September has been a difficult month for crypto investors, especially those betting big on ether, the token linked to the ethereum blockchain.
Ether fall 13% for the month, its second largest monthly decline in the past year, behind just a 16% drop in June. Bitcoin fell 7% in September.
It’s difficult to tie short-term price movements to a specific event, and with the crypto’s historic rally over the past 12 months, pullbacks are to be expected. Ethereum, the second most valuable cryptocurrency behind bitcoin, is still up around 830% over the past year.
Investors are now buying the September low. On Friday, the first day of October, ether and bitcoin both climbed over 9%.
12 month ether price chart
But September’s roller coaster reflects a particularly rocky stretch for the Ethereum ecosystem, which has given investors and developers cause for concern.
Network speed and high transaction costs continue to be a problem. The “London” upgrade in August was supposed to make transaction fees less volatile, but it had limited effect.
Meanwhile, rival blockchains dubbed “ethereum killers” are taking advantage of ethereum challenges.
Ethereum also unexpectedly divided into two separate chains in late August, after someone exploited a bug in the software most people use to log into the blockchain. This exposed the network to attack, and not for the first time.
“All of these factors could have an impact on the speculation side, without a doubt,” said Mati Greenspan, founder and CEO of Quantum Economics, in an interview. “But keep in mind that Ethereum has appreciated quite well so far this year and the whole market appears to be consolidating right now. So I wouldn’t try to read these short moves too deeply. term.”
Still, ethereum, which serves as the main building block for all kinds of crypto projects, like non-fungible tokens (NFTs), smart contracts, and decentralized finance (DeFi), has a few major hurdles to overcome to fend off emerging competition. .
A central premise of Ethereum’s security stems from the existence of a single set of virtual books, which means you can’t make coins out of thin air. This ledger has to work, because the decentralized nature of the blockchain means there is no rule keeper or bank standing in the middle of transactions to act as an accountant.
Ethereum developers were rightly alarmed in August when the chain split due to a bug.
“This 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 can be spent more than once and transactions can be reversed, Hougan said. Smart contracts overseeing billions of dollars in assets could also have been at risk. Smart contracts allow users to build apps on top of Ethereum with self-executing code, eliminating the need for third parties to handle transactions.
Such an attack would have been difficult to execute, as it was clear which nodes were on the right side of the split and which were not. “But in theory there was a risk,” Hougan said.
The good news for miners and exchanges is that most of them upgraded their software as recommended and the issue was resolved relatively quickly, said Tim Beiko, Ethereum’s protocol developer coordinator.
Auston bunsen, co-founder of QuikNode, which provides blockchain infrastructure to developers and businesses, said it was a “responsibly disclosed vulnerability.”
“It’s a reminder that blockchains in general and Ethereum in particular are new and disruptive technologies,” Hougan said. “They can do amazing things – settle billion dollar transactions in minutes and program money like software – but they’re not completely mature.”
The longer term problem for Ethereum is that random issues like this keep happening.
In April, the Ethereum blockchain was hit by a bug in one of the software used to access it. And in November, many Ethereum’s DeFi apps temporarily crashed after a Geth upgrade debacle, which led to the chain splitting in two.
Geth is the abbreviation for Go Ethereum. To access the ethereum blockchain, operators and miners have their choice of software. Most use Geth, which represents 64% of the network.
When the ethereum blockchain broke in half a few weeks ago, it was because Geth had a bug in his consensus mechanism. This is what creates the single source of truth for transactions so that everyone sees the same, no matter what software they are using.
The developers discovered the bug, released a new version with a fix, and publicly asked everyone to update. Many users have upgraded, but others have not. When an unknown actor exploited the bug, Ethereum branched off, meaning it split into two separate chains: one for those who had updated their software and one for those who had not. .
Ethereum “has sought the veneer of decentralization by having many customers, but as a result, they have incompatibilities,” said Nic Carter, co-founder of blockchain data aggregator Coinmetrics.
When software does not communicate with each other, it creates problems for the network.
Bitcoin takes a very different approach. It is based on highly secure software allowing nodes to access the blockchain. Bitcoin developers have long sought to avoid hard forks at all costs, so any changes to core software tend to be accepted rather than passed on to users. according to Carter.
“Ethereum prioritizes faster development, but it comes at the cost of a more fragile set of software implementations,” Carter said.
Some crypto experts attribute Ethereum’s success to its first-come advantage. Most NFTs and 78% of DeFi applications, or dApps, run on ethereum, according to the State of The Dapps website.
That is starting to change, thanks to the growing popularity of rival blockchains.
Even before this latest blockchain split, users were complaining about Ethereum’s heavy congestion and high transaction fees, which hit an all-time high of $ 70 earlier this year, and just this week they have gone from 20 $ to $ 46 and back down to $ 32..
At current prices, the fees continue to scare away some users.
They are turning to blockchains like Cardano, a platform used to create dApps, and Solana, whose native coin has grown almost 4,800% since September 2020. Launched last year, Solana is gaining ground in NFT and DeFi ecosystems because it is cheaper and faster. to use as Ethereum.
Solana process 50,000 transactions per second, and his the average cost per transaction is $ 0.000025, according to its website. Ethereum can only roughly handle 13 transactions per second and the transaction costs are significantly more expensive than on Solana.
Institutional money circulates. Solana comes from closed $ 314 million private token sale led by Andreessen Horowitz and Polychain Capital.
Investors who had largely focused on Ethereum “increasingly diversified their holdings into other cryptocurrencies, fueling alternative blockchains like Algorand, Solana and Cardano,” said Mark Peikin, CEO of Bespoke Growth Partners.
Bunsen told CNBC that while Solana is making good progress in terms of usable blockchain, it is not yet decentralized enough to satisfy the crypto community as a whole.
It is not immune to bugs either. Last month, Solana suffered a 17 hours outage following a denial of service attack, which took the form of a stream of transactions caused by bots.
The list of so-called Ethereum killers is long and includes blockchains like Matic and Polygon, which are complementary to Ethereum, according to Bunsen, as well as Cardano, which is known for its security.
“I think some of these Ethereum killers will get away with this,” Bunsen said. “But they won’t kill Ethereum.”
Ethereum also has its own ongoing upgrade. For several years, he has been building Ethereum 2.0, which should be ready by the first quarter of 2022.
The metamorphosis will shift Ethereum to a less energy-intensive mining process and, according to the founder of the Vitalik Buterin network, could increase the speed over 7,000 times to reach 100,000 transactions per second.
If successful, Bunsen said, Ethereum 2.0 will be a “huge upgrade in terms of throughput to the Ethereum network and a huge win for the environment in general.”
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