Reasons for Ethereum’s Popularity
Blockchain is a revolutionary technology that has found its place in multiple industries. However, without Ethereum, this innovation wouldn’t be half as useful as it is today. Thanks to the implementation of smart contracts, Ethereum has made a direct contribution to the creation of decentralized finance (DeFi) and the bullish crypto cycle we are currently experiencing.
In 2021, the DeFi and NFT markets have both contributed considerably to the price increase of ether – the project’s cryptocurrency. What’s more, these two market niches show no signs of slowing down their growth. This has made some experts go as far as declaring that Ethereum might overtake Bitcoin as a store of value in the near future.
In this article, we go over some of the basics of one of the most popular cryptocurrencies and explain how it works. More importantly, we will provide a thorough analysis of all of the factors that might influence the growth of this project even further, to the point of squashing all competition in its path.
What Is Ethereum?
For those who aren’t familiar with the technology, Ethereum is a blockchain platform that allows the deployment of decentralized applications (dapps). These are made possible by smart contracts, which automate the functions of this decentralized network. Dapps act like third-party software that uses the security and immutable data of the Ethereum ledger. They have a wide variety of use cases, including decentralized finance (lending, exchanges, swaps), supply chain tracking, and games, among others.
A mining model named proof-of-work (PoW) secures the Ethereum network. This implies that miners compete for rewards by solving complex math puzzles. In a nutshell, ETH mining serves three essential features:
- creating new ETH tokens
- verifying the transactions on the network
- protecting the platform from 51% attacks
Moreover, two of the most important features of Ethereum are the creation of proprietary cryptocurrencies under the ERC-20 protocol and non-fungible tokens (NFTs) under the ERC-721 protocol. This has allowed the creation of thousands of different cryptocurrency tokens that enrich the crypto space as we know it.
When talking numbers, we can state that ether remains firmly in the #2 spot of most valued cryptocurrencies by market cap. The ETH token, which is used for transaction fees on the network, doesn’t have a capped maximum supply. At the time of writing, there are almost 118M ETH tokens in circulation. Let’s go forth with some of the reasons which allow for a positive forecast for Ethereum.
Ethereum has one major drawback, which is the PoW consensus mechanism that the network currently uses. This method has proven over time to scale poorly with the mass usage for which the Ethereum network is intended. It’s slow and needs massive amounts of energy, which increase as more users join the network.
Consequently, the DeFi boom has led to an oversaturation of the Ethereum network and skyrocketing transaction fees. However, developers are working towards shifting the entire Ethereum blockchain to a more cost-and-energy-efficient proof-of-stake (PoS) model.
The so-called Ethereum 2.0 update should be completed sometime in 2022 and should bring much better scalability for a greater future of Ethereum.
Scalability and Speed
As we mentioned earlier, the poor scalability of the Ethereum network is becoming a big issue for everyday users. DeFi exchanges in particular have been hit by the increasing gas fees and slow transactions of the Ethereum blockchain. These high fees have rendered some crypto swaps completely unrealistic, where the transaction fee is often larger than the amount of cryptocurrency exchanged.
Unfortunately, the poor scalability of the PoW model has also been detrimental to artists who want to mint NFTs on the blockchain. Recording a single NFT on Ethereum can cost multiple hundreds of dollars, which discriminates against less wealthy artists. This has led users to seek alternatives among the competition and third-party scaling blockchains such as Polygon. These issues should be resolved with the switch to PoS in the near future, which allows experts to keep a bullish view of Ethereum.
One of the recent updates of the Ethereum blockchain introduced a coin burn function. With the London hard fork and the EIP-1559 implementation, a part of the ETH transaction fees is burned at each new block discovery. Currently, more than 500,000 ETH have been burned since the network upgrade that went active on August 5, 2021.
This means that, ultimately, fewer ETH will be created in the long run, which will increase the scarcity of the token. The reduced supply should additionally lead to a higher valuation, following the laws of supply and demand of digital commodities such as the ETH token.
Smart Сontract Сapability
The smart contract capability of the Ethereum platform is what gives it the most value. Ethereum’s ecosystem is highly advanced, considering its longevity in the crypto sphere. In comparison, competing platforms such as the Binance Smart Chain, Solana, or Cardano are still struggling with some youth issues, such as smart contract bugs, network outages, and limited functionality.
Ethereum, on the other hand, has already established a dapp base with functional and high-performance wallets. Consequently, its smart contracts are used by thousands of different software solutions in various industries.
A New Type of Connectivity
We mentioned that smart contracts allow us to track data automatically on the blockchain. Ethereum offers the ability to improve various industries by offering better end-to-end visibility of the data. For instance, smart contracts can be put to interoperate with internet-of-things (IoT) devices and effectively enhance vital industries, such as supply chains.
Correlation to Bitcoin
While ETH is an alternative cryptocurrency, or altcoin, it remains a powerful market driver. Usually, ether follows bitcoin’s market movements, as most altcoins do. However, it is worth noting that during significant price rallies, ETH also outperforms BTC and provides a better short-term profit opportunity for traders and investors. As such, some analysts believe in the ether prediction where this coin could become more valuable than bitcoin.
Because of its pioneering status as a smart contract platform, Ethereum remains incredibly important in the blockchain sphere. With the upcoming updates and improvements, this network should see considerable growth that could outpace even Bitcoin. After all, it’s the home of more than 90% of all DeFi platforms, and this niche is only beginning its ascension towards mainstream adoption.