Ethereum: past, present and future
Ethereum is often referred to as the world’s computer. But what exactly is the world’s computer?
Mostly, it’s a public computer that can be used anywhere around the globe, that nobody really owns, capable of processing information. Its most important feature is that it can auto-execute contracts. That means written agreements are no longer needed. Instead, smart contracts on the Ethereum blockchain are written in code. They automatically execute when contract conditions are met. They don’t require an intermediary and don’t need both parties in a transaction to know or trust each other. They also can’t be censored or changed and are public.
For example, any financial contract can be put on the Ethereum blockchain. Same with bets and wagers. How about energy contracts? If I have excess energy from my solar panels, I can sell it to you directly, peer-to-peer, without the involvement of an energy company. This would democratise the energy market and keep money in the communities around the world.
These are just a few examples. We can think about many legal, financial or social contracts that can be automated using simple “If This Then That” logic that is at the core of the Ethereum blockchain. In the long term, perhaps we can build entire decentralised autonomous organisations using smart contracts as building blocks. These organisations can function like businesses, execute economic transactions, balance budgets and maximise for any outcome we programme.
While some of these examples might seem futuristic to you, many are already real. Decentralised finance (DeFi) applications are becoming more prevalent and sophisticated. You can now use your digital coins as collateral to receive loans or lend them out to earn interest without counterparty risk. There is now $1.9bn locked in DeFi applications, three times the number seen in March this year. True, you still need to find your way into the crypto economy, but apps such as Cash App are making it much easier.
Many projects are also working on digitising real-world assets such as stocks, bonds, gold and oil, real estate, etc. There are many benefits of re-building our financial system on the public blockchain and we are likely to see the adoption of this technology in energy markets, privacy and identity markets, supply chain management and many more.
So what does it mean for Ethereum and its native cryptocurrency ETH?
The Ethereum computer is still in its early days. Running smart contracts on the network is still expensive and slow, while the processing capacity is limited. The current state of Ethereum could be compared to mobile phones of the late 1990s. This brings us to the blockchain trilemma – solving for security, scalability and decentralisation. So far, it has proved nearly impossible to maximise for all three properties. Ethereum, for example, is decentralised and secure, but not scalable in its current state.
Solving for scalability?
The emergence of decentralised applications built on top of the Ethereum network has driven an increase in transactions and daily gas usage. Gas is used to pay for any type of interaction with the system.
For example, gas usage is now at the all-time high, driven by DeFi applications.
Similarly, daily transactions are at levels not seen since early 2018 as ETH is often used as collateral for DeFi loans and also needed to interact with smart contracts.
These and other metrics show that the usage of the Ethereum network is rapidly increasing. But this hasn’t led to an Ethereum price rise. After a rally off the March lows, the price of ETH has stagnated over the past few months.
There are several reasons for why ETH is not benefiting from the growth in DeFi:
- Some investors prefer to buy DeFi coins directly to get exposure to the sector;
- ETH is no longer the only collateral that can be used in DeFi applications. Other coins such as BAT, wrapped BTC, 0X and others can also be used;
- Many investors worry about Ethereum’s transition to Proof of Stake (PoS) consensus and what that might mean for DeFi applications.
To improve the Ethereum ecosystem and address some of these concerns, the community has been working on two primary solutions.
Upgrade to PoS
The transition from Proof of Work (PoW) to Proof of Stake (PoS) protocol is often at the centre of Ethereum price news stories. The upgrade will happen in three stages, and the first stage, or Phase 0, is set for the second half of 2020. Phase 0 will introduce the Beacon chain and allow ETH holders to stake their coins. Also, a new token, ETH 2.0, will be created and will exist in parallel with today’s ETH token. ETH used for staking will be locked up until all stages of the upgrade are complete.
In Phase 1, sharding will be introduced. This process will break the Beacon chain into 64 shards, operating as their independent networks. Sharding is a critical component of addressing scalability. Nodes on each shard will be processing and verifying data just on their own shard and not the entire blockchain.
Phase 2 will then merge the main Ethereum chain with the Beacon chain, finalising the transition to PoS consensus. Ethereum 2.0 will also support multiple computing languages, not just Solidity, making it easier for the developers to build on it. Due to the complexity of this transition, Phase 2 is not expected for a couple of years.
EIP 1559 or Ethereum Improvement Proposal 1559
While not among the Ethereum latest news, EIP 1559 is still important. First introduced in April 2019, it would do two things. First, change the fee structure on the network. Second, alter the economics of Ethereum. The new fee would be composed of a base fee and a tip to miners to skip the line. The base fee would be set by the system, depending on network conditions and usage. It would ensure all users pay the same price during the same conditions. Right now, fees are set by users based on an inefficient auction mechanism.
The proposal calls for the base fee to be burned, which would change the economics of the network. Burning the base fee would reduce the total supply of ETH over time and make it a deflationary asset. In today's investment landscape, this would be a compelling narrative.
Short-term Ethereum price forecast: what experts have to say
There are many price predictions for ETH and other cryptocurrencies. Unfortunately, we don't quite know how to value these assets and, as such, any Ethereum price forecast should be taken with a grain of salt.
A prediction service LongForecast.com, for example, uses mathematical and statistical methods to analyse historical data. Its Ethereum price analysis is quite bearish as it doesn’t see ETH reaching $300 until late February 2021.
Similarly, the Ethereum price forecast from WalletInvestor.com predicts ETH at $207 in one year, suggesting it could be a poor short-term investment.
Other analysts are more optimistic. The recent ETH price analysis in the Crypto Research Report predicted that Ethereum might reach $331 in 2020. It uses Irving Fisher's "equation of exchange" model. The model looks at all the possible use cases for cryptocurrencies and makes assumptions about changes in supply and demand. The analysts see the total addressable market for cryptocurrencies at $212trn, including all areas of finance and currency, among other things.
Historically, high profile investors such as Nigel Green and Tom Lee predicted that Ethereum would reach $2,500 and $1,900, respectively. While their Ethereum (ETH) price predictions didn’t yet eventuate, the real-world case for the Ethereum blockchain remains robust. Will Ethereum price rise alongside real-world adoption? That is less certain.
As always, investors should consider their risk tolerance and do some homework before investing in ETH, crypto projects or anything else.