September was a tough month for crypto investors, especially those who bet a lot on Ether, the token tied to the Ethereum blockchain.
Ether fell 13% for the month, its second largest monthly decline last year, after just 16% in June. Bitcoin fell 7% in September.
It is difficult to relate short-term price movement to any particular event, and setbacks can be expected with the historic rally in crypto over the past 12 months. Ethereum, the second most valuable cryptocurrency after Bitcoin, is still up 830% over the past year.
Investors are now buying the September dip. On Friday, the first day of October, Ether and Bitcoin both climbed over 9%.
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Ether 12-month price chart
But September’s roller coaster reflects a particularly rocky stretch for the Ethereum ecosystem that has been a cause for concern for investors and developers.
The speed of the network and high transaction fees continue to be an issue. The “London” upgrade in August was supposed to make transaction fees less volatile, but had only a limited effect.
Meanwhile, rival blockchains dubbed “Ethereum killers” are taking advantage of Ethereum’s challenges.
Ethereum also unexpectedly split into two separate chains in late August after someone exploited a bug in the software that most people use to connect to the blockchain. This exposed the network to an attack, and not for the first time.
“All of these factors could undoubtedly have an impact on the speculative side,” said Mati Greenspan, founder and CEO of Quantum Economics, in an interview. “But don’t forget that Ethereum has appreciated quite a bit so far this year and the entire market seems to be in a consolidation at this point. So I wouldn’t try to dig too deep into these short-term moves.”
Still, Ethereum, which serves as the primary building block for all types of crypto projects such as non-fungible tokens (NFTs), smart contracts, and decentralized funding (DeFi), has some major hurdles to overcome to fend off emerging competition.
The unexpected split from Ethereum
A central premise of Ethereum’s security relies on the existence of only one set of virtual books, which means you cannot create coins out of nothing. This ledger has to work because the decentralized nature of the blockchain means there is no rulers or bank sitting in the middle of the transactions to act as an accountant.
Ethereum developers were rightly alarmed in August when the chain split due to a bug.
“That fork temporarily created two separate records of transactions on the Ethereum network – like parallel books,” said Matt Hougan, chief investment officer at Bitwise Asset Management, which created the first cryptocurrency index fund.
For a while, it was unclear whether the split would lead to a “double-spend attack” where the same token could be issued more than once and transactions reversed, Hougan said. Smart contracts that oversee billions in assets may also have been at risk. Smart contracts allow users to build applications on Ethereum with self-executing code, eliminating the need for third-party providers to process transactions.
Such an attack would have been difficult to carry out because it was clear which nodes were on the correct side of the split and which were not. “But in theory there was a risk,” said Hougan.
The good news for miners and exchanges is that most of them have updated their software as recommended and the problem was resolved relatively quickly, said Tim Beiko, the coordinator for Ethereum’s protocol developers.
Auston Bunsen, co-founder of QuikNode, which provides blockchain infrastructure to developers and companies, said it was a “responsibly disclosed vulnerability”.
“This is a reminder that blockchains in general, and Ethereum in particular, are new and disruptive technologies,” said Hougan. “They can do amazing things – process $ 1 billion in transactions in minutes, and code money like software – but they’re not fully developed.”
Mistakes happen over and over again
The longer-term problem for Ethereum is that random glitches like this keep popping up.
In April, the Ethereum blockchain was hit by a bug in one of the software programs used to access it. And in November, many of Ethereum’s DeFi apps temporarily went off after a geth upgrade debacle, which split the chain.
Geth is short for Go Ethereum. To access the Ethereum blockchain, operators and miners have their software to choose from. Most use geth which makes up 64% of the network.
When the Ethereum blockchain collapsed a few weeks ago, it was because Geth had a flaw in his consensus mechanism. This creates the single source of truth for transactions so everyone sees the same regardless of what software they’re using.
Developers discovered the bug, released a new version with a fix, and publicly asked everyone to update. Many users upgraded, but others did not. When an unknown actor took advantage of the bug, Ethereum split, meaning it broke into two separate chains: one for those who had updated their software and one for those who hadn’t.
Ethereum “sought the appearance of decentralization by having many customers, but as a consequence they have incompatibilities,” said Nic Carter, co-founder of the blockchain data aggregator Coinmetrics.
When the software programs fail to communicate with each other, it causes problems for the network.
Bitcoin takes a completely different approach. It is based on a highly secure software program for nodes to access the blockchain. Bitcoin developers have long tried to avoid hard forks at all costs, so any changes in the core software are usually activated and not propagated to users. after Carter.
“Ethereum prioritizes faster development, but that comes at the expense of more fragile software implementation,” Carter said.
Some crypto experts attribute Ethereum’s success to its first mover advantage. Most NFTs and 78% of DeFi apps or dApps run on Ethereum, according to the State of The Dapps website.
That is starting to change thanks to the growing popularity of competing blockchains.
Even before this recent split in the blockchain, users were complaining about Ethereum’s heavy congestion and high transaction fees, which hit a record $ 70 earlier this year and only went from $ 20 to $ 46 this week fell back to $ 32.
At current prices, the fees continue to drive some users off.
They are turning to blockchains like Cardano, a platform for creating dApps, and Solana, whose native coin has grown nearly 4,800% since September 2020. Solana was launched last year and is gaining traction in the NFT and DeFi ecosystems because it is cheaper and faster to use than Ethereum.
Solana processes 50,000 transactions per second and the average cost per transaction is $ 0.00025 according to its website. Ethereum can only process around 13 transactions per second and the transaction fees are much more expensive than Solana.
Institutional money flows. Solana has just completed a $ 314 million private token sale led by Andreessen Horowitz and Polychain Capital.
Investors who had largely focused on Ethereum “have increasingly diversified their holdings into other cryptocurrencies and fueled alternative blockchains such as Algorand, Solana and Cardano,” said Mark Peikin, CEO of Bespoke Growth Partners.
Bunsen tells CNBC that while Solana is making good strides toward a usable blockchain, it isn’t yet decentralized enough to please the larger crypto community.
It’s also not immune to bugs. Last month, Solana suffered a 17-hour downtime following a denial-of-service attack that took the form of a bot-generated flood of transactions.
The list of so-called Ethereum killers is long and includes blockchains like Matic and Polygon, which Bunsen says are complementary to Ethereum, as well as Cardano, which is known for its security.
“I think some of these Ethereum killers will make it,” said Bunsen. “But they won’t kill Ethereum.”
Ethereum has its own upgrade in the works as well. It has been building Ethereum 2.0 for several years, which is expected to be ready in the first quarter of 2022.
The overhaul will shift Ethereum to a less energy-intensive mining process and, according to network founder Vitalik Buterin, could increase the speed by 7,000 times to 100,000 transactions per second.
If successful, Bunsen said, Ethereum 2.0 will be a “huge upgrade in terms of throughput of the Ethereum network and a huge win for the environment in general”.
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