Top US crypto exchange Coinbase is evaluating the road ahead for leading smart contract platform Ethereum (ETH), which has had a bumpy start to the new year.
In a detailed report, Coinbase’s head of institutional research David Duong says that Ethereum is at a critical juncture both regarding its own attempts to roll out ETH 2.0 as well as facing pressure from other blockchain projects.
“As the scalability challenges for Ethereum continue to grow, we think traction for L1 [layer-1] alternatives will mainly depend on how quickly we see the emergence of ETH 2.0 and L2 [layer-2] solutions.
That is, we could likely see the continued growth of alternate L1 networks in [the first half of] 2022 as well as bridges to connect these chains. However, the window of opportunity for L1 alternatives may start to narrow considerably in [the second half of] 2022, as we expect ZK [zero-knowledge] proof technology to improve and rollups to gain more widespread use.”
In a zero-knowledge proof, one party is able to prove the veracity of a piece of information to a second party without revealing the information itself. Cryptographers employ the ZK method for increased levels of security and data privacy.
The report highlights how the steep cost of using the Ethereum protocol has negatively impacted its widespread growth but also mentions that a considerable amount of development is still performed using ETH.
“Gas fees on the Ethereum network have been one of the biggest impediments to the mass adoption of both ETH as well as smart contract platforms in general. This is one reason why layer-1 alternatives like Solana (SOL), Avalanche (AVAX) and Terra (LUNA) attracted significant attention in 2021.
Yet, the majority of active app development across L1 networks still seems to be happening on the Ethereum blockchain with total value locked of $156 billion across 214 projects.”
Ethereum rang in the new year valued at $3,730 but has witnessed a series of price drops, now down a total of 32.9% and trading for $2,501.
The Coinbase analysis concludes by saying that Ethereum’s transition to proof-of-stake will likely result in fewer ETH being issued to and subsequently sold by miners, but without any impact on the blockchain’s functionality. The report sees no definitive winner emerging this year.
“However, we do think that the culmination of L2 scaling solutions combined with upgrades like the Beacon Chain merge and sharding could limit progress for alternative L1s in their current form.
As ETH scalability improves, DApp [decentralized application] users may refrain from looking for faster and cheaper alternatives to Ethereum, for example.
Nevertheless, we think that there will still be room for multiple chains to coexist in the crypto space in the near term, facilitated by cross-chain interoperability and the possible need for alternative consensus mechanisms.”