Editor's note: This Weekend Edition, we're taking a break from our usual fare. In this essay, most recently published in the 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 profit.
"The fees were crazy high!"
"Does it really cost this much to transfer my tokens?"
"I gave up trying to make the transaction go through."
It's some of the most frequent feedback we get...
Over the past year, we've seen a massive uptick in transaction fees on Ethereum (ETH).
I ran into this problem recently. I wanted to transfer some Ethereum from my MetaMask wallet to a centralized exchange. Simply sending my Ethereum from one address to another would have cost $80. That wouldn't bother me if I were trying to send $1 million worth of Ethereum... But I was trying to send just $100.
That means it would have cost me $180 to do a $100 transfer. Meanwhile, I could do a similar transaction for about $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, commonly called "gas" fees, are what sustain the miners and keep the ecosystem working. If you conduct a transaction on any network, you should expect to pay a fee. I've said before that I have a general mistrust of systems or networks that don't have fees.
But Ethereum has added so many new users and has become so busy that the demand for access is outstripping the network's capabilities.
You see, Ethereum is the world's second-largest crypto by market cap. It's the largest crypto if you count users and transactions. So by some metrics, Ethereum has already passed bitcoin (BTC).
As a result, it has gotten too popular to process transactions in a cheap or efficient way...
A simple swap on the Ethereum mainnet can cost anywhere from $20 to $100, compared with a few dollars or cents on blockchains like Avalanche or Harmony.
In many ways, Ethereum has become a victim of its own success...
The surge in Ethereum gas fees has caused billions of dollars to bridge to cheaper blockchains. Ethereum has simply gotten too expensive for most users.
Last April, 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...
That's 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 it's only 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 reduce network fees substantially and increase transaction throughput by creating new subchains called "shards."
We believe 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 would be the first blockchain to be decentralized, secure, and cost- and energy-efficient.
You see, every blockchain faces three main challenges to become successful...
First, it must be secure. It needs to be difficult to rewrite the history of the blockchain, post invalid transactions, and perform double-spending or 51% attacks.
Second, it must be decentralized. Instead of power residing in the hands of a few, it's shared by the community.
Finally, it must be able to scale to handle a growing number of users in a cost- and energy-efficient way.
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've sacrificed decentralization or security for their scalability. Meanwhile, Ethereum is extremely secure and decentralized... But it has a scalability problem. It's 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 one 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 go mainstream.
We're already seeing signs of it happening...
Some of the biggest companies in the world – like Ford, Visa, and MetLife – are already invested in and using crypto. Meanwhile, countries like El Salvador and the Central African Republic are using or allowing crypto as legal tender. And we're seeing more and more individual investors get into this space. 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. That's a 37% increase.
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 investing,
Eric Wade
Editor's note: According to Eric, cryptos are on the cusp of an incredible moment... And it could be here as soon as August 31. Even if you don't own a single crypto, this event could impact your wealth for years to come. That's why Eric is sharing how you can prepare your portfolio. He has identified five tokens that have 10-bagger potential... but only if you act now. Click here for more details.
