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Ethereum thrives in NFT madness – so does network congestion



The NFT craze has once again put Ethereum – a blockchain-based computer network that supports it – on the map, but the platform is already paying for its success.

The price of ether, the network’s domestic currency, first rose to $ 3,000 on Sunday and rose to $ 3,340 on Monday afternoon, prompted by an explosion of NFT, or non-combustible tokens, and another market called defi, short for decentralized financing. A year ago, it was trading at only $ 210.

Ether gains, the second-largest cryptocurrency by market value after bitcoins, accelerated even as the momentum of bitcoins slowed. Ether gained over 40% in April, while bitcoin fell by about 2.4%.

Ethereum, launched in 2015 on the concepts behind bitcoins, is a platform for developers to build and operate applications similar to Android or iOS. Unlike those operating systems that are owned and controlled by Alphabet Inc.

and Apple Inc.,

respectively, Ethereum is an open source software project, which means that no central country has control.

The rally on the air is connected with the recent activity in the network. About seven million new Ethereum addresses ̵

1; or accounts that can hold etheric balances – were created in the first four months of 2021, for a total of more than 55 million, according to analyst firm IntoTheBlock. And the dollar value of transactions on the platform amounted to $ 1.5 trillion in the first quarter, according to research firm Messari, more than the previous seven quarters combined.

Another seal of approval: The European Investment Bank, a lender owned by EU member states, issued two-year bonds worth $ 120 million last week on the Ethereum network, the first of its kind.

“Currently, the value and use of Ethereum have been validated,” said Danny Kim, revenue manager at SFOX’s crypto prime broker.

However, this success has led to network congestion and increased transaction fees, which have led competitors to enter the market, along with growing concerns about the environmental impact of cryptocurrencies.

For most of its existence, Ethereum had more promises than payouts. This has changed in the last year thanks to NFT and defi. NFTs are similar to bitcoin symbols, with a twist: They are created only one by one and they are not interchangeable, like currency symbols. NFT is associated with a digital work of art or other real-world object and is sold as a unique digital property.

Since the launch of the National Basketball Association’s Top Shot collectibles six months ago, the NFT has become a cultural phenomenon. The group Kings of Leon sells NFT, tied to the release of an album. Twitter Inc.

CEO Jack Dorsey has auctioned off NFT from his first tweet of its kind. The zenith? Digital artist Beeple sold a work of NFT at Christie’s for a record $ 69 million.

Non-fungible tokens, or NFTs, have exploded on the digital art scene over the past year. Proponents say they are a way to make digital assets scarce and therefore more valuable. The WSJ explains how they work and why skeptics wonder if they are built to last. Photo illustration: Jacob Reynolds / WSJ

Total NFT sales on the Ethereum network rose to $ 2 billion in the first quarter from $ 94 million in the fourth, according to tracking site NonFungible.

Meanwhile, the defi market includes a wide range of financial services that allow crypto owners to borrow or lend against their holdings. With more institutional investors entering crypto markets, fueling the bitcoin rally and expanding derivative bets, there is a corresponding demand for crypto asset loans.

The total amount of crypto stored in Ethereum’s definition protocols – a number reported as “total locked” – jumped to $ 68 billion, according to the DeFi Pulse website, from about $ 900 million a year ago.

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The boom in both NFT and defi coincided with the wild ride in the market for everything from stocks to home-building materials, sparking new fears that global markets are in a bubble. Many investors are speculating that the markets have more room to work, thanks to an aggressive stimulus from the Federal Reserve that is committed to keeping interest rates close to zero for the foreseeable future.

The growth of markets such as NFT and defi is “amazing,” said Jean-Marie Mognetti, CEO of asset manager CoinShares. “Ethereum as a network is what makes all this possible.”

For all the recent noise, Ethereum is a software project that is still under development and the obstacles it faces are significant.

The outbreak has raised questions about Ethereum’s energy consumption, given similar concerns about the bitcoin network. Ethereum’s energy use is much lower than that of bitcoins.

The Ethereum network consumes about 568 terahash per second – a measure of the network’s total computing power – according to data provider YCharts. Bitcoin, by contrast, consumes about 143 million terahase per second. What’s more, Ethereum is in the middle of an upgrade cycle that will move to an even less energy-intensive system.

However, its biggest challenge is the same from the start: scalability. The network aims to be a “global computer” that manages the traffic of hundreds of millions of people around the world. The recent jump in traffic has led to significant network congestion, which has caused a delay in settlement time and a sharp rise in transaction fees.

Fees are essentially access fees, but they increase or decrease depending on traffic. The average fee reached a record $ 38 in February, according to statistics site BitInfoCharts, and rose to $ 30 on April 20, making it particularly unattractive for small transactions.

“As you add more users to the platform and more activity, it increases fees,” said Wilson William, an analyst at research firm Messari. “As you try to grow, it becomes a less consumer-friendly experience.”

For these reasons, Top Shot, the most popular NFT, does not work on the Ethereum network. Dapper Labs, a Vancouver-based startup that created and managed the program with the league and players, created its own network called Flow.

Ethereum’s scaling issues have made it impractical to use Dapper Labs, something the company discovered back in 2017 when it launched CryptoKitties, a game that allows users to create and market unique animated cats. It was essentially the first NFT and the first popular application running Ethereum. And as soon as it started, it almost stopped Ethereum.

“Twenty-four hours after we started, [Ethereum] the network had capacity, ”said Dapper Labs CEO Roham Garegozlu. “And it has been ever since.”

Although Dapper Labs is not specifically looking for Flow to replace Ethereum, there are several other projects that are trying to take advantage of Ethereum’s problems. Binance cryptocurrency has created its own version of Ethereum called Binance Smartchain. Other rivals include Solana, Cardano, Cosmos and Polkadot. Now they all look attractive, Mr Withiam said, but as they grow, they are likely to see the same scaling problems that Ethereum has. “It will be a difficult problem to solve,” he said.

Write to Paul Vignes at paul.vigna@wsj.com

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