Sometimes it seems that the more Ethereum succeeds, the less people use it.
Ethereum is arguably technically more advanced than Bitcoin or any other major blockchain system. It certainly has had more real world impact than any other system, creating the madness that is NFT mania. And it successfully redid the core system, converting to Proof of Stake. By comparison, Bitcoin is still flailing around trying to deal with technically trivial block size issues.
Earlier this year, Ethereum was drifting down, with the supply of coins steadily decreasing. Among other things, the POS protocol burns a lot of Ethereum in fees, so the more transactions occur, the fewer tokens are available for transactions. In the long run, burning up and sequestering coins could render Ethereum unusable. (Which seems like a serious bug to me, but what do I know?)
But a decentralized POS protocol is anything but stable and predictable. This month Ethereum has reversed some trends, with the supply of coins increasing [2]. This increase in supply has corresponded to a decline in transactions, which has burned less in fees.
Krisztian Sandor reports that this trend is partly because of the increased use of "layer 2" networks, i.e., systems that do their own thing, using Ethereum only as a resource [2]. This is good news and bad news. It's great that useful things are happening using Ethereum, and "layer 2" systems make it possible to scale up Ethereum to handle the real economy. But the drop in traffic and fees isn't great for validators, and contributes to the concentration validating in a relative few large nodes.
Looking at the big picture, JP Morgan analysts found that the use of Ethereum has decreased since the switch to POS [1]. The "Shanghai" upgrade to POS made it easier for validators to cash out, which did increase the amount of stakes. But the number of validators remains highly concentrated. The report concludes that the upgrade has been "disappointing".
It's getting pretty complicated. Massive fraud and scandals have driven away investors and legitimate businesses. Regulators everywhere are breathing fire. The NFT bubble is over. Lots of "layer 2" businesses are using Ethereum, but in ways that their customers never see. And the core network is becoming highly centralized, losing traffic, and flirting with strange and crazy protocol problems.
This is not the way things were supposed to happen!
Ethereum keeps doing good things, and doing them well. But the whole shebang is going nowhere, fast.
- Will Canny (2023) Ethereum's Shanghai Upgrade Has Been 'Disappointing,' JPMorgan Says. Coindesk, https://www.coindesk.com/markets/2023/09/22/ethereums-shanghai-upgrade-has-failed-to-boost-network-activity-jpmorgan-says/
- Krisztian Sandor (2023) Ether Turns Inflationary as Network Revenue Plunges to 9-Month Low. Coindesk, https://www.coindesk.com/markets/2023/09/22/ether-turns-inflationary-as-network-revenue-plunges-to-9-month-low/
Cryptocurrency Thursday
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