Ethereum, Bitcoin’s closest rival, faces its moment of truth

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Six floors of a downtown Denver event space hum with hundreds of coders and entrepreneurs who have come to discuss and celebrate the cryptocurrency Ethereum. The governors of Colorado and Wyoming drop by, strolling past rainbow wall decor and posing with the Bufficorn, a shaggy mascot that is a cross between a buffalo and a unicorn.

The occasion is the third annual gathering of ETHDenver, as the event is known, and it comes at a critical juncture for Ethereum. The cryptocurrency has long been the clear No. 2 to Bitcoin, and its current circulating value is a robust $30 billion—about one sixth of its bigger rival. Now, Ethereum is on the cusp of a major upgrade that boosters believe will overcome congestion problems that have long bedeviled its network.

The outcome of the upgrade, called ETH2, will be critical to the future of Ethereum, which launched in 2015, and whose blockchain now serves as a ledger of record for of applications even other cryptocurrencies. It will also determine whether Ethereum remains the go-to platform for so-called smart contracts.

The ability to create these contracts—digital agreements between parties that Ethereum’s platform will perform certain functions on their behalf—has opened up a new world in which individuals can turn services like investments and betting, over to machines. It’s a big advance from the relatively narrow constraints of Bitcoin, whose blockchain creates a transaction record but is incapable of smart contracts.

A prominent example of smart contracts—and a hot topic at ETHDenver—is the emerging field of decentralized finance, or DeFi, which promises to let people borrow and lend without a banking intermediary. Instead DeFi users rely on Ethereum’s blockchain to administer, record and pay out their transactions.

According to Richard Ma, a former commodities trader who now runs a firm called Quantstamp, approximately 50,000 people already participate in DeFi activity. He predicts this number will soon balloon as services become more user-friendly, and points to the more than $1 billion worth of Ethereum already locked up in smart contracts.

The mood in Denver was also buoyant thanks to Ethereum’s hyper-positive culture, which has allowed its community of developers to avoid some of the schisms and infighting that has often plagued the world of Bitcoin.

“Ethereum is about unicorns and rainbows. The tone of the culture is super-welcoming, I’ve never felt out of place,” says Carolyn Reckhow, the head of strategy of tBTC, a company that extends some of the Ethereum platform’s investment capabilities to holders of Bitcoin.

Yet for all the enthusiasm on display in Denver, Ethereum has long been beset by unfilled promises. Its current price of $280 is less than a quarter of the $1,400 it reached in early 2018 while Bitcoin, by contrast, has climbed back to half of its all-time high.

Meanwhile, the narrative around the two currencies has shifted. Crypto enthusiasts now regard Bitcoin as a “store of value” or “digital gold” while the value of Ethereum is more closely tied to the performance of its platform, which has become an operating system of sorts for the larger cryptocurrency industry.

But even as Ethereum has emerged as a backbone for the rest of the industry, it has failed to overcome a sluggish architecture that can only process 15 transactions per second. By comparison, networks like Visa can process thousands during the same amount of time.

Ethereum’s transaction bottlenecks mean it isn’t equipped to handle a huge influx of mainstream users that Ma and others predict will soon arrive. And while Ethereum leaders have touted a series of technical solutions, those solutions seem to be forever a few years away.

In the case of ETH2, the solution relies on a series of “shards” or mini-blockchains that interact with a new and improved version of Ethereum’s main ledger. If ETH2 arrives, it could allow the network to process up to tens of thousands of transactions a second.

“If they do figure out the scaling, Ethereum will be in an amazing place. If they don’t, a number of other blockchains are very scalable,” says Erik Voorhees, a well-known early Bitcoin entrepreneur, who cited lesser-known Ethereum alternatives Cosmos, Cardano, and Tezos.

Voorhees also cautioned that, if Ethereum doesn’t fix its congestion problems in the near future, the hundreds of enthusiastic developers packing the Denver venue would decamp for a rival project.

A key figure likely to influence Ethereum’s ultimate success or failure is Vitalik Buterin, who authored a paper describing the project in 2013 when he was just 19. A tall, gangly figure who likes to sport shirts and bags adorned with animated creatures, Buterin remains the intellectual and spiritual figure of the Ethereum community.

In Denver, he appeared on stage with children and Colorado Gov. Jared Polis—a longtime cryptocurrency proponent—to read a new picture book about the Bufficorn mascot. The following evening, during an interview, Buterin told the crowd he hopes the final stages of ETH2 will be achieved by 2021, but cautioned it could take as long as five years. He also praised the Ethereum community as the most healthy it’s ever been, noting that it may not be as large as during the height of the 2017 cryptocurrency bubble, but that those who remain are more dedicated than ever.

The assembled Ethereum crowd appeared unfazed by the prospect of more delays to its long-promised upgrade, and applauded Buterin enthusiastically at the conclusion of the interview. In response, Buterin smiled shyly and bunny-hopped off the three-foot stage before sliding past the rainbow and unicorn decor and out the door.

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