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Seeking Alpha 2023-03-26 18:57:00

Ethereum is at risk of losing its dominant status in DeFi — here's why

While ethereum ( ETH-USD ) remains the dominant blockchain in decentralized finance (DeFi), the adoption and usage of the operating system could retreat if it's unable to boost transaction speed, according to a recent note from Bank of America. “We view Ethereum’s long-term viability as dependent on its ability to fulfill the vision laid out in its road map, which includes implementing sharding architecture to expand its throughput capacity significantly,” analyst Alkesh Shah wrote. In the cryptocurrency world, throughput is a metric that measures how many transactions a blockchain can process per second. So, if ether's ( ETH-USD ) throughput isn't increased, then application developers will likely tap other blockchains to build on, he contended. So-called sharding refers to the splitting of the blockchain into smaller pieces, or "shards," to support a larger number of users. The solana ( SOL-USD ) blockchain, meantime, can complete "way more transactions per second than Ethereum," Bradley Duke, co-CEO at digital asset investment firm ETC Group, told Seeking Alpha via email. But the former "has not gained greater market share of DeFi because far more people trust Ethereum to run smoothly, stay secure and keep its state data in sync than they do for Solana.” BofA's Shah explained that the smart contract-enabled platform of ether ( ETH-USD ) gave the blockchain a "first-mover advantage as developers building applications gravitated to it." That, in turn, led to network effects, he added, as the number of decentralized applications and users both expanded. Smart contracts are programs stored on a blockchain that automate certain actions required in an agreement (think of if-then logic). All in, the ecosystem's early success "became a double-edged sword as the number of transactions became so large that network congestion occurred," driving up average transaction fees. Ether ( ETH-USD ), changing hands at $1.76K as of Friday afternoon, has shot up 45.5% since the start of 2023 after enduring one of its worst years on record. From a year ago, the token was still down 44%, battered by a series of high-profile bankruptcies in the industry, increased regulatory scrutiny and economic uncertainty. See why SA contributor Dhlerin Bechai thinks ETH is a Buy .

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