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The rise and fall of Ethereum

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Rise and fall of Ethereum Crypto Heroes

During 2017, the year of ICOs, many cryptocurrency enthusiasts believed that Ethereum has all the chances to beat Bitcoin and take the leading position. On January 15th, 2018, ETH price reached its historical maximum of almost USD 1’400 and its market cap of USD 134 billion made up 19% of the total money invested into the industry.

Ethereum’s statistics at its peak on January 15th, 2018 Crypto Heroes

Ethereum’s statistics at its peak on January 15th, 2018

The outlooks were really promising, but now in December 2018, Ether’s price has dropped below USD 100, there are practically no more new projects on this blockchain and the people all around the internet talk about Ethereum’s death.

How this prominent project has come to this state? Let’s find out.

How Ethereum was created

Unlike Bitcoin that was created by an anonymous person or a group of people under the name of Satoshi Nakamoto, Ethereum has a real person standing behind the project, Vitalik Buterin. Vitalik was aiming to create a platform that would take the best from decentralized technologies that Bitcoin represents and provide developers with an awesome tool for creating decentralized apps.

Ethereum was launched in 2013 when cryptocurrencies were still a topic to be discussed in very close confines. Bitcoin was primarily used by geeks and people distributing illegal substances such as drugs and weapons on the dark market.

What are smart contracts?

What makes Ethereum different from Bitcoin and all its derivatives such as Litecoin, Dogecoin and other, is that apart from the means of payment it offers an open-source platform for developing decentralized apps based on smart contracts.

A smart contract is a programme that performs a certain action (e.g. money transferring) under specific conditions that are specified in a programmatic way. It opens wide opportunities for eliminating third-parties that are usually involved in serious deals such as purchasing real estate and thus decreasing the costs for conducting the whole operation.

“Code is law” – this was developers’ favorite motto when Ethereum popularity was on the rise. And this is true: the code cannot cheat, it cannot be bribed, it is not a subject to any human error. The online experts were predicting the new era of decentralized apps that would replace real estate agents, notaries, banks and other financial institutions.

However, the truth turned out to be not as rose-colored as cryptocurrency enthusiasts were painting it.

ICOs’ boom

It was not until 2017 that the model of fundraising first utilized by Ethereum became popular in developers’ environment. The model works in the following way:

  • A startup launches initial coin offering into the market.
  • The digital coins based on Ethereum serve as stocks and guarantee their owners the right for the company’s share.
  • The startup uses the funds for developing the product.
  • The profits that it gains are distributed across coin holders.

Since everything is transparent on the blockchain it eliminates the chances of the startup to hide its profits and cheat investors somehow. Also, an ICO is much easier to launch than a traditional IPO (initial public offering) that was used by companies to raise funds in the past on the stock market.

There’s no wonder that ICOs have quickly gained popularity. During 2017, IT startups have raised USD 6.5 billion using this scheme. Ether’s price has grown hundredfold from USD 8 in January to 876 U.S. Dollars in December. The easy money made startup founders feel dizzy, the new method of fundraising was declared to be the new standard that was surely going to conquer the world.

ICOs have raised USD 6.5 billion during 2017 Crypto Heroes

Coinschedule: ICOs have raised $6.5 billion during 2017

Sweet dreams are smashed by the harsh reality

In March 2018 the first alarming news started to show up. SEC toughens regulations upon ICOs, one after the other the governments of other countries crack down on cryptocurrencies as well, Bitcoin price is plummeting together with Ether and all other cryptocurrencies.

The reason behind such an abrupt fall is that once the rose-colored glasses were taken off, it’s become obvious that the decentralized future, the way it was described by all these startups, will never become a reality.

It turned out that practically none of them ever worked on their projects. Startup founders were simply sitting on their moneybags and showing good statistics to their investors: look how many new developers we’ve hired, what a big new office we’ve moved to, etc. (the author of the article has worked in such a crypto startup and she knows what she’s talking about).

As a result, there comes the disappointment, Ether’s price dropping, and the massive money outflow. In September 2018, ICO’s have sold off the raised Ether for USD 200’000, two months later this sum has already reached USD 280’000.

ICOs have sold more than $280,000 worth of Ether over November 2018 Crypto Heroes

ICOs have sold more than $280,000 worth of Ether over November 2018

Ethereum reveals its flaws

In addition to the greediness of startups, Ethereum itself has revealed many flaws as its popularity has grown and the network overload exceeded all the planned indices.

First, the network capacity. Ethereum allows processing 19 transactions per second at the maximum. Compare it to VISA and Mastercard that process thousands of transactions every second.

Then go transaction fees and the time that is needed for a transaction to be confirmed by the network. Cryptocurrency addicts say that one of the main advantages that cryptos provide in comparison with bank transfers is based on low transaction fees and instant transfer of value. But when too many people try to send ether at the same time, the fees grow and so does the confirmation time. Either you pay several dollars worth of gas (Ethereum’s native unit of computation used for transaction fees), or your transaction will never be processed at all.

CryptoKitties, an Ethereum-based online game that was launched in December 2017 and grew extremely popular in a matter of a few days, literally put down the whole network. The transaction fees spiked from USD 0.3 to USD 1.4 per transaction, it was impossible to make a payment in Ether, the transactions took ages to confirm. Just think of it. A single game putting down the whole platform. A good reason to take a second thought before using this product, isn’s it?

Ethereum network fees drastically increased Crypto Heroes

Ethereum network fees drastically increased after the launch of CryptoKitties. Source: BitInfoCharts

In addition, Ethereum smart contracts are based on the programming language Solidity which very complicated is and it’s very hard to write the code without any mistakes in it. A bug in the program may lead to money loss with no chance of a refund and no serious business would entrust its funds to the code (which is law, remember?) under such circumstances.

New projects to resolve Ethereum’s issues

Ethereum has many flaws, that’s true, but don’t be too eager to bury the whole industry just because of one project. With the rise of blockchain technologies’ popularity, many new projects started to appear trying to offer something faster and more reliable.

Here are some of them:

  • WAVES: max tps 100, very low and fixed fee ~USD 0.02
  • TRON: max tps 2000, (assumably) zero fees
  • EOS: max tps 4,000, zero fees and in addition the possibility to reverse a transaction in case your funds are stolen

Now that the market is at the downtrend, the tokens of these projects don’t feel so well either. But unlike all those top ICOs that have raised millions in 2017 and now are lost for eternity, the projects mentioned above continue vigorously develop their products:

Tron, Waves and EOS continue developing their product Crypto Heroes

Tron, Waves, and EOS continue developing their product and add many new lines to GitHub in spite of the overall market downtrend. Source: messari.io

The rise and fall of Ethereum: Conclusion

Ethereum was the pioneer among all the platforms for Dapps’ development. With the rise of blockchain popularity, the platform couldn’t handle so many users and inevitably many flaws showed up. But it’s hard to be the first one in the area and do everything perfectly at once.

Ethereum may yet live to rise again since it has a very huge community that is keen on developing it further. Vitalik Buterin declared his plans to move the project from PoW to PoS mining algorithm in 2017 and implement Ethereum Sharding that may help to resolve most of the issues described above. If the project’s team has enough determination they will surely reach all these goals, earlier or later, and Ethereum will reach the new heights.

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