If you are interested in the crypto market, use blockchain technology in your business, or are interested in NFTs, you might have heard of the recent Ethereum crash. Ethereum is the second-largest and most popular blockchain globally, behind Bitcoin. In addition, Ethereum is the blockchain of choice for many FinTech and HiTech businesses and decentralized applications.
An Ethereum crash and soaring gas fees are distressing for the businesses and apps that rely on this blockchain and those who invested in the cryptocurrency Ether and other Ethereum-based projects. Let’s explore what led to the recent Ethereum crash and the long-term outlook for the blockchain platform.
Otherside NFT Sales and The Ethereum Crash
Otherside is a metaverse project created by the popular tech startup Yuga Labs, the company behind the exclusive Bored Ape Yacht Club collection of NFTs. Yuga Labs is valued at 4 billion dollars, and Bored Ape Yacht Club NFTs have sold for millions of dollars. So when the startup announced they would be selling “Otherdeeds” or land deeds for space in their new Otherside metaverse project, there was a lot of consumer interest.
Before we get into too many details regarding the Otherside NFT mint and the subsequent Ethereum crash, check out our additional NFT resources if you want to learn more about NFT development and NFT marketplaces. This post will not cover this information in great detail, so follow the links above to familiarize yourself with the terms and technical information. In addition, these posts will help contextualize the information in this piece.
As we said, consumer interest in Otherdeeds is sky-high. In the 24 hours following the release of roughly 55,000 “Otherdeeds,” Yuga Labs made over 300 million dollars in sales. Plus, “Otherdeeds” generated an additional sum on secondary markets like OpenSea. Current estimates put secondary market sales at roughly 250 million. Intense consumer demand put a strain on the Ethereum network that was too much to bear.
Ethereum currently uses a proof-of-work consensus mechanism to verify new blocks and transactions on the blockchain. This consensus mechanism is capable of verifying about 30 transactions per second. In addition, verifying transactions on Ethereum requires “gas,” and the fees associated are called gas fees. Gas fees are variable because miners verifying transactions choose the ones with the highest associated fee. In times of intense demand, gas fees rise, and they can get out of hand quickly.
What Happened with the Otherside Land Deeds?
With transaction speeds at only 30 per second, it is easy to see how high demand could clog the Ethereum network and drive gas fees up. Unfortunately, when Otherdeeds were released, this is precisely what happened. Lucky users were able to purchase their Otherdeed NFTs for about six thousand dollars apiece, with gas fees ranging from one to two hundred dollars. Many users, however, got stuck paying exorbitant gas fees. In some cases, the gas fees associated with purchases were greater than six thousand dollars.
Variable gas rates are one of the main criticisms of Ethereum. So-called “gas wars,” like the one sparked by the Otherdeeds release, can drive the costs of even the most basic transactions through the roof and make Ethereum transactions inaccessible to most people. Many technologists feel the future of blockchain technology is meant to expand accessibility, not restrict it. Unfortunately, high gas fees limit accessibility to Ethereum.
Beyond sky-high gas fees, there is another issue Ethereum has that directly led to the crash caused by Otherdeeds. The proof of work consensus mechanism requires a lot of energy, and it is not very efficient. Thirty transactions a second might sound like a lot, but in reality, this number is tiny when demand is high, as we saw during the Otherdeeds release.
Visualize a traffic jam on the highway. As congestion increases, traffic moves slower until it eventually reaches a standstill. This is what happened with the Otherdeeds release. Congestion caused so much strain on the Ethereum network that it caused a crash. In addition, many people paid outrageous gas fees for transactions that never went through. Luckily for those that experienced this frustrating event, Yuga Labs has said they will refund gas fees for transactions that failed to properly process.
Ethereum 2.0 A Brighter Future?
If you are interested in the crypto market, you might have heard of Ethereum 2.0. Many erroneously believe that Ethereum 2.0 is a new blockchain, but in reality, Ethereum 2.0 is a much-needed network update to Ethereum. The core update will be moving Ethereum from a proof of work consensus mechanism to a proof of stake consensus mechanism.
Instead of pitting miners against each other in a competition to solve complex problems to validate blocks, the proof of stake mechanism awards transaction validation to validators based on the amount of cryptocurrency they have staked in the network and the amount of time they have been staking. Proof of stake rewards quantity and longevity.
This consensus mechanism uses far less energy. Proof of work blockchains like Bitcoin and Ethereum use an excessive amount of power, and many people would like to see more sustainable options. In addition to being far more energy efficient, proof of stake consensus mechanisms can process more transactions per second. According to Ethereum’s own estimates, when the network upgrades from proof of work to proof of stake, transaction speeds will increase from 30 per second to 100,000 per second.
The performance numbers are far stronger for proof of stake networks. Ethereum is slowly upgrading to Ethereum 2.0. The project has been underway since 2020, and there is optimism that the network will be entirely upgraded by 2023. The Ethereum 2.0 upgrades should drastically reduce gas fees and eliminate the network congestion issues that led to the recent crash.
Regardless of the issues inherent in Ethereum, the market power of NFTs should not be underestimated. Yuga Labs and its Bored Ape Yacht Club NFT collection illustrate how lucrative these digital assets can be. It shouldn’t be lost on anyone that this startup generated over 500 million dollars in sales in less than 24 hours and crashed the second largest blockchain network with NFTs.
Some will criticize Yuga Labs and how they coded the smart contracts behind Otherdeeds. Still, there is debate amongst blockchain developers as to whether any code optimizations would have reduced gas fees or eased congestion issues. If you want to know more about NFTs, Ethereum, and all things crypto, speak with an experienced app development partner.