Ethereum Could Hold Lead as Dominant Smart-Contract Blockchain: Coinbase Analysts

Don't write off Ethereum just yet.

The second-largest blockchain network by market capitalization after Bitcoin has become the dominant venue for some of the hottest cryptocurrency innovations, from decentralized finance (DeFi) to non-fungible tokens (NFT).

The network's popularity – and the high fees of transacting on it – has inspired a bevy of competitors aiming to undercut Ethereum with lower costs, faster speeds and higher throughput. Speculation that up-and-coming "ETH killers" or layer 1 blockchain alternatives such as Solana, Binance Smart Chain and even Cardano might one day overtake the market leader has sent the rivals' token prices soaring.

But analysts at Coinbase Institutional, which provides cryptocurrency research to big investors, say Ethereum might succeed in staving off the upstarts.

Ethereum’s layer 2, or companion system, which works alongside the main blockchain to speed transactions at lower cost, may help to stave off competition from other layer 1, or base layer, protocols. Planned upgrades to Ethereum itself, such as a full transition to a proof-of-stake blockchain from the current proof-of-work system as well as the introduction of sharding may also help.

As the ecosystem’s scalability improves, users of decentralized applications, or dapps, may refrain from looking for faster and cheaper alternatives to Ethereum, Coinbase Institutional said in a recent reporthttps://assets.ctfassets.net/7ca8qfn907uv/6rAJu49TzJRGEPkJEH2dHW/aa40f48ddfa4af4d5edf3dbe68ffde96/MktReport_2022.01.12_ETH_2.0_Killer__4_.pdf.

Coinbase Institutional says it still expects "multiple chains to coexist in the crypto space in the near term," but Ethereum could keep its throne.

"We do think that the culmination of [layer 2] scaling solutions combined with upgrades like the Beacon Chain merge and sharding could limit progress for alternative [layer 1s] in their current form," according to the Coinbase Institutional report.

Proof-of-stake transition

The Ethereum Blockchain is about to transition to a proof-of-stake consensus model from the energy-intensive proof-of-work mechanism the Bitcoin blockchain uses. This will happen by merging with the Beacon Chain – effectively a beta version of the future proof-of-stake blockchain that's already up and running.

The changes should help reduce energy consumption and computational power on Ethereum. While this does not guarantee faster transactions and lower gas fees, the availability of layer 2 systems like zero knowledge (zk) rollups can attract developers and encourage capital to stay in the ecosystem.

The development is likely to narrow layer 1 alternatives’ opportunities in the second half of 2022, according to the Coinbase analysts.

Zk-Rollups bundle transactions together and execute them in an off-chain environment before sending the updated transaction data back to Ethereum. The scalability that can be achieved as rollups gain more widespread use could be key to the success of Ethereum 2.0, according to Coinbase Institutional.

"This would be crucial for allowing the network to potentially scale to billions of users in the long run, processing tens of thousands of transactions per second," according to the report.