Throughout the history of cryptocurrencies, altcoins have had a lot of trouble competing with Bitcoin, which is basically the gold standard of the market. In terms of everything from network effects to brand recognition, there is still simply no real threat to Bitcoin’s position at this time.
That said, Ethereum briefly passed Bitcoin in one key area last week: total daily USD-denominated transaction fees. In fact, Ethereum miners collected more in fees than Bitcoin miners on this past Saturday and Sunday too, according to Coin Metrics.
Additionally, while it’s been a rough September for the Bitcoin price, Ether is in the green (just barely) this month, and the cryptocurrency recently enjoyed one of its best 24-hour Bitcoin-denominated price moves ever recorded.
In cryptocurrency networks, transaction throughput is limited in order to preserve decentralization. If the network is processing too many transactions per second, the users’ ability to run their own full nodes and check that no one is cheating will be harmed. Since the whole point of using a public blockchain is to gain properties like censorship resistance and trust minimization, avoiding centralization is key.
Due to the limitations placed on capacity, cryptocurrencies like Bitcoin and Ethereum see higher transaction fees when the networks become congested. This is exactly what has happend with Ethereum over the past month, as total daily USD-denominated transaction fees hit levels not seen in over a year.
So, what has caused the recent spike in Ethereum transaction fees? It appears the blame can be placed on a Ponzi scheme-esque game called FairWin, which also has a critical vulnerability in its associated contract on the Ethereum blockchain. According to ETH Gas Station, FairWin has recently accounted for roughly a third of the activity on the entire Ethereum network.
The spike in FairWin’s popularity, according to Etherscan, correlates almost perfectly with the increase in total fees seen on the Ethereum network this month, according to Coin Metrics.
What Does This Mean for Ethereum’s Future?
The total value of all the transaction fees paid on a cryptocurrency network every day is a key metric to watch because it illustrates the level of demand for that particular blockchain. If people are willing to pay relatively high fees to use a particular blockchain, they must be getting some sort of utility out of it.
Additionally, fees are intended to eventually replace the creation of new Bitcoin as the incentive for miners to secure the network. Things will likely work differently for Ethereum, as the Ether token is expected to be issued on a perpetual basis, which means a never-ending block subsidy. This is effectively a trade-off of dilution of the current Ether supply in exchange for a higher level of network security.
In terms of their possible effect on the Ether price, it’s unclear if fees are an important metric to watch. While total fees can be a useful indicator of the amount of real activity on a cryptocurrency network and provide a greater incentive for miners or stakers to secure the network, this data point doesn’t necessarily have much to do with the native token of the network.
This point is especially true when it comes to Ethereum, as that blockchain is often used to issue and transfer non-native tokens.
At the end of the day, it does not seem clear that a popular Ponzi scheme game or the movement of something like Tether USD means people should be buying and holding Ether over the long term. And as Castle Island Ventures Partner Nic Carter recently explained, a cryptocurrency increases in value when users decide to hold the asset for long periods of time rather than utilize it as a sort of appcoin.
It is perhaps the market’s realization of this point that was behind Ether’s 85% drop against Bitcoinsince the peak of the hype around the altcoin becoming the largest cryptocurrency (measured by market cap) back in June 2017.