How Ethereum Could Solve the “Blockchain Trilemma”
Editor’s note: This weekend edition we are taking a break from our usual fare. In this essay, last published in Stansberry Digest Masters Series, crypto expert Eric Wade explains how Ethereum’s own success created its biggest challenge… explains why an upcoming update could change the crypto world as we know it… and reveals how this shift could give us the chance to make money.
“The fees were insane!”
“Does it really cost that much to transfer tokens?”
“I gave up trying to get the transaction to go through.”
This is some of the most frequent feedback we receive…
Over the past year, we have seen a massive increase in Ethereum (ETH) transaction fees.
I got this problem recently. I wanted to transfer some Ethereum from my MetaMask wallet to a centralized exchange. Just sending my Ethereum from one address to another would have cost $80. It wouldn’t bother me if I tried to send 1 million dollars worth of Ethereum… But I tried to send only 100 dollars.
That means it would have cost me $180 to make a $100 transfer. Meanwhile, I was able to do a similar transaction for around $0.05 on Binance Smart Chain, now called BNB Chain.
I closed MetaMask and decided to do the transaction later. And I’m not alone…
Ethereum fees, often called “gas” fees, are what sustain the miners and keep the ecosystem running. If you perform a transaction on a network, you should expect to pay a fee. I’ve said before that I have a general distrust of systems or networks that Do not do it have fees.
But Ethereum has added so many new users and has become so busy that the demand for access exceeds the network’s capabilities.
You see, Ethereum is the world’s second largest crypto by market cap. It is the largest crypto if you count users and transactions. So by some calculations, Ethereum has already passed bitcoin (BTC).
As a result, it has become too popular to process transactions cheaply or efficiently…
A simple swap on the Ethereum network can cost anywhere from $20 to $100, compared to a few dollars or cents on blockchains like Avalanche or Harmony.
In many ways, Ethereum has become a victim of its own success…
The increase in Ethereum gas fees has prompted billions of dollars to bridge the gap to cheaper blockchains. Ethereum has simply become too expensive for most users.
By April of last year, Ethereum had 80% of the crypto market’s total value locked (“TVL”) on its blockchain. Today it only has 59% of the market’s TVL. Take a look…
This is where ETH 2.0 comes in…
With ETH 2.0, Ethereum will shift from an energy-inefficient Proof-of-Work consensus mechanism to the more efficient Proof-of-Stake mechanism. This upgrade aims to increase Ethereum’s scalability while maintaining the security and decentralization of the network.
But that’s just the first step… The real long-term solution is “sharding”.
Sharding will split the blockchain data horizontally to expand the capacity of the network. It will significantly reduce network fees and increase transaction throughput by creating new sub-chains called “shards”.
We believe that the ETH 2.0 upgrade and sharding will make Ethereum the Layer 1 blockchain of choice.
A Layer 1 blockchain has the ability to process transactions on its own without another network. So if Ethereum can offer low-cost transactions, it will be the first blockchain that is decentralized, secure, and cost- and energy-efficient.
You see, every blockchain faces three main challenges to be successful…
First, it must be secure. It must be difficult to rewrite the history of the blockchain, enter invalid transactions and perform double spending or 51% attacks.
Second, it must be decentralized. Instead of power being in the hands of a few, it is shared by the community.
Finally, it must be scalable to handle an increasing number of users in a cost- and energy-efficient manner.
Typically, blockchains sacrifice one pillar to satisfy the other two. It’s the “blockchain trilemma”.
For example, some blockchains have cheap and fast transactions… But they have sacrificed decentralization or security for their scalability. Meanwhile, Ethereum is extremely secure and decentralized… But it has a scalability problem. It is so popular that it has higher transaction fees than any other blockchain.
This blockchain trilemma has kept many developers and investors on the sidelines. But soon they will have a Layer 1 blockchain that offers everything – creating a wave of new development and investment on Ethereum.
So this upgrade will have a big impact on the market. We believe it will move us from Crypto 1.0 to Crypto 2.0… where crypto and the blockchain finally become mainstream.
We are already seeing signs of that happening…
Some of the biggest companies in the world – such as Ford, Visa and MetLife – are already invested in and using crypto. Meanwhile, countries such as El Salvador and the Central African Republic use or allow crypto as legal tender. And we see more and more individual investors entering this area. Over the past 12 months, the number of Ethereum addresses holding even the smallest amount has risen from 59.7 million to 81.9 million, according to Glassnode. This is an increase of 37%.
With cheaper and faster transactions and a way to beat inflation, we expect more money to flow into this space… pushing up the prices of many tokens and coins.
Good investment,
Eric Wade
Editor’s note: According to Eric, crypto is on the cusp of an incredible moment… And it could be here as soon as August 31st. Even if you don’t own a single crypto, this event could affect your fortune for years to come. That’s why Eric shares how to prepare your portfolio. He’s identified five tokens that have 10-bagger potential… but only if you act now. Click here for more information.
