For many years, Ethereum has led the way among blockchain platforms as the top choice among blockchain developers and cryptocurrency enthusiasts. With more functionality than the Bitcoin blockchain and a focus on platform development across the board, the blockchain has continued to see surges in its popularity and use.
However, while the blockchain remains a top choice nonetheless, it has suffered over the past year from the same issue that many technology platforms suffer - scalability. Since Ethereum is the leading blockchain option, many have used it as their gateway into the crypto and blockchain worlds. This growth in use has led to a scalability and functionality issue that threatens to overwhelm the network.
Scalability and rising gas fees
Ethereum's primary issue is scalability. The growth in the blockchain's user base means that the network is getting more congested, and operating it is getting more challenging by the month. It is almost a case of Ethereum losing on two sides - on the one hand, the network is looking to onboard more users and projects. On the other hand, doing so will probably mean that the platform won't function as well as it should anymore.
While some world developments look to make this situation better, the cracks are beginning to show for Ethereum, and the signs aren't so good. One of the areas where Ethereum has seen significant use has been in decentralized finance (DeFi). As many know, DeFi has grown to be the most interesting thing to come out of the crypto space since last year, with total assets locked in DeFi protocols now worth $44.57 billion, per data from DeFi Pulse.
Data from DeFi Prime shows that the Ethereum blockchain remains the most popular blockchain option for DeFi developers. However, its scalability issues have begun driving many protocol creators to competing blockchains.
There is also the problem of surging gas fees. Essentially, gas fees are charges you incur when making transactions on a blockchain network. Gas fees vary based on blockchains, and most blockchains with high usage rates tend to charge incredibly high gas fees.
On the Ethereum blockchain, gas fees have continued to rise since November 2020. The figures reached a peak on February 23, when an average transaction would cost over $12 to process. Gas fees on the blockchain have dropped since then, but they continue to be higher than what you would pay on other competing chains.
The rise in gas fees is undoubtedly due in no small part to DeFi activity. As more people are pledging tokens and conducting transactions on Ethereum-based DeFi protocols, gas fees on the network will continue to rise, causing more problems. It's a classic vicious cycle that leaves many users paying higher sums for conducting transactions.
DeFi protocols step back
Earlier this month, SushiSwap, a top decentralized exchange and fork of the Uniswap platform, announced that it had added support for several Ethereum alternatives on its platform. The announcement confirmed the deployment of several blockchain options, including the Binance Smart Chain, Polygon, xDai, and Fantom.
At the onset, SushiSwap's decision was met with significant criticism. Many claimed that it was simply a ploy to bring more users to the exchange, which hadn't provided so much liquidity. Still, the SushiSwap exchange continues to grow. Data from Dune Analytics shows that SushiSwap is the second-largest decentralized exchange, with $1 billion in daily trading volumes. It still has a long way to go before catching up with Uniswap, but it is doing its bit to chart a course for itself.
Interestingly, the trend of moving away from Ethereum hasn't been limited to just SushiSwap. Several other Defi projects have also begun retreating as they look to take advantage of benefits such as higher scalability and faster operations.
It is worth noting that these projects aren't exactly moving away from Ethereum. Instead, they're merely adding other alternatives, allowing their customers to take advantage of their offerings. This year, the teams behind Polkadot and Moonbeam completed the first part of Balancer, another top decentralized exchange, on the Moonbeam TestNet.
Also, 1inch, a top exchange aggregator, added support for the Binance Smart Chain to its platform. With the feature, users will be able to change networks from Ethereum to the Binance Smart Chain and enjoy quicker transactions with lower fees. Speaking on the platform's plans, Sergey Kunz, 1inch's co-founder, explained:
"We don't plan to move completely away from Ethereum. Our expansion to BSC is just an add-on as we've gotten a lot of requests from the 1inch community because there's a lot of money and activity on BSC."
Hope in ETH 2.0.
While things look dire for Ethereum, the top blockchain could gain its lost market share with the upcoming Ethereum 2.0 upgrade.
Ethereum has tested the upgrade for a long time now, with many heralding it as the move that will see the blockchain transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus algorithms. Beyond the consensus algorithm switch, ETH 2.0 is also expected to provide several updates for the blockchain, including scalability and user functionality.
ETH 2.0 is already in development, and its slow rollout began last year. Its sharding and staking features will allow users to return to the typical blockchain experience, with the blockchain expected to handle more transactions and provide lower fees. Of course, the move to PoS means that miners will also be able to eliminate energy wastage - a consistent problem with PoW.
There are differing opinions about whether ETH 2.0 will be enough to solve Ethereum's scalability and gas fee problems. So far, however, the enthusiasm is high, and the industry is looking ahead at what might come.