Bitcoin and Ethereum are now on different paths
Ethereum’s upgrade to the Proof-of-Stake consensus mechanism is a pivotal development in the blockchain protocol sector, putting the two largest cryptocurrencies on a different path in terms of energy consumption, narratives from regulators and debate about centralisation.
This is part of our Crypto market update Q4. Download the report here.
After rolling delays of the Ethereum upgrade (the “Merge”), the price of ether doubled on the announcement of the Merge date in July. Since then, sentiment leading up to as well as following the Merge has been cautious to negative, with concerns about potential problems in the early days and weeks following the Merge. If problems are avoided or resolved, a relief rally into year end is likely, and Ethereum potentially “flipping” Bitcoin will be a hot topic again.
At the same time, Ethereum’s high transaction fees and scalability issues have created an opportunity over the past two years for other platforms to take some of Ethereum’s market share. Until Ethereum’s scalability significantly improves when the next phase of the upgrade goes live, (scheduled for the end of 2023), other chains have the chance to attract projects and build critical mass.
Nonetheless, despite the erosion of its market share from complete dominance (around 95 percent in 2020), Ethereum continues to dominate the smart contract platform space, with a leading market share across most application sectors — accounting for two thirds of the Total Value Locked (TVL) in decentralised finance and approximately 85 percent of the value of NFT transactions. Solana is Ethereum’s strongest challenger in NFTs, processing almost the same number of transactions year-to-date, although only 10 percent of the value. Recently its transaction count has been a multiple of Ethereum’s, with the value approaching 25% of Ethereum’s.
Meanwhile, Solana’s teething problems of recurring outages and bugs are reminiscent of bugs and hacks marring the early days of Ethereum. A strong developer team is committed to improving the Solana network and innovating fast, including the launch of a mobile platform with a software kit to develop mobile Web 3.0 applications and the development of a smartphone. Other leading blockchain protocols such as Avalanche and NEAR continue to build and innovate.
Applications Some application sectors have continued to grow their user bases, largely unaffected by the global macro developments or the crypto market specific events. Some have seen their business models challenged and need to innovate; others must rebuild trust.
Application sectors still only account for less than five percent of the aggregate crypto market capitalisation. As the still early stage blockchain technology continues to identify and build out real-world use cases, application sectors represent the greatest medium-to-long-term growth opportunities.
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