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Gas Price Growth Threatens Ethereum’s Success


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Ethereum is the most popular platform to create decentralized applications using blockchain (DAPPs). Ethereum’s tokens called “Ether” ((ETH)) are almost as popular as bitcoin (BTC) and they are traded in most of the cryptocurrency exchanges. Ethereum positions itself as a decentralized global computer to run smart contracts. Anyone with coding skills can create an application and run it on Ethereum Virtual Machine (EVM). Using Ethereum platform and EVM is similar to renting a car. Ethereum charges you for each line of code so that each line of code costs some gas. Thus, users need gas to run their applications on the Ethereum computer. Gas cannot be bought using fiat currency, it can only be bought using Ether token.

Despite positioning as a global decentralized computer and a platform to run DAPPs, the Ethereum platform no longer serves the purpose it was created for.

The first problem of the platform is that it is becoming very expensive for its main users. We calculated the change in price of gas (aka renting costs).

The formula below just converts the price of gas from Ethers to dollars.

Price of 1 million units of gas in USD = Average price of 1 unit of gas in Wei * USD/ETH * 1024

See the spreadsheet with calculations here.

At the beginning of 2017, 1 million units of gas could be bought for $0.18, at the beginning of 2018, the same amount of gas is priced at $18. This means that for DAPPs the cost of using the Ethereum platform has increased 100-fold during one year.



Source: author’s calculations based on data from etherscan.io

In order to send one transaction, users of Ethereum blockchain need 22,000 units of gas. As at 31.12.2016, a transaction fee for such a payment was $0.0037, at 31.12.2017, one has to pay $0.37 to send one transaction.

The second problem is the scalability of Ethereum. Strong attention to Ethereum platform brought new users, not developers of DAPPs, but those who wanted to use ETH as an investment vehicle. As a result, demand for ETH grew exponentially, and in December 2017, with many people playing the first blockchain game CryptoKitties and buying digital cats for Ether, the Ethereum platform faced the scalability problem. Strong demand for Ether as a store of value and as an instrument for speculation makes Ethereum an expensive platform for developers of DAPPs.

Miners of ETH, however, must be happy with what is going on because they share the growing fees. Despite calls from DAPP developers to detach gas price from ETH price, there is no action from Ethereum community to support its key target users. As there is no central management figure in decentralized communities such as Ethereum, there is no one who can convince ETH miners to lower gas prices. Thus, gas prices are downward sticky.

In the short-term, miners can collect great fees for processing payments, but there are other cheaper cryptocurrency alternatives (such as Litecoin, Dogecoin) designed specifically for payments.

Ether was created as a cryptocommodity and fuel for smart contracts. If Ethereum community turns its back to developers of DAPPs, those DAPPs will choose another blockchain to build on top of. As Investopedia points out, Cardano, NEO, Qtum aim for the same market as Ethereum does.

As of 24.01.2017, Ethereum’s market cap is around $100 billion and 1 ETH trades at 1,034 USD. Ethereum is already larger than Goldman Sachs (GS) ($98 billion) and almost three times smaller than Visa (V) ($280 billion) in terms of market capitalisation. According to CoinDesk, Ethereum blockchain processes 15 transactions per second compared to the 45,000 processed by Visa. Given the fact that ETH is now used mostly for payments and not to run smart contracts, the price of ETH tokens seems overvalued.

Ether no longer serves the function it was created for and is used mostly as a cryptocurrency, not as a fuel for smart contracts. Growing attention to Ethereum and extraordinary price performance of its token will attract even more speculators. This will increase the cost for DAPPs even further, and many, many DAPPs will consider other blockchain platforms to build on top of.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Aydar is a Chief Editor at CryptoEconomist.Ru and a proponent of sustainable financing. 

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