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03 Juni 2021

Ether has outperformed many markets, can you afford the gas fees?

Crypto Finance Editorial Team

Über den Autor

The ether price has outperformed many markets, but can you afford the gas fees?

Ether (ticker ETH), the native cryptocurrency of Ethereum, has rallied 1.133% in the last year, and boasts the second largest crypto market cap. However, due to heavy network usage and Ethereum’s consensus mechanism, the network has become extremely congested, and its gas fees have risen.


Ethereum and it use cases
The Ethereum network went live in 2015. It was created in Zug, Switzerland, by a group of entrepreneurs, led by Vitalik Buterin. The technology is community run, and powers thousands of decentralised applications, including its native cryptocurrency called ether.

If you are interested in learning the full story of Ethereum, I suggest you pick up a copy of The Infinite Machine by Camilla Russo, which looks at the history of Ethereum and its rise to fame.

The Ethereum community supports a digital economy, multiple ways to create applications and to generate financial returns, and much more. Ethereum is an open-source blockchain available to anyone who has internet and a digital wallet. Furthermore, it is considered the internet of assets or smart money – anything you own can be presented and traded on Ethereum network applications, e.g. in the form of non-fungible tokens (NFTs).

Ultimately, Ethereum aims to be a fairer financial system because it does not discriminate, or sleep! Anyone with an internet connection can earn interest, send, receive, borrow, and access funds anywhere in the world, through multiple Decentralised Finance avenues.

Ethereum 101
A blockchain can be described as a public database that is updated and shared across multiple computers. When you send ether to someone, the transaction data needs to be added to a block for the transfer to be successful. Each block cryptographically referencing its parent block creates a chain. Nodes are the computers in the network that agree upon each new block in the chain. Currently, miners reach agreement through a proof-of work consensus mechanism. Anyone who wants to add a new block to the chain needs a miner to solve a difficult puzzle that requires a great deal of computing power and electricity.

ETH 2.0 is introducing a proof-of-stake consensus mechanism, which requires holders to stake their ETH to become validators in the network. Stakers will have the same responsibility as the miners do in the proof-of-work consensus mechanism.

The Ethereum Virtual Machine (EVM) is the single authorised computer whose state is agreed on by everyone on the Ethereum network. Anyone who participates in the network – by running a node – can submit a request to change the EVM, which then needs to be verified, validated, and executed by other participants.

Application developers upload their programmes on the EVM through smart contracts. A smart contract is a script, which implements certain parameters. When parameters are satisfied, a certain action or computation is performed. A simple smart contract might create and assign ownership of a digital asset if there is an exchange between a sender and recipient. Thus, a developer can build and deploy applications and services such as marketplaces and financial instruments. Developers need to supply ether in order to power the network to build applications.

The ether coin allows for the existence of a market for computation, which gives economic incentive for participants to validate and execute transaction requests. Any user who transmits a request must also offer some amount of ether to the network, which is the fee for whoever does the work of verifying and executing the transaction.

Ethereum 2.0 solves the Blockchain Trilemma
Ethereum receives a great deal of criticism in the crypto community for some of its blockchain flaws, even though it is has a fully functioning network with over 600,000 active addresses. Blockchains aim to achieve the trio of scalability, security, and decentralisation all together, but often one characteristic is sacrificed.

 

The Ethereum 2.0 upgrades aim to solve the trilemma.
Ethereum faces a scalability challenge because more transactions need to be processed per second. Instead of increasing node sizes, which favour more powerful and expensive computers, shard chains, which produce 64 new chains, will be introduced to reduce network congestion and improve speed. Validators will only need to run their own shard, instead of the entire Ethereum chain, making nodes more lightweight. Furthermore, shard chains will decrease transaction fees substantially. Because more chains will now be used to complete transactions, competition for spaces in blocks will be reduced, and exorbitant gas fees will not be applied.

To further battle slow transaction times and high gas prices, while also leveraging Ethereum’s robust mainnet, Layer 2 Rollups execute transactions outside the main chain (layer 1). Layer 2 builds on top of Ethereum, and therefore it is an update to scalability, which is not at the expense of decentralisation or security. Optimistic rollups are currently in the spotlight.

Arbitrum recently launched its optimistic rollup mainnet, and the popular decentralised exchange Uniswap is set to launch on it, which will allow users to trade for a few cents with faster transaction speed.

Ethereum 2.0’s transition – from a proof-of-work to a proof-of-stake consensus mechanism – will also tackle security concerns, such as the possibility of a 51% attack. In proof-of-stake, the validators who secure the network must stake a significant amount of ETH into the protocol, which will be destroyed if they try to attack the network. In proof-of work consensus, it is not possible to punish miners who attack the network. By eliminating the need for miners, the Ethereum network will not use as much electricity, thus becoming more eco-friendly.

Next week we will take a look at Ethereum sidechains, which aim to further solve Ethereum’s limitations. Specifically, we will dive deeper into the popular Polygon Network and the Matic token, which is available for both trading and storage with us.

Find out more about trading ETH on our Crypto Asset Trader (CAT) with our FINMA-regulated Brokerage.

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