Key takeaways:
- Morgan Stanley has recently released a report on Ethereum, in which it underscored the importance of adopting a Proof-of-Stake consensus as soon as possible
- High transactions fees and low scalability are Ethereum’s main pain points
- Ethereum’s competitors, including Binance’s blockchain network, Cardano, and Solana offer similar functionality as Ethereum at much lower costs
Morgan Stanley has recently issued a report titled Cryptocurrency 201: What Is Ethereum?, in which the investment banking giant put the world’s second-largest cryptocurrency under the microscope and detailed why it could lose market share to Proof-of-Stake (PoS) competitors in the future.
High transaction fees threaten Ethereum’s market share
The Morgan Stanley researchers noted that high transaction costs represent a major challenge for the Ethereum network. Not only do high fees “create scalability problems,” but they also “threaten user demand,” the researchers wrote.
The high costs of transacting value on the Ethereum platform could have huge ramifications in terms of the number of non-fungible tokens (NFTs) and decentralized finance (DeFi) products and services deployed on its rails. If the transition from the currently used and highly energy-intensive Proof-of-Work (PoW) to PoS consensus mechanism doesn’t come soon, Ethereum could continue losing ground to Binance, Solana, and Cardano, which all offer smart contract functionality and are capable of processing transactions at a fraction of the cost.
The researchers acknowledged the weird position Ethereum finds itself in. On the store-of-value front, it can’t really challenge Bitcoin’s first mover advantage and widespread popularity, while on the smart contract front, cheaper and faster competitors are vying for its users. The Morgan Stanley analysts wrote:
“Ethereum faces more competition in the smart contract market than Bitcoin faces in the store-of-value market. Ethereum may lose smart contract platform market share to faster or cheaper alternatives.”
According to blockchain analytics firm DeFi Llama, Ethereum’s share of the total value locked (TVL) in various DeFi products and services dropped from roughly 97% in January 2021 to 59% by the time of this writing.
“The Merge,” an Ethereum 2.0 upgrade designed to usher the network into a PoS era, is slated for the second quarter of 2022. If the Ethereum developers fail to deliver on this promise, Ethereum’s market share will very likely continue to slip.
