Concerns About Ethereum.
If you have been following previous issues of the Digest, you know that I’m a big believer in Ethereum. There are plenty of reasons to be bullish on ETH, given that it’s the biggest ecosystem with arguably the brightest people in crypto.
However, there’s one thing that has been keeping me uneasy for some time now: fees.
I’m no stranger to paying exuberant amounts of money to do business on Ethereum. “You gotta spend to earn,” and so far, the gains have been offsetting the costs.
Moreover, even with the recent bump in gas prices, they’re still far from what we’ve seen in Spring this year. During that time, gas prices could stay in the range of 300-400 gwei for days.
Still, even though the price of transactions in ETH may have declined, it keeps increasing in USD terms. And that’s becoming concerning.
With ETH at around $4,500, you start thinking very strategically about what you’re doing. You think twice about whether you want to transact or try to wait it out with a risk that you will need to pay even more in the future. This dynamic discourages more and more activity on Ethereum with ETH price growth.
Imagine using DeFi, when a single transaction might cost you over $200, and a single transfer costs $50 or even more. Or, say you want to flip NFTs on OpenSea, so you will need to pay $150 and up to buy just a single item.
Now think what will happen if ETH is going to $5,000-6,000-7,000… The higher it goes, the fewer people will use the network. For many, gains will stop offsetting gas-induced losses.
I want to see $10,000 ETH, but only after the network moves to Proof-of-Stake. If it happens while Ethereum is still on the Proof-of-Work algorithm, it may put the network in danger since the vast majority of its users will be priced out. I’m concerned that this may happen, and here’s why.
ETH burning stats. Source: Watch the Burn.
The long-awaited EIP-1559 proposal introduced a mechanism where part of each transaction’s fee gets burned. At the current rate, ETH gets burned much faster than it gets produced. Note the “Net Reduction” metric—that’s for how much the burning rate is higher than the mining rate.
When ETH goes up, it attracts speculators who don’t necessarily use the network. They trade on centralized exchanges and don’t suffer from high transaction fees. But, at the same time, they reduce the number of tokens in circulation by simply holding them, which adds to further price growth.
High burning rate plus speculation create conditions in which ETH may go up to $10,000, making Ethereum accessible to only a handful of whales. This will give an upper hand to Ethereum killers. Not gonna lie; in such a case, I will move from Ethereum for at least until the transition to PoS happens or the price drops to some reasonable levels.
As of now, Ethereum developers are on track to make the transition happen. But, even Vitalik Buterin stated that it’s more realistic to expect it to happen at the beginning of 2022. Hence, there may be a window of opportunity for Ethereum Killers to shine at the end of the year.
Wrapping this up, while I still believe in Ethereum, I think you should take a closer look at its competitors over the coming weeks. Fortunately, we have Full Digital Asset Reports on all major Layer-1 blockchains.
SIMETRI Portfolio–Slowly Taking Off
Over the past weeks, altcoins have been showing pretty good performance. However, that’s mostly applicable to large caps. I don’t think we reached the stage when the market’s participants move up the risk curve and start actively playing with mid-to-low caps.
While our safer Picks like Arweave, Terra, and Sushi are doing relatively well, the projects with smaller caps like Karura and Gelato remain near their entry points. I expect that to change closer to the year’s end.
