Ethereum, the world’s second-largest cryptocurrency, has crossed over 100 million tokens in circulation, according to CoinMarketCap, renewing concerns about the eroding value of the currency.
While Ethereum has opted not to set an upper limit on its total coin supply, the blockchain network’s community is worried about how an oversupply could depress prices and scare away speculators and miners. This could be disastrous for the network.
Ether’s total supply has grown around 10 percent per year. Bitcoin, the number one cryptocurrency based on market value, has a supply of 17 million coins, with a cap of 21 million.
Demand and supply in the crypto world works similarly to the physical world: For a price of a commodity to rise, there must be scarcity in supply. If a currency is constantly being printed, it cannot be scarce.
The same goes for ether, the currency of Ethereum: The more coins there are in circulation, the less scarce the currency is, which means it loses value. Ethers are the “fuel” for running decentralized applications on the Ethereum blockchain. They can be used to pay for transaction fees and computational services on the network. They can also be bought and sold for trading.
While capping a token’s supply may make it more valuable, this measure also has downsides. For example, it may end up as purely a speculative product when demand far outstrips supply.
Ethereum founder Vitalik Buterin has dabbled with the idea of setting a cap of around 144 million ethers recently, but nothing has been cast in stone so far.
Ethereum faces other problems
This supply issue compounds with other concerns the network faces, including scalability problems. The Ethereum community has been calling for the network to transition into a new form that consumes less energy and processes more transactions, among other benefits.
Bitcoin and Ethereum now process around six transactions per second. In comparison, large payment networks like Visa process thousands of transactions per second.
At a recent event, Buterin said that solutions like proof-of-stake, which is a new way of validating transactions on a blockchain, will allow Ethereum to process 1 million transactions per second and potentially more than 100 million transactions per second.
Proof-of-stake, sharding, and “validators”
In a conference held by Singapore blockchain company Kyber Network last week, Buterin shared an update on another solution for Ethereum’s scalability problem: “sharding.”
A shard is the small part of a whole, and sharding is the act of breaking something down into portions. In blockchain terms, sharding would split Ethereum into many partitions, and spread the responsibility of verifying transactions between them. As such, it’s no longer necessary for the entire network to verify every activity.
With sharding and its parallel processing of transactions, the network’s bandwidth and transaction speed increases.
The verification of the transactions would have to be done by validators who, among other responsibilities, approve transactions and receive rewards for every block added to the chain.
The updated network could move away from mining-related problems, such as mining pools becoming centralized by giants using specialized hardware.
“This is to encourage diversity and […] a decentralized structure,” Buterin explained.
Competition is heating up
Alternative blockchain protocols that aim to compete with Ethereum have emerged. EOS, which raised the largest initial coin offering seen to date at US$4 billion, is one such competitor.
For now though, it seems Ethereum is still the top provider for smart contract-related blockchain projects. It is said that 94 out of the top 100 blockchain projects have launched on Ethereum. The network has a strong developer base, with about 250,000 developers building on the platform so far. As such, it will be a challenge for other up-and-coming decentralized application protocols to compete with that.
As promising as EOS sounds, it will be some time before it can build on its base of developers. However, it has already begun creating its community by offering hackathons and giving handsome rewards to fix its issues.
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