A capacity crisis is roiling Ethereum as it hits a historic low against Bitcoin. Although declining prices appear to be part of a broader corrective trend, some analysts argue hiccups in the protocol’s development are the root cause. Meanwhile, Vitalik Buterin claims salvation via ETH 2.0.
“The Ethereum blockchain is almost full”
Ethereum’s network utilization recently surpassed 90 percent, according to Etherscan. The surge in transactions is a clear sign of adoption. Yet, the Ethereum blockchain does not have the throughput to handle this traffic. This leads to network congestion and high fees.
The reason behind the spike in network utilization? Tether, potentially.
Tether’s USDT is steadily migrating from the Omni to Ethereum blockchain. More than 40 percent of USDT is now using the ERC20 standard, as Anthony Sassano, an Ethereum developer and head of marketing at Set Protocol, pointed out.
As network load increases the cost of processing these transactions also increases. Functionally, this makes user-friendly dApps difficult, stifling adoption. Several startups that previously launched as ERC20 tokens are even migrating away from Ethereum because of these limitations.
Migrating away from Ethereum?
Now, some of the most popular decentralized applications are running on competing smart contract platforms. MyWish, a platform that helps people budget using smart contracts, announced earlier this year that it is migrating to Binance Chain.
EOS and TRON are also absorbing dApp share from incumbent Ethereum, according to Dapp Radar. Because these protocols boast much higher transaction throughput, at the cost of centralization, they can run more sophisticated gambling and gaming dApps.
Ethereum is currently characterized by a 15 transactions per second bottleneck. Centralized databases can easily handle thousands of transactions, while EOS and TRON can do anywhere from 25–100 based on live tests (though they publicly claim much higher numbers).
The transaction bottleneck impedes Ethereum from realizing its potential as a widely adopted “world computer.” Even Vitalik Buterin, the protocol’s figurehead and co-founder, raised these concerns.
“Scalability is a big bottleneck because the Ethereum blockchain is almost full. If you’re a bigger organization, the calculus is that if we join, it will not only be more full but we will be competing with everyone for transaction space. It’s already expensive and it will be even five times more expensive because of us.”
In response to these growing concerns, Ethereum is scheduled to make two major updates in the next six months that will help fix these issues, claims Buterin.
The first hard fork is set to occur in October, with Ethereum developers recently finalizing a list of six different changes. The system-wide upgrade, dubbed Istanbul, is expected to boost chain interoperability with Zcash and improve denial-of-service attack resilience, among other efficiency improvements.
The second, more ambitious update is Ethereum 2.0 (Serenity). Scheduled for mainnet activation sometime in the first quarter of next year, it is the most anticipated Ethereum hard upgrade and hard fork.
The long-awaited upgrade aims to help the network support “millions of transactions per second” via second-layer solutions, including Sharding and Plasma. In a May video, Vitalik Buterin explained how these two solutions work in tandem.
“The reason I think layer 1 and layer 2 are complementary is because ultimately, if you look at the math, the scalability gains from the layer 1 improvements and layer 2 improvements do ultimately multiply with each other. If you have a Sharding solution, the Sharding solution itself might increase the scalability of Ethereum by a factor of 100, or eventually even more.”
Due to the importance of the upgrade, the Ethereum Foundation recently announced grants worth more than $2 million. The capital is destined to seven different companies that are “currently tasked with delivering long-standing multi-client testnets” for Serenity.
Ethereum price analysis
Despite efforts to upgrade the network, the price of Ethereum continues retracing. In fact, the ETH/BTC pair has never traded lower except for the first 7 months after it launched in July 20, 2015, and during a short period of time before the beginning of the 2017 bull market.
Correspondingly, following the 55 percent correction that began on June 26, the ETH/USD pair is currently trading around $167. This price point represents a significant level of support for Ethereum. During the beginning of the year it also acted as a strong barrier containing the price of ETH from going up on several occasions. Now, it could prevent it from a further drop.
If the $167 support level indeed holds, there are two bullish patterns that could allow Ethereum to rebound from this area.
The first one is a falling wedge that appears to be developing on the 3-day. This is a technical formation that signals a price reversal from bearish to bullish. Upon the breakout point, the falling wedge predicts a 38 percent surge that could take ETH to $242.
The second pattern is a red nine candlestick that could form on Sept. 1, per the TD sequential indicator. This technical index forecasts a three-to-twelve days upswing or the beginning of a new countdown that could start around Sept. 4, if validated.
A combination of the strong support level, with the falling wedge, and the upcoming buy signal from the TD sequential indicator could have the potential to resume the bullish trend that began in mid-December 2018. The last indicator that will confirm the bullish outlook is a spike in volume.
Nonetheless, if Ethereum is bound to continue falling it may try and test the next level of support around $145.
It remains to be seen if the different bullish signals presented will allow ETH to recover in terms of its dollar value.
For for everyone, not just investors, the upcoming upgrades to Ethereum (if successful) will drastically improve the fundamentals of the coin. If the network is finally able to fulfill its promises of conducting millions of transactions per second then it will substantially accelerate adoption. And, hopefully, redeem its price against Bitcoin.