Ethereum Stands Proud as the Second Biggest Cryptocurrency. What are the Risks..?
In Part 1 we covered what Ethereum is and what it’s currently famous for. In Part 2 we will address Ethereum’s potential and the pitfalls it is exposed to.
Strengths
Developer Numbers
At the time of writing Ethereum has approximately 2,300 developers working on it monthly. Bitcoin comes in 2nd place with 400 developers while Cardano has 250. That’s a lot of brain power focused on Ethereum.
Charismatic Leaders
Of the 8 original founders Buterin and Lubin remain. As Ethereum was first conceived by Buterin he is arguably the lynchpin of the whole project while Rubin has been pivotal to bringing big businesses to the table. From the outside these two figures seem to work well together and have already done so for years.
Clear Development Roadmap
The Ethereum Roadmap is clearly understood by miners and developers.
To read the original Twitter thread click here.
The highlights are as follows:
The big theoretical questions have mostly been answered
Development and implementation now have the most hours allocated to it
Complexity will reduce over time (Phew)
At the time of writing, we are edging close to the blue square in the middle (ETH 2.0)
Complexity
Ethereum is big and complex. This makes it hard to copy. Combine this with the number of developers working on it any attempts to copy it are likely to fail as those attempts would likely to be left behind by the constant innovation.
Consensys
Consensys is Ethereum’s business arm which looks to construct software services and applications on the Ethereum blockchain. It has successfully built relationships with the worlds leading companies whilst also launching a number of Initial Coin Offerings (the crypto version of an Initial Public Offering1 ) for some flagship projects. Check out the case studies here.
First Mover Advantage
Ethereum was the first network to deploy smart contracts.
Majority of projects built on Ethereum
Other blockchains are offering smart contracts but the majority are still build on Ethereum.
Weaknesses
Centralised Leadership
The big downside of having influential leaders like Buterin and Lubin is that their connection to Ethereum is extremely relevant to Ethereum’s success. If they were to leave Ethereum unexpectedly (or even planned) it would undoubtedly shake confidence in the whole project. It does not mean it will fail but in the eyes of the market it could lead to a big sell off.
Current Size Makes it Difficult to Pivot Direction
Unlike smaller projects with fewer stakeholders Ethereum has a vast network of interested parties. The Miners, Developers and Investors all have a vested interest in the success of Ethereum but may all pull in different directions on key decisions. This was demonstrated recently when the developers updated the network (EIP1559) so that it would burn (destroy) a portion of the gas fee2 for every transaction. This limits the inflation of the ETH in circulation but also means that the rewards for mining drop. The upgrade went through but not without some complaint.
Still linked to success of Bitcoin
While there have been some recent moves away from this, Ethereum’s price is still linked to Bitcoins which acts as an index for the whole industry.
Opportunities
Decentralised Finance
We covered DeFi in Part 1 and how removing the middle men from the financial system will increase speed and efficiency whilst reducing costs and giving the unbanked (1.3 million adults in the UK and 1.7 billion people globally who don’t have bank accounts) a banking option without having to use the traditional sector.
Non Fungible Tokens (NFT’s)
Speculation is currently driving the crazy valuations we are seeing. There will be winners and losers in the short term but this sector will mature over time. Once they have, true value will be provided and we will get access to some of the really cool features.
Threats
Regulation
Although ETH is large enough to comply and fight these regulatory battles the smaller altcoins that use ETH as a platform are not. A black listing and Regulatory attack by the Securities Exchange Commission (SEC) or other regulators could cause devastation to the lower cap altcoins which in turn could cause a sell off of Ethereum based tokens, increasing ETH supply and reducing the price.
Ethereum Killers
Lots of competing projects have been branded ‘Ethereum Killer’ but none have succeeded yet. Cardano is the only one that is currently mounting a challenge but even that hasn’t implemented Smart Contract technology yet. That being said we can’t factor in a “new” project that may sway the market. As of writing though it is unlikely to happen.
Bugs
One of the largest threats to a blockchain project is the developers themselves. ETH has had some close calls with some updates having some foundational issues that needed to be patched rapidly. This is a long tail exponential risk meaning that it is low in probability but with the potential to really screw things up. Bitcoin is not as complex nor does it have big updates so it is not as at risk as Ethereum.
Hackers
There will always be hackers looking to steal funds or exploit systems.
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Until Next Time
The Wealth Gap
An initial public offering (IPO) is when a private company becomes public by selling its shares on a stock exchange.
Gas fee is the ETH cost of using the Ethereum Network. If you want to send ETH from one address to another, you need to pay a little bit of ETH to do so. That gas fee goes to the Miners who keep the blockchain updated.