According to founder Vitalik Buterin, the Ethereum (CRYPTO:ETH) network is on the verge of a dramatic technological revolution. One year from now, Ethereum will transition into a proof-of-stake (PoS) network where investors will be able to earn interest from validating blockchain transactions with their coins (known as staking), execute digital interparty agreements (smart contracts) at record speed, and use far less electricity when utilizing the network. The upcoming Ethereum 2.0 network upgrade is a massive overhaul from the current slow and inefficient network.
But the potential for reduction of fees to execute those smart contracts — or what is referred to as gas fees in the crypto community — is what makes Ethereum look like such a good buying opportunity right now. Let’s look at how this is a game changer and why, among other elements, it makes Ethereum an ideal investment to buy now.
High barrier to decentralized finance
Nowadays, Ethereum powers pretty much everything in the $196 billion decentralized finance (DeFi) space, including borrowing and lending, high-yield cryptocurrency savings accounts, peer-to-peer software, the trading of certificates of digital asset ownership (e.g. in the case of non-fungible tokens), and coin swaps. Most DeFi platforms that offer such services issue their own tokens, but they are based on the Ethereum blockchain, known as ERC-20, thanks to its ability to power smart contracts.
That brings up a pretty significant problem: high gas fees. Right now, the Ethereum network can only process about 15 transactions per second. These are just regular transactions, like sending money from point A to point B.
On the other hand, smart contracts take up much more data to store on the blockchain and require more consideration in the form of gas fees from users for processing. Furthermore, like in the service industry, investors can provide a “gas tip” for better/faster service (transaction processing), further driving up gas fees.
Take the example of NFTs. Right now, it can cost as much as $150 in gas fees to mint a new NFT for sale. There are more extreme examples. In July, when Mila Kunis auctioned 10,000 of her animated series Stoner Cats NFTs, investors rushed to purchase them. The Ethereum network got so overloaded it caused gas prices to soar to hundreds of dollars apiece. Keep in mind that investors themselves are also paying about $20 on an average day in gas fees to purchase each NFT. That steep $20 per day is because NFTs are a smart contract — they bind the buyer with the NFT and the seller with the payment, and its processing takes up space on the blockchain and requires consideration to execute.
In addition, taking out a crypto asset loan these days is quite expensive. For example, it costs close to $80 to deposit collateral on a DeFi lending platform and an additional $80 to withdraw. Again, these high base rates mean that investors need to deposit a large sum of money to earn a meaningful fixed income or take out a huge loan so it’s worth the costs.
Ethereum 2.0 to the rescue
Luckily, the launch of Ethereum 2.0 would definitively lower these gas fees to an near-zero levels, making it easier for people to access DeFi services. Indeed, Buterin plans to scale ERC-20 to the point where it can process more than 100,000 transactions per second. With all this friction to DeFi about to go away, I highly recommend investors increase their stake in the promising coin.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.