Analysis: Cryptocurrency ethereum is flourishing but risks linger.
Ethereum has outperformed major digital currency competitors this year, helped by a surge in decentralised finance (DeFi) and the possibility of a technical adjustment this summer, but it faces roadblocks that could stymie its development.
With a price increase of more than 350 percent this year, ethereum has the second-largest market capitalization after bitcoin, but it lacks the cache and could face more operational difficulties, preventing it from overtaking its biggest rival.
The words "ethereum" and "ether" have become interchangeable in the crypto world. Ethereum is the blockchain network in which decentralised applications are embedded, and ether is the token or currency that allows or drives their use.
According to data tracker CoinGecko.com, Ethereum's market cap was $410 billion on Friday, second only to bitcoin's $1 trillion. On Thursday, it reached a new high of $3,610.04, and it was last up 1% at $3,524.
Meanwhile, Bitcoin has gained a more modest 97 percent this year. Bitcoin has dropped approximately 18 percent since reaching an all-time high of just under $65,000 in mid-April.
Demand for ethereum has risen as institutional interest has grown, but supply has been small. According to Kraken Intelligence, a research blog run by cryptocurrency exchange Kraken, the token's availability on exchanges in April was at its lowest level in nearly two and a half years.
"It's more than just a piece of paper. It's a whole ecosystem that enables the development of new applications "According to Bradley Kam, CEO of Unstoppable Domains, a blockchain domain provider.
DeFi, or peer-to-peer cryptocurrency networks that allow lending outside of conventional banking institutions, is at the core of ethereum's ascendancy. Many websites are powered by the Ethereum network, which uses open-source technology and algorithms to set prices in real time based on supply and demand.
According to DeFi Pulse numbers, the value locked - the total number of loans on DeFi platforms - was $79 billion as of Friday, up nearly 600 percent from $11 billion in October.
DeFi, on the other hand, has flaws. According to Dune Analytics, 2% to 5% of transactions on ethereum-based decentralised exchanges failed due to issues like slippage or insufficient "gas" rates, which are the fees needed to complete a transaction on the ethereum blockchain.
On Uniswap, a DeFi protocol for exchanging cryptocurrencies, approximately 1.1 million transactions were made between April 15 and April 21. According to data from analytics platform Etherscan and Dune Analytics, 241,262 transactions failed, reflecting the highest number of transaction failures in the entire ethereum network.
"DeFi is on track for meteoric growth, but that growth comes with inherent risk," said Alex Wearn, CEO of crypto exchange IDEX.
"Issues like failed transactions and front-running are not subtle, costing users millions of dollars every day," he said, referring to the practise of putting a transaction ahead of a known potential contract in the execution queue. "These major issues restrict these products' appeal to a broader audience, suffocating ecosystem development."
Wearn reports that DeFi hacks have cost more than $285 million so far this year.
DeFi platforms, according to proponents, are the future of financial services, as they provide a cheaper, more reliable, and open way for individuals and businesses to access and provide credit.
TECHNOLOGY BUMPS
According to market participants, Ethereum has also been hampered by the network's inability to scale to meet demand without incurring high transaction fees and slow transaction execution.
The first step of Ethereum 2.0, which was released last year, aims to solve the network's technical issues with speed, reliability, and scalability.
The proposed migration to Ethereum 2.0, according to John Wu, president of AVA Labs, an open-source platform for financial applications, has been in the works for years.
"Deadlines have always been put back," he said, "so it's difficult to feel at ease with the unknown."
Ethereum is also up against networks like AVA Labs' Avalanche and Binance Smart Chain, all of which are compliant with ethereum's properties and applications.
Since February, users have transferred more than $170 million from ethereum to Avalanche, according to data from AVA Labs.
ANOTHER TECHNICAL ENHANCEMENT
Still, the prospect of a technological change known as EIP (ethereum improvement proposal) 1559, which is scheduled to go live in July and is expected to reduce ethereum supply, has given the digital currency a boost.
EIP-1559 seeks to reduce the uncertainty of ethereum fees by adding a method to burn some of those fees, which analysts believe would delay the token's issuance.
Analysts believe the effect on ethereum's price would be close to that of a bitcoin halving case, in which the supply of bitcoin was reduced and the price soared to new levels.
"There are a lot of numbers floating around the market about the possible effect of something on the scale of a halving of bitcoin," said Richard Galvin, co-founder and CEO of crypto fund Digital Asset Capital Management.
"They're all pretty upbeat drivers who, I assume, have benefited from a decent revaluation."
