Numerous DeFi projects are being launched now. Many projects are replicating traditional financial concepts on the blockchain with a focus on decentralization. Yes, all projects won’t be successful and the surreal game of yield farming may not sustain. But DeFi will sustain because of the power of the concept. DeFi activity originated on Ethereum and till now majority activity is taking place on it only.
“The dilemma is that if one does not risk anything one risks even more.” - Erica Jong
Understanding blockchain trilemma
Ethereum killers come and go. Every new project claims to be an Ethereum challenger. Some projects highlight the problem of low TPS, some highlight the problem of the arbitrary gas fee. Some projects highlight that Ethereum has a scalability issue. True! Ethereum has issues and that’s why so many so-called ‘killer’ projects exist. Vitalik Buterin introduced a concept called ‘scalability trilemma’. A blockchain needs to be scalable but scalability shouldn’t come at the cost of decentralization and security. Immutability is important in a blockchain. A blockchain needs to be permissionless too. 51% attack resistance is also of prime importance. These are the basic criteria to operate a transparent blockchain. Scalability comes last. The trilemma states that it’s not possible to find the optimum perfection in all the three areas – scalability, decentralization and security. So, a blockchain needs to balance these three areas and while balancing some compromises are made.
Image source - Blockchain scalability trilemma
The recent DeFi boom sky-rocketed Ethereum gas fee. Slow TPS of Ethereum is being highlighted again and again. The proposed ETH 2.0 is going to have a very high throughput. That’s good but not enough for Visa level scalability. ETH 2.0 is supposed to solve many problems of Ethereum but it is going to be a continuous and long development process. Ethereum will move from PoW to POS in Eth 2.0 but the gas fee will be there always. Ethereum is designed to be not feeless. The base layer scalability surely won’t reach the desired level very soon. Layer 2 is the immediate solution for Ethereum. Ethereum is again innovating here. This time, innovation is taking place with layer 2 scaling solutions. Layer 2 solutions are off-chain solutions. Vitalik Buterin himself proposed Plasma in 2017. A project like Matic is based on Plasma. ZK-Rollup, Optimistic Rollup, Validium etc. are different layer 2 scaling solutions of Ethereum. A project like Loopring has grown tremendously after successfully using ZK-Rollup and achieving 2K TPS. ZK-Rollup is supposed to provide max throughput of 20K+ TPS on ETH 2.0. Scalability will come to Ethereum in a different form.
The reality is that Ethereum is a powerhouse and the development is taking place at lightning speed. The eco-system is ready and reinvention of the use cases are happening in a continuum. The world computer is imaginative and unstoppable. The market cap dominance of Ethereum is 10.67% vs. Bitcoin’s 65.42% now. The gap between the number one and two players is very high. Will we see more upward price movement? Price is a function of utility, adoption and innovation in the field of cryptocurrency. Ethereum’s continuous track of evolution is evidence of dynamism. Anticipation is high but ETH bull is expected to return with extra-ordinary vigour.
< To be continued in the next part >
Note: This post was first published here for Cryptowriter in association with voice.com.