Are Non-Fungible Tokens Breaking Ethereum?

We are in the middle of one of the periodic booms in cryptocurrency valuations. This year, Bitcoin hit an all-time high of $60,000 per coin, making the previous “boom” of 2017 pale in comparison.

Increases in the valuation of Bitcoin generally result in a corresponding rise in the values of other cryptocurrencies and a consequent increase in the interest in blockchain technologies. As the value of Bitcoin rises, so do the values of all other cryptocurrencies such as Ethereum (ETH). It’s easy to think of Ethereum as being the “silver” to Bitcoin’s “gold.” But in reality while the Bitcoin blockchain is used for virtually nothing but trading Bitcoin, the Ethereum blockchain is also a platform for executing program logic on the blockchain (smart contracts). These smart contracts power an increasingly diverse family of distributed applications. Moreover, while the core technologies underpinning Bitcoin are fairly static, the Ethereum network is poised to undergo several major technological shifts.

Proof of Work

The Ethereum and Bitcoin blockchains originally shared the same core algorithm for securing transactions?the Proof of Work protocol. This protocol is what makes public blockchains immune from hacking—one would have to apply computing power equivalent to the entire distributed network of blockchain nodes to falsify a transaction. Proof of Work is a truly unique innovation allowing a distributed system to guarantee the integrity of its data records. However, Proof of Work is computationally and environmentally very expensive and limits the transactional throughput that can be supported by the network.

The limits of Proof of Work on Ethereum were seen in 2017 during the “CryptoKitties” boom. CryptoKitties started as a game on Ethereum, which allowed players to breed “digital cats.”  Each cat’s unique identity was stored on the blockchain, and each cat had a unique genetic makeup. Some “Kitties” became immensely valuable and intensely traded, but the delays in processing Ethereum transactions during peak processing brought the Ethereum network to its knees.


Recently, we’ve seen a similar boom in another category of mostly Ethereum-mediated digital assets. Non-fungible tokens (NFTs) are Ethereum-based identifiers that are associated with real-world assets. Normal Ethereum tokens are “fungible”—my ETH coin can be exchanged for your ETH coin. However, an NFT is tied to a specific asset in the real world and cannot be converted into anything else. NFTs have been created that represent the ownership of artwork, in-game items, or collectibles.

Part of the NFT concept makes a lot of sense?a blockchain-based token can indeed be used to transfer ownership of an associated real-world item without the need for third-party mediation. However, a lot of NFTs have been created that appear to be associated with intangible or easily copied digital artifacts. For instance, Twitter co-founder Jack Dorsey’s first tweet was “sold” as an NFT for 1630 ETH ($2.9 million)!

Ethereum Enhancements

Whatever you think about NFTs, the increase in load on the Ethereum network has created another scalability crisis. Ethereum transaction fees are going through the roof, and delays on the network are increasing. If Ethereum is going to compete successfully against up-and-coming alternative chains such as Hedera Hashgraph, something has to be done to improve the throughput of the network. Luckily, we are on the verge of several big paradigm shifts in Ethereum with ETH 2.0, which may pave the way for greater throughput.

Firstly, the Ethereum “Beacon Chain” has introduced an alternative to Proof of Work for confirming transactions. Proof of Work is replaced with “Proof of Stake,” in which validators stake an amount of Ethereum as a guarantee of integrity. While with Proof of Work, you would have to assemble an unreasonable amount of computing power to falsify a transaction, with Proof of Stake, you would need to assemble an unreasonable amount of Ethereum currency. Secondly, “shard chains” will allow the Ethereum network to be partitioned into multiple blockchains that can operate in parallel, increasing throughput proportionally. Both enhancements are due in 2021.

Given the already intense activity on the Ethereum network and the rapidly rising capitalization of Ethereum cryptocurrency, it’s likely that these changes will result in a substantial uptick in Ethereum utilization. The increase in value of the Ethereum currency is already outpacing Bitcoin’s meteoric rise. It is not inconceivable that following the introduction of ETH 2.0, Ethereum will compete with Bitcoin as the dominant blockchain.


Leave a Reply

Your email address will not be published. Required fields are marked *