By: Adam Sharp
Editor, The HIVE Newsletter
Nasdaq: HIVE | TSX: HIVE
Ethereum Network adoption is soaring. ETH is the platform of choice for the vast majority of non-fungible tokens (NFTs), stablecoins, decentralized autonomous organizations (DAOs), and decentralized finance (DeFi) apps. Innovative uses of smart contracts are exploding, and Ethereum is the trusted “chain of record”.
We’re starting to see what’s possible with smart contracts. But all that usage has caused Ethereum network fees (gas) to soar. Today it costs around $5-8 to simply send ETH, but it costs much more to interact with a smart contract. For example, to purchase an NFT on OpenSea, the world’s largest NFT marketplace, fees can range from $50-300 or more during peaks.
HIVE is a huge stakeholder in the Ethereum Network. In November 2021 we produced 2,334 ETH for $10.4 million USD in ETH mining revenue. Today HIVE runs 4.3 Terahash of ETH mining capacity. Add in $13 million USD of Bitcoin mining revenue in November, and we set a monthly $280 million annual run rate (for more production #s see our Dec 3rd news release).
So high Ethereum gas fees are good for us, revenue-wise. But for ETH to go truly mainstream, it needs lower fees and higher throughput. It needs effective scaling solutions to meet current and future demand.
Fortunately there’s a very promising group of Ethereum scaling projects making good progress on this goal. These are often called “layer-2” scaling solutions, and the basic idea is to take ETH transactions off the primary blockchain and settle them in larger batches later on. Layer 2s have the potential to dramatically lower the cost to transact on Ethereum.
Some of the leading layer-2 scaling projects include:
Layer-2s Attract Major VC Funding
These layer-2s are significant projects, and they have some brilliant software talent working on these solutions. And they’re very well-funded. For example, Starkware, the maker of Starknet, just raised a $50 million financing round from top investors at a $2 billion valuation (which came only a few months after a $75 million round). And the lead VC was none other than Sequoia Capital, which invested early in Google and many others.
In early November, Andreessen Horowitz (a16z) led the $50 million Series B round of Matter Labs, the firm behind zkSync (a16z’s crypto division is arguably the top crypto investor in the world).
Each layer-2 has a different strategy and is at a different stage in its development. Polygon is live and has a lot of developers building on it. Starkware just launched StarkNet Alpha on mainnet. Decentralized exchange dYdX recently broke 45 transactions per second using Ethereum-based ZK-Rollup technology, according to TrustNodes (that’s ~10x Ethereum capacity).
There are dozens (hundreds?) more scaling solutions at various stages of development. They should improve rapidly over time, as advancements will be replicated due to the open source nature of crypto. Eventually there will likely be hundreds of different scaling options, all competing in a free and open market. Competition will be fierce, and innovation will happen fast. It’s beautiful to watch at these early stages.
Eventually ETH2.0 (proof of stake) may provide further avenues for scaling (if it happens). And sharding also has great potential to increase throughput eventually (sharding is essentially breaking up the blockchain into smaller chunks and dividing among miners).
Ethereum’s Tremendous Potential and Challenges Ahead
We’re just now beginning to see the possibilities of Web 3. Major innovations are being made in debt markets, lending, trading, stablecoins, and investing. We’re seeing it culturally too, in art, memberships, and music.
However, it is important to realize that there are still significant challenges ahead. It’s likely that with so many teams working on scaling, that will be figured out eventually. But government regulation could prove to be a trickier issue. Much of DeFi and Web 3 are operating in regulatorily-uncertain environments.
For example, many projects choose not to accept U.S. investors due to legal uncertainties. However, it seems likely that innovative projects will tend to move to more regulation-friendly jurisdictions. So politicians might be wise to not act too rashly. Crypto owners now make up a sizable portion of the world, and the potential for useful new technologies that could benefit the economy is high. We all want bad actors to be punished, but that doesn’t mean we should put a halt to innovative and disruptive projects.
Andreessen Horowitz and others are lobbying hard in D.C. for sensible regulation which would allow this new technology to flourish. HIVE is doing what it can to support these efforts, and will aim to do more going forward.
Web 3’s potential for disruption is high, and the majority of the innovation is happening on Ethereum. But to truly go mainstream, ETH needs to be affordable to everyone. With so many different scaling solutions being tested, it’s likely that a few will prove to be game-changers.
So we’re supportive of the numerous scaling solutions being built. These “layer 2” systems have the potential to dramatically increase throughput on the Ethereum Network. Assuming they work, we’re pretty sure there will still be plenty of demand for transacting on the primary ETH blockchain. After all, eventually you have to settle up on the chain of record.
Thanks for reading!
About HIVE: HIVE is a leading crypto mining company. Its shares are traded on the Nasdaq under ticker: HIVE. If you’re on Twitter, you can follow us there. Visit our main site, or check us out on Youtube.
Editor, The HIVE Newsletter