Ethereum’s First Mover Advantage Threatened by Limited Throughput and Increasing Competition

According to reports, Bank of America (BAC) stated in a research report last week that Ethereum was the first to introduce the idea of a blockchain operating system compatible with smart contracts and decentralized applications, but despite benefiting from this first mover advantage, the platform’s throughput is still limited. Analysts AlkeshShah and Andrew Moss wrote that the Shapella upgrade did not address scalability issues, “but as a pioneer in future upgrades, it took a small step forward. Ethereum may not be able to improve throughput in the short term, and the increasingly fierce competition from alternative blockchains will limit its adoption and use. The main concern surrounding the liquidity event in Shanghai is that validators can extract and sell pledged ETHs, which account for 16% of the total supply of ETHs. However, the extraction process aims to “prevent short-term significant outflows from validators and the resulting security risks

Bank of America: Ethereum Shapella upgrade did not address scalability issues

Introduction

Recently, Bank of America (BAC) released a research report that discussed the strengths and weaknesses of Ethereum, the second-largest cryptocurrency by market capitalization. The report highlighted Ethereum’s first mover advantage in introducing the idea of a blockchain operating system compatible with smart contracts and decentralized applications. However, despite this advantage, the platform’s throughput is still limited, and competition from alternative blockchains is increasing.

What is Ethereum?

Ethereum is a decentralized blockchain platform that is used for smart contracts and decentralized applications (DApps). Built on top of the Ethereum blockchain is Ether (ETH), the cryptocurrency that powers transactions on the network and is used to pay for computational services.

Ethereum’s First Mover Advantage

Ethereum was the first blockchain platform to introduce the idea of smart contracts, which are self-executing contracts that enforce the terms and conditions of an agreement. Smart contracts allow for complex financial transactions to occur automatically without the need for intermediaries. Additionally, Ethereum’s compatibility with DApps has made it increasingly popular in the decentralized finance (DeFi) space. However, despite these strengths, Ethereum’s throughput is still limited.

Limited Throughput and Scalability Issues

Ethereum’s current maximum capacity for processing transactions is around 15 transactions per second (tps). In comparison, traditional financial systems can process thousands of transactions per second. This limited throughput is a major issue for Ethereum, as it creates bottlenecks and slows down the network. The recent Shapella upgrade attempted to address scalability issues, but it only took a small step forward in this regard. As a result, Ethereum may struggle to improve throughput in the short term, which could limit its adoption and use.

Increasing Competition from Alternative Blockchains

As the popularity of blockchain technology has grown, so has the competition in the space. Ethereum’s dominance is threatened by the emergence of alternative blockchain platforms that offer faster transaction speeds and greater scalability. For example, platforms like Solana and Polygon are gaining traction due to their faster processing speed and lower transaction fees. If Ethereum cannot address its scalability issues and improve throughput, it may struggle to compete with these alternative blockchains.

Concerns Surrounding the Shanghai Liquidity Event

Another concern for Ethereum is the upcoming liquidity event in Shanghai. Validators can extract and sell pledged ETHs, which account for 16% of the total supply of ETHs. However, the extraction process aims to “prevent short-term significant outflows from validators and the resulting security risks.” While this process should help to stabilize the network, it remains to be seen how it will play out in practice.

Conclusion

Ethereum’s first mover advantage in introducing the concept of smart contracts and DApps has been instrumental in the growth of the blockchain industry. However, the platform’s limited throughput and scalability issues are significant challenges that it must overcome if it wishes to remain competitive. Additionally, increasing competition from alternative blockchains is a threat to Ethereum’s dominance in the space. The upcoming liquidity event in Shanghai also raises concerns about the stability of the network. As such, it is important for Ethereum to continue to innovate and address these challenges if it wishes to maintain its position in the market.

FAQs

Q1. What is a first mover advantage?

A: A first mover advantage refers to the benefits that an organization gains by being the first to enter a particular market or introduce a new product or service. In the case of Ethereum, it was the first blockchain platform to introduce the concept of smart contracts and DApps, which has helped to establish its dominance in the market.

Q2. What is the scalability issue with Ethereum?

A: Ethereum’s current maximum capacity for processing transactions is around 15 transactions per second (tps). This limited throughput is a major issue for Ethereum, as it creates bottlenecks and slows down the network. The recent Shapella upgrade attempted to address scalability issues, but it only took a small step forward in this regard.

Q3. What is the difference between Ethereum and other blockchain platforms?

A: Ethereum is a decentralized blockchain platform that is used for smart contracts and decentralized applications (DApps). It is built on top of the Ethereum blockchain, which is used to power transactions on the network with the cryptocurrency Ether (ETH). Alternative blockchain platforms differ in their approach to processing transactions and addressing scalability issues.