Ether, the cryptocurrency based off of and powering the blockchain technology Ethereum, made headlines last month after soaring to over $400 a coin. The huge surge caused many people to speculate that Ethereum would one day surpass Bitcoin, the world’s most valuable cryptocoin both by market cap and coin price. Now, Ethereum is making headlines again, but this time the news isn’t good. Since reaching the $400 mark last month, the price of Ether has steadily fallen over 45% (as of this writing the price of one Ether is less than $200). The drop in price is peculiar mostly because blockchain technologies, especially Ethereum, are still consistently creating positive buzz (see for example Brooklyn using blockchain to operate a renewable energy grid).
So what the heck is going on with Ethereum that’s been causing the recent slide?
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Ethereum’s Main Flaws
Although Ethereum has been praised for its many advantages over Bitcoin (e.g. faster transaction times, more use cases, the non-finite supply of coins, etc), the technology does have several limitations that are hindering its progress.
In a recent comment posted to a thread on Reddit, one of the chief architects of Ethereum, Vitalik Buterin, shared what he believes to be the 7 most valid criticisms of Ethereum:
- Scalability sucks; the blockchain design fundamentally relies on bottlenecks where individual nodes must process every single transaction in the entire network
- PoW [Proof of Work] is extremely expensive, and furthermore is fundamentally vulnerable to 51% spawn camping attacks with no effective strategy for recovering from one. Selfish mining is profitable starting at 25-33% hashpower, and 51% censorship attacks are definitely profitable.
- Privacy sucks
- It’s hard for regular users to hold large amounts of funds without running substantial risks of theft or loss due to theft or loss of their private keys.
- Economics do not encourage good “storage hygiene”; insufficient incentives for clearing storage and insufficient cost for filling it, especially for long periods of time
- Bunch of various marginal technical inefficiencies.
- [I]t’s hard for regular users to know that contracts they are interacting with do what they say they do, and do not have accidental or malicious bugs.
Scalability Issue Causing Bottlenecks
The scalability issue is probably the most prevalent and most often discussed. The flaw is most noticeable when Ethereum is being used for ICO’s (Initial Coin Offerings). For example, Status’ ICO last month was expected to raise over $200 million, but because of the bottleneck effect caused by Ethereum’s network, the ICO was slow to reach its expectations (see also Bancor’s ICO which faced similar congestion). It’s quite possible that speculators and market participants are getting tired of Ethereum’s scalability issue causing traffic jams whenever a large number of orders are being processed and are the main reason why the price of Ether has been falling. If Ethereum is to succeed in the future, it needs to be able to handle more transactions.
Switch to Proof of Stake Looming
Proof of Work (PoW) is also a hotly debated subject. For those who don’t know, PoW is the algorithm that is the basis of almost ever cryptocurrency that is currently being mined.
Made most famous by Bitcoin, miners have to solve a computational math problem in order to “prove” they did the work, create a new block on the chain, and receive the coin as a reward. The reason why it is so expensive it because as time goes on, it takes more and more computational power to solve the problem. That means more computers are using more power to mine coins.
Ethereum is currently using a similar PoW algorithm as Bitcoin, but the plan is to switch to something called Proof of Stake (PoS) at some point. PoS does not have the same energy and cost inefficiency problem as PoW. Instead of creating a new block on the chain after a miner solves a difficult math problem, a new block is chosen in a deterministic way based on the amount of coins the miner, or as PoS proponents like to call them minters or forgers, has on hand (i.e. their “stake”).
The chief criticism of PoS systems is the fact that there is no “cost” to miners which opens the door for abuse (e.g. DDOS attacks). Although there are several proposed solutions to this problem currently being worked out, still many stakeholders may be wary of Ethereum’s switch to PoS in the near future which could be further contributing to the recent slump.
Too Many Miners
Even while PoS does have some drawbacks yet to be solved, PoW is clearly not working. As more and more miners attempt to get in on the action, not only does that cost the network a ton of energy, but it also creates diminishing returns for everyone involved.
Reports of stores selling out of expensive top-of-the-line graphics cards and mining rigs going for sale for crazy prices on Craigslist are becoming more common. More miners mining for Ether increases the overall difficulty to mine which in turn makes mining less profitable.
Indeed the mining difficulty for Ether has been steadily increasing over the last few months so it could be possible that the network is closing in on the “Difficulty Bomb”, the point at which difficulty becomes so high that mining becomes impossible. If that were the case, the switch over to PoS would allow for the continued creation of new Ether coins. Hopefully, that is not the case, since it seems like Ethereum is not yet ready for the switch.
General Market Forces
It’s also entirely possible that the drop in Ether is due to something completely unrelated to Ethereum’s flaws. Bitcoin has also seen a recent slump (although not to the same extent) which would suggest that whatever is causing Ethereum’s woes is more market driven.
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Many have speculated on the possibility of an ICO, and by extension a cryptocurrency, bubble. The drop in Bitcoin and Ethereum could be a sign that people are taking those fears seriously.
Alternatively, publically traded tech companies have also been down the last few weeks which have left investors uneasy. It could very well be that the cryptocoin market is fluctuating along with markets in general but just more wildly based on the associated risks involved with cryptocoins. Regardless, only time will tell if this most recent slump in Ethereum will be a consistent trend or if Ethereum will surpass Bitcoin and become the technology powering a global currency as many have hoped.