Cryptocurrencies have taken the world by storm over the last few years, and one of the leaders has been Ethereum (ETH 0.50%). The Ethereum blockchain allows developers to build smart contracts into transactions like NFTs, and investors have bid up Ethereum's value in anticipation of this being an important part of the digital economy.
There's no question that blockchains like Ethereum have the potential to be highly disruptive, so what should investors know about this blockchain and cryptocurrency?
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Transactions are growing but still relatively low
The chart below shows the number of transactions per day on the Ethereum blockchain. You'll notice that transactions have grown tremendously since 2017 but have actually been in decline over the past year. I'll get into some reasons below, but this is notable given that some competitors are seeing explosive growth in transactions.
I will also note that 1 million transactions per day is only about 11.6 transactions per second. That may seem like a lot, but if cryptocurrency is going to be disruptive to traditional finance, it'll need to get to thousands or tens of thousands of transactions per second, which some cryptocurrencies are already built for.
Data by YCharts.
Ethereum's move into a proof-of-stake consensus mechanism from proof-of-work network is expected to do away with some of these challenges. But fundamentally I think it's clear that Ethereum has become the high-value blockchain, while others will provide low cost with high speed. That's a valuable position today, but will it hold up in the long term? We don't know.
Fees, fees, fees
The biggest disadvantage of Ethereum has always been its relatively high fees. In the following chart you can see the typical fee for simply moving Ethereum around, but the cost to mint or buy an NFT can sometimes be hundreds of dollars, and in some cases, users aren't even guaranteed a successful transaction.
Data by YCharts.
There are a couple of things to note, though. One is that transaction costs are coming down. This is partly because of network improvements, but it also helps that developers are building more efficient contracts, reducing concessions. The other is that the move to PoS is supposed to help with transaction costs. It's not clear how much costs will drop, but if it's significant, that would make Ethereum more attractive to users.
The competition
There's no question that Ethereum has the lead today in smart contracts, NFTs, tokens, and other cryptocurrency developments. But it's not without competition.
In the last year, Solana (SOL 5.08%) has exploded in price in large part because developers are flooding to the platform. Solana is faster, can handle more transactions, and is much cheaper to use at fractions of a penny. This should be a worry to Ethereum.
Data by YCharts.
The biggest advantage Ethereum has is first-mover advantage. It has the biggest NFT projects today, users hold billions of dollars in Ethereum, and it has a big infrastructure lead over competitors. But the competition is improving, and Ethereum needs to complete its move to proof-of-stake to address some of its competitive disadvantages.
Ethereum is a cautious buy
I think Ethereum will continue to be the leader in high-value projects and NFTs for the next few years, but I do see a need for lower-cost transactions and higher volume through the blockchain. Ethereum has a lead, and that's why it's a buy, but I'm cautious because the competition is getting stronger. Ethereum may not be able to dominate in the long term the way it has over the last year.
