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Ethereum is flourishing in NFT madness – it is also congestion in the network



NFT craze has put Ethereum – the blockchain-based computer network backing it – back on the map, but the platform is already paying for its success.

The price of ether, the internal currency of the network, crossed the $ 3,000 milestone for the first time on Sunday, climbing as high as $ 3,340 on Monday afternoon, driven by the explosion of NFTs or non-fungal tokens, and another market called defi, cards for decentralized financing. A year ago, it was trading at only $ 210.

The gains in ether, the second largest cryptocurrency by market value behind bitcoin, have accelerated even though bitcoin’s momentum has slowed. Ether gained more than 40% in April, while bitcoin fell around 2.4%.

Launched in 2015 on the concepts behind bitcoin, Ethereum is a platform for developers to build and operate apps, just like Android or iOS. Unlike the operating systems owned and controlled by Alphabet Inc.

and Apple Inc.,

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

The rally in ether is tied to the recent outbreak of activity on the network. About seven million new Ethereum addresses ̵

1; or accounts capable of maintaining ether balances – were created in the first four months of 2021, bringing the total to more than 55 million, according to research firm IntoTheBlock. And the dollar value of transactions on the platform was $ 1.5 trillion in the first quarter, according to research firm Messari, more than the previous seven quarters combined.

Another stamp of approval: The European Investment Bank, a lender owned by EU countries, issued $ 120 million in two-year bonds last week on the Ethereum network, a first for such a large issue.

“Right now, the value and use of Ethereum has been validated,” said Danny Kim, head of revenue at crypto prime broker SFOX.

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

For most of its existence, Ethereum had more promise than payout. That changed last year thanks to NFTs and defi. NFTs are bitcoin-like tokens with a twist: only one is created at a time and they cannot be exchanged as currency tokens are. NFT is connected to a digital artwork or other object in the real world and is sold as a unique digital property.

Since the launch of the National Basketball Association’s “Top Shot” collectibles six months ago, NFTs have become a cultural phenomenon. The band Kings of Leon sold NFTs tied for an album release. Twitter Inc.

Chief Executive Jack Dorsey auctioned off an NFT of his first ever tweet. Zenithen? Digital artist Beeple sold an NFT work of art at Christie’s for a record $ 69 million.

Nonfungible tokens or NFTs have exploded on the digital art scene in the past year. Supporters say they are a way to make digital assets scarce and therefore more valuable. WSJ explains how they work and why skeptics question whether they are built to last. Photo illustration: Jacob Reynolds / WSJ

The total value of NFT sales on the Ethereum network increased to $ 2 billion. In the first quarter from $ 94 million. Fourth, according to the data tracking site NonFungible.

The defi market, meanwhile, consists of a wide range of financial services that allow crypto holders to borrow against their holdings or lend them out. With more institutional investors entering crypto markets promoting the rally in bitcoin and the expansion of derivative games, there has been a similar demand for cryptocurrencies.

The total amount of crypto contained in defi protocols on Ethereum – a number called “total value locked” – has risen to $ 68 billion, according to the website DeFi Pulse, from about $ 900 million a year ago.

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The boom in both NFTs and defi coincides with a wild market ride in everything from stocks to home-building materials, which has raised new fears that global markets are in a bubble. Many investors speculate that the markets have more room to run thanks to aggressive stimulus from the Federal Reserve, which has promised to keep interest rates close to zero for the foreseeable future.

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

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

The outbreak of activity has raised questions about Ethereum’s energy consumption, raising similar concerns about the bitcoin network. However, Ethereum’s energy consumption is much lower than bitcoin.

The Ethereum network uses approx. 568 terashash per second – a measure of the total computing power of the network – according to data provider YCharts. Bitcoin, on the other hand, uses about 143 million terra strokes per Second. In addition, Ethereum is in the middle of an upgrade cycle that shifts to an even less energy-intensive system.

However, its biggest challenge is the same since launch: scalability. The network aims to be a “world computer” that handles traffic from hundreds of millions of people around the world. The recent increase in traffic has resulted in significant congestion in the network, which encourages a delayed settlement time and a steep increase in transaction fees.

The fees are essentially tolls for access, but they go up or down depending on traffic. The average fee hit a record $ 38 in February, according to statistics site BitInfoCharts, rising back to $ 30 on April 20, making it particularly attractive for small transactions.

“Adding more users to the platform and more activity increases fees,” said Wilson Withiam, an analyst at research firm Messari. “When you try to grow, it becomes a less user-friendly experience.”

It is for these reasons that Top Shot, the most popular NFT, does not run on the Ethereum network. Dapper Labs, a Vancouver-based startup that created and runs the program with the league and the players, designed its own network called Flow.

Ethereum’s scaling issues made it impractical for Dapper Labs to use, something the company discovered back in 2017 when it launched CryptoKitties, a game that allows users to create and trade unique animated cats. It was essentially the first NFT and the first popular app to run on Ethereum. And as soon as it was launched, it almost knocked Ethereum to an end.

“Twenty-four hours after we launched, [Ethereum] networking was on capacity, ”said Dapper Labs CEO Roham Gharegozlou. “And it has been ever since.”

Although Dapper Labs does not specifically state that Flow will replace Ethereum, there are a handful of other projects that want to take advantage of Ethereum’s problems. Crypto Exchange Binance has created its own version of Ethereum, called Binance Smartchain. Other rivals include Solana, Cardano, Cosmos and Polkadot. Everything seems attractive now, said Mr. Withiam, but as they grow, they will likely see the same scaling problems that Ethereum has. “It’s going to be a tough problem to solve,” he said.

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

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