Ethereum has done a lot in its short existence. From its first day of trading in mid-2015 till now the cryptocurrency has seen its value rise more than 150-fold. With its innovative ability to allow decentralized applications to run over its network, ethereum has hosted billions of dollars in initial coin offerings, becoming the top cryptocoin for such token sales. It's even survived that hallmark of its more grown-up financial markets peers, the flash crash.
But after all that, ethereum now finds itself facing its most vexing challenge yet: digital beanie babies.
In November, a Canadian company called Axiom Zen introduced CryptoKitties, collectible cat avatars that exist solely on the blockchain, where users can mate them, sell them, or just gaze on them adoringly. Most sell for hundreds of U.S. dollars; one of them fetched $114,482.59. Arguably, they're cute.
Amazingly, demand has exploded in the past week to the point that the rest of the network has been thrown into gridlock. By Monday, more than 11 percent of ethereum's traffic was devoted to handling the exchange of digital cats. Cryptokitties has managed to prove, simultaneously, that the ethereum network both can and cannot sustain a digital marketplace.
Here's how it works. Each CryptoKitty has a unique identifier, its genetic code, that gives it physical traits like color and appearance as well as reproductive capabilities. The latter comes into play when valuing kitties; the quicker they can pump out new kitties (with new genetic stats), the more they're worth. The one that sold for a hundred-grand can breed (provided it has a willing mate) every minute; the slowest take a week.
It didn't take long for things to approach Malthusian extremes. Collectors have spent nearly $7 million so far on the tokens, which trade on the ethereum network, as the CryptoKitty population surged. The mania quickly overloaded the capabilities of the blockchain architecture, forcing Axiom Zen to increase transaction fees to cool things down. Here's a view of pending transactions on ethereum, a measure of how slowly it takes to get an ether trade done:
It's not just speculators who've been affected. SophieTX, a company that had scheduled an ethereum0-based ICO Tuesday, postponed the sale Tuesday and offered up this apology to investors:
I never thought I’d say this, but, due to a digital kittens gaming application clogging the Ethereum Network (yes really) the SophiaTX Token Generation Event will be postponed for 48 hours and rescheduled for Thursday, December 7th 2017...The team here at SophiaTX is working around the clock to ensure a successful TGE launch, however, merely hours before the start time, the entire Ethereum network slowed down and brought issues due to success of a gaming application running on their platform called CryptoKitties.
This isn't the sort of announcement you'd ever imagine making in ordinary securities markets: “Sorry guys, we're gonna have to delay our IPO because another company came out of nowhere and started using the NYSE's networking architecture to run a massive multiplayer game of Tamagotchi.”
But the import of this goes beyond a single ICO. Just as bitcoin wants to be a new model for money, ethereum wants to be a new model for business. Unlike bitcoin, ethereum's infrastructure allows for smart-contracting to occur in a decentralized, cryptographically secured network. Proponents have suggested that the blockchain could disrupt everything from global shipping to democratic elections. There's a reason why the majority of the ICO market – which has pulled in more money in the last 6 months than series A venture fundings – take place on ethereum.
But here we finally have an actual ethereum-based company running an actual ethereum-based business (with actually cool technology, once you dig into it), and, well – oh shit – the network is buckling. And all for kitties.
This isn't to say that ethereum can't live up to its decentralized dreams. But it's an indication that something in the model isn't right.
Crypto networks like ethereum and bitcoin have yet to prove that the privacy and decentralization they promise is worth the computing power required to run them. Why would anyone prefer a decentralized ledger if it's ten times slower and a tenth as efficient as keeping your own in-house database? These inherent engineering challenges have spurred the development of competing coins and bespoke blockchain networks. But having a separate private network for every application is exactly what ethereum was designed to avoid.
It's unclear who will lose out. The winner, in any case, will be whoever cashes out of the CryptoKitty boom at the top.