By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) – Ethereum outperformed major digital currency competitors this year, supported by the boom in decentralized finance (DeFi) and the anticipation of a technical adjustment this summer, but it faces challenges. obstacles that could slow down its rise.
With more than 350% jump in price this year, Ethereum has the second-largest market cap after Bitcoin, but not as much cache and perhaps more operational challenges that could prevent it from eclipsing its main rival.
In the crypto world, the terms “ethereum” and “ether” have become synonymous. Technically, ethereum is the blockchain network that decentralized apps are embedded into, while ether is the token or currency that enables or drives the use of those apps.
Ethereum’s market cap on Friday was $ 410 billion, following Bitcoin’s at over $ 1 trillion, according to data tracker CoinGecko.com. It hit a record high of $ 3,610.04 on Thursday and was last up 1% to $ 3,524.
Bitcoin, meanwhile, has grown 97% more modest this year. Since hitting a record high of just under $ 65,000 in mid-April, bitcoin has actually fallen by about 18%.
Major Graphic Cryptos in 2021 – https://fingfx.thomsonreuters.com/gfx/mkt/rlgpdywrwvo/Pasted%20image%201620292105900.png
An increase in institutional interest has increased the demand for ethereum, but the supply has been limited. The supply of tokens on exchanges in April hit their lowest level in nearly 2-1 / 2 years, according to Kraken Intelligence, a research blog from the Kraken cryptocurrency exchange.
“It’s more than just a coin. It’s an entire ecosystem that enables other applications to be built,” said Bradley Kam, managing director of blockchain domain provider Unstoppable Domains.
At the heart of Ethereum’s ascendant is DeFi, which refers to peer-to-peer cryptocurrency platforms that facilitate lending outside of traditional banking institutions. Many sites operate on the ethereum network, using open-source code with algorithms that set prices in real time based on supply and demand.
The locked-in value – the total number of loans on DeFi platforms – was $ 79 billion on Friday, according to DeFi Pulse data, up nearly 600% from $ 11 billion in October.
DeFi, however, has its problems. Research from Dune Analytics has shown that 2% to 5% of transactions on Ethereum-based decentralized exchanges have failed due to complications such as slippage or insufficient “gas” prices, which are the fees necessary to complete. a transaction on the ethereum blockchain.
Between April 15 and April 21, for example, around 1.1 million transactions were made on Uniswap, a DeFi protocol used to trade cryptocurrencies. Of these, 241,262 failed, which is the highest number of transaction failures across the entire ethereum network, according to data from analytics platform Etherscan and Dune Analytics.
“DeFi is destined for meteoric growth, but with that growth comes inherent risks,” said Alex Wearn, chief executive of crypto exchange IDEX.
“Problems like failed trades and startup trades are not subtle, costing users millions of dollars every day,” he said, referring to the practice of placing a trade first in the bank. execution queue just before a known future contract. “These major issues … limit the appeal of these products to a wider audience and ultimately hamper the growth of the ecosystem.”
Wearn estimates that over $ 285 million has been lost in DeFi hacks so far this year.
Supporters say DeFi sites represent the future of financial services, providing a cheaper, more efficient and accessible way for individuals and businesses to access and deliver credit.
Ethereum has also been plagued by the network’s inability to keep up with demand without incurring high transaction fees as well as slow transaction execution, market participants said.
The first phase of an upgrade called Ethereum 2.0 launched last year aims to address the network’s technological issues with speed, efficiency and scalability.
However, John Wu, president of AVA Labs, an open source platform for financial applications, pointed out that the planned migration to Ethereum 2.0 has been underway for years.
“The deadlines have constantly been delayed so it’s hard to get comfortable with this stranger,” he said.
Ethereum also faces stiff competition from networks such as Avalanche from AVA Labs and Binance Smart Chain, which are also compatible with Ethereum’s assets and applications.
Data from AVA Labs has shown that users have transferred more than $ 170 million to Avalanche from ethereum since February.
ANOTHER TECHNICAL IMPROVEMENT
Still, hopes of a technical adjustment called EIP (Ethereum Improvement Proposal) 1559, which is slated to go live in July and which would reduce the supply of ethereum, gave the currency a boost. digital.
EIP-1559 aims to reduce the volatility of Ethereum’s fees by introducing a mechanism to burn off some of those transaction fees, which should slow the issuance of the token, analysts said.
The impact on Ethereum’s price could be similar to a bitcoin halving event, in which an adjustment reduced Bitcoin’s supply and propelled its price to record highs, analysts said.
“There are a lot of numbers circulating in the market on the potential impact that has like a halving type magnitude with bitcoin,” said Richard Galvin, co-founder and managing director of crypto fund Digital Asset Capital Management.
“These are all pretty positive riders who have, I guess, seen a pretty strong reassessment.”
(Reporting by Gertrude Chavez-Dreyfuss in New York; Additional reporting by Tom Wilson in London; Editing by Alden Bentley and Matthew Lewis)