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While ethereum (ETH-USD) remains the dominant blockchain in decentralized finance (DeFi), adoption and usage of the operating system could regress if it cannot increase transaction speeds, according to a recent note from Bank of America.
“Us believes that the long-term viability of Ethereum depends on its ability to deliver on the vision set out in its roadmap, which includes implementing a sharded architecture to significantly expand its throughput capacity,” analyst Alkesh Shah wrote.
In the world of cryptocurrency, throughput is a metric that measures how many transactions a blockchain can process per second. Therefore, if the performance of ether (ETH-USD) does not increase, application developers are likely to turn to other blockchains to build, he stated. The so-called sharding refers to the division of the blockchain into smaller parts, or “shards”, to support a larger number of users.
Meanwhile, the solana (SOL-USD) blockchain can complete “far more transactions per second than Ethereum,” Bradley Duke, co-CEO of digital asset investment firm ETC Group, told Seeking Alpha via email. But the former “hasn’t gained a bigger share of the DeFi market because far more people trust Ethereum to run smoothly, stay secure, and keep their state data in sync than Solana.”
BofA’s Shah explained that the smart contract-enabled ether (ETH-USD) platform gave the blockchain a “first-mover advantage, as developers building apps gravitated towards it.” That, in turn, led to network effects, he added, as the number of decentralized applications and users expanded. Smart contracts are programs stored on a blockchain that automate certain actions required in an agreement (think if-then logic).
Overall, the ecosystem’s initial success “became a double-edged sword as the number of transactions became so large that network congestion ensued,” driving up average transaction fees.
Ether (ETH-USD), changing hands at $1.76K as of Friday afternoon, has soared 45.5% since the start of 2023 after enduring one of its worst years on record. From a year ago, the token was still falling 44%, hit by a series of high-profile industry bankruptcies, increased regulatory scrutiny, and economic uncertainty.
See why SA contributor Dhlerin Bechai thinks ETH is a buy.
