Ethereum’s Scale is Preventing More DeFi Adoption and Usage

With the advent of Ethereum, and then subsequently the DeFi industry, adoption became a much hotter topic as the newly created tokens promised all of the possibilities and financial freedom without banks and institutions to control them.

And now, as we’ve entered into the second half of 2020, there seems to be too much adoption in the DeFi space, an unexpected and unwanted problem that’s been putting a strain on the entire ecosystem.

With most of the DeFi ecosystem based on the Ethereum network, the cost of operating any of the thousands of dApps and protocols depends on the cost of transacting on the Ethereum network.

However, it turns out that the influx of dApps and users to DeFi has pushed Ethereum’s transaction fees through the roof. Data from Etherscan showed that, on Jun. 11, a total of 15,374 ETH was paid in transaction fees on the Ethereum network.

The same day, the average gas price on the network reached its three-year all-time-high, with an average gas price recorded on that day being around 709 gwei. This is a 1,816% increase from the day before, when the average gas price was around 37 gwei.

According to ETHGasStation, the standard gas price on the Ethereum network currently stands at around 37 gwei, which equals roughly $0.179 per transfer.

The cost of transfer should not be confused with the cost of doing complex operations on the network like interacting with chained smart contracts which attract very high fees. For example, yield farming involves complex interactions with the smart contracts and the fees are quite high compared to just the transfer cost.

A lot of the spikes can be attributed to the yield farming mania in DeFi space which promised incredibly high returns on staking. A lot of people rushed into yield farming after it spread on Twitter that people could make 200% interest per year while lending on DeFi apps like curve.

With the smart contract ETH fees cost of $10 just to start yield farming, the system excludes a lot of small players who would like to lend or start by lending small amounts like $100. Because they will have to wait for months or even an year just to recover the ETH gas fees which make the whole offer less exciting.

Readers much note that such smart contracts are a risky business. They involve a lot of smart contract and liquidation risks and the returns are short-lived.

Crypto Twitter has been ablaze with numerous complaints from DeFi users, with hundreds of people claiming they paid fees as high as $50.

This is a direct consequence of a huge spike in interest from new users. TheGraph, a decentralized protocol for building dApps on Ethereum, experienced significant service degradation on Jun. 24, a problem that impacted many DeFi applications which were using the protocol as its front-end. Throughout the morning, 500 errors were reported, with several other errors popping up throughout the day.

The company said that the crash was a result of a significant growth in query volume—the day of the crash saw over 45 million queries, a sharp rise from the usual 25 million. And it wasn’t just simple transactions that clogged the network—the Graph noted in its postmortem that they began receiving “especially complex” queries that contributed additional strain to their already thinly-stretched database.

“This is largely due to the recent growth in adoption of DeFi applications; including product launches, liquidity mining programs, and crypto price appreciation,” the company said.

While a huge influx of new users might seem like something any network would welcome with open arms, this presents a significant problem for Ethereum which has seen its fair share of controversy surrounding its scalability. The fact that the network can, in theory, breed hundreds of thousands of dApps and facilitate the development of decentralized finance proved to be hard to execute in reality.

Crypto Twitter and the rest of the internet are filled with numerous complaints coming both from Ethereum’s critics and its most avid users—none of the promises the network makes are worth anything if it can’t handle more users.

This could have a detrimental effect on the future of DeFi. As more people flock to Ethereum, the slower and more expensive to use the network will become. While it might take some time, this will ultimately turn people away from Ethereum and turn them towards a competitor blockchain.

This doesn’t mean that Ethereum has signed its death sentence, though. The network’s sheer presence and potential market reach will certainly push developers to deliver Ethereum 2.0. We could also see a second-layer solution such as the Lightning Network on Bitcoin created on Ethereum if ETH 2.0 fails to deliver in time.

Understanding Ethereum’s Gas and Transaction Fees

Despite being dubbed the “lifeline of the Ethereum network,” gas is an obscure term outside of the Ethereum community. While it is often used to describe transaction fees on the network, really understanding gas requires diving a bit deeper into the mechanics of Ethereum.

The post Understanding Ethereum’s Gas and Transaction Fees appeared first on Crypto Briefing.

DAI’s Market Cap Could Be Used to Predict ETH Price

Price predictions are the crypto industry’s favorite game—everyone from stock market veterans to small day traders constantly racing to give their take on why a price of a digital asset is set to rise or fall.

While Bitcoin’s price has often been tied with the performance of the stock and commodities markets, the rest of the crypto market has seen its price-performance tied closely to that of Bitcoin. With numerous factors affecting the price of thousands of coins, using the most common macros such as the number of active addresses and trading volumes has been the most common way to predict price movements.

Despite being the second-largest cryptocurrency by market cap, Ethereum is no different. Aside from the volumes on its DeFi apps, very few metrics have been found to correlate with its price movements.

However, according to the latest data from cryptocurrency research and analytics company Santiment, everyone has been overlooking a very simple but important metric that has historically indicated price movements on Ethereum.

In a May 14 tweet, the company shared its revealing insight—that the market capitalization of DAI can often foreshadow the price of ether (ETH). 

Santiment explained that this metric is often overlooked because few thought of using a stablecoin such as DAI, whose value is always pegged at or near $1, as a way to predict how the price of ether will move. 

While the company acknowledged that DAI’s price is useless in this case, its market capitalization certainly isn’t.

To understand how DAI’s market cap affects Ethereum, one must understand how DAI works. DAI is a stablecoin developed by Maker, a decentralized protocol built on top of Ethereum. Maker offers users a smart contract platform that backs and stabilizes DAI through a series of dynamic feedback systems called collateralized debt positions (CDPs). CDPs then enable users to deposit an asset into a smart contract as collateral for a loan, which is issued in DAI.

Therefore, users can deposit either USDC or ETH into a Maker smart contract, get the USD equivalent of DAI, and then use DAI as they would any other cryptocurrency. And since DAI is pegged to the U.S. dollar, users only owe back what they initially borrowed plus the accumulated interest.

The more DAI is issued, the more its market cap increases. And as most users either deposit ETH or use DAI on Ethereum network dApps, an increase in its market cap could be used to foreshadow an increase in Ethereum’s price.

Santiment’s data showed that in the past three months, the movement of DAI’s market cap moved almost exactly like Ethereum’s price. 

Graph comparing the price of Ethereum with DAI’s market capitalization from February 2020 to May 2020
(Source: Santiment)

“This can be a great under-the-radar metric to follow to foreshadow Ethereum’s next move upward and beyond its recent $226 barrier,” the company wrote on Twitter. 

With DAI’s market cap currently stable at around $110 million, Santiment believes that any increase to this number could happen at the same time as a major price movement of ether.