Why Ethereum Won’t Dethrone Bitcoin in 2018
Earlier this week I came across a tweet from John McAfee suggesting that Ethereum would surpass Bitcoin by market cap, as soon as the end of 2018.
This is not a particularly revolutionary prediction, as many have pointed to exactly the same prediction since the launch of Ethereum. There is even a term for this prediction, “Flippening”, used among crypto enthusiasts to refer to the dethronement of Bitcoin.
I adamantly disagree with the notion of a flippening. Rather than focus on the reasons why Bitcoin will sustain its position atop the crypto market cap hierarchy, I have chosen to explore exactly why Ethereum is not in a position to take the throne anytime soon.
Ethereum — The Backstory
Ethereum is a platform built to process smart contracts. Smart contracts are programs that execute precisely based on input code, which become the building blocks for creating decentralized applications that can remove traditional middlemen.
In summer 2014 when Ether launched its public sale (ICO), the development of a smart contract platform was a revolutionary breakthrough. A novel infrastructure for developers to build upon, Ethereum has since experienced significant network effects across every metric (# of transactions, # of launched applications, developer community, etc.).
Such success never comes pain-free and recently Ethereum is facing a number of headwinds including: Scaling concerns & solutions, Regulatory backlash, and a number of emerging high-profile competitors.
Scaling
The single biggest technological risk surrounding the Ethereum blockchain is solving the issue of scaling.
We have seen numerous events over the past year, including the launch of CryptoKitties and popular ICOs, which have brought the Ethereum blockchain to a virtual standstill.
The question that must be asked is…if the breeding of virtual cats can wreak such havoc on the Ethereum blockchain, how will it be able to handle the vision of a truly decentralized world computer?
Competition
The emergence of other smart contract platforms means developers now have a variety of different choices to deploy smart contracts to build their applications. Legitimate competitors of Ethereum include: NEO, Cardano & EOS.
There is no one size fits all solution for developers seeking to launch applications. In some cases, transaction speed is paramount and in other instances decentralization is of utmost importance. This leads me to believe that Ethereum will no longer be the de facto solution when building decentralized applications, as has been the case over the past several years.
If Ethereum can solve it’s scaling issue then I feel confident it will maintain the #1 spot (among smart contract platforms) due in large part to the already vibrant community of developers comfortable building on its platform. However, I believe the overall share of applications built on Ethereum will decrease as we see a more fragmented breakdown among all of the smart contract platforms.
Regulatory Backlash — Unregistered Securities Offerings
The regulatory landscape surrounding ICO & token sales is an absolute mess right now. Over the past three plus years, thousands of such public token sales have been marketed, most of which have violated one or more existing securities law frameworks.
This is a particularly precarious situation for Ethereum for two reasons:
- The Ethereum ICO was an unregistered sale of securities. Additionally the sale was marketed to non-accredited US investors who would not have been able to participate under existing SEC investment regulations. I am not an expert on securities law but I would imagine similar regulations were breached in other legal jurisdictions as well. Most within the crypto ecosystem (myself included), have chosen to selectively ignore Ethereum itself when discussing ICO regulation. The fact remains though that if regulatory bodies want to send a message, going after Ethereum would do just that.
- Of the thousands of apps launched on Ethereum with a corresponding token sale, a significant number claimed “utility token” status when in fact the token is absolutely a security. There is no doubt in my mind that many of these projects will absolutely need to face the music for their actions. This reconciliation process for accrued legal repercussions will likely result in developers shying away from launching apps on Ethereum until there is significantly more clarity.
Consensus Mechanism
The proposed solution to the aforementioned scaling crisis is the Casper Protocol. Implementation of Casper will result in a major change to the Ethereum consensus mechanism, shifting from the current Proof of Work (PoW) to a Proof of Stake (PoS) system.
While the Casper upgrade appears on paper to be a viable solution, the transition will clearly annoy miners who have invested significant amounts of capital and time acquiring the necessary hardware to mine Ether.
The roadmap for Casper suggests a gradual transition from PoW to PoS consensus which will soften the economic blow to miners. Despite such precautions, I foresee an exodus of miners deciding to jump ship and devote their mining resources to a different blockchain, the most logical beneficiary would be Ethereum Classic (ETC).
Conclusion
It is fair to say that Ethereum has had a virtual monopoly as a platform for developers to launch decentralized applications via smart contracts. Increased reliance on the blockchain has led to serious concerns about scaling, resulting in significant proposed changes to Ethereum’s core consensus mechanism. Meanwhile the competition of smart contract platforms continues to heat up, as emerging platforms offer differentiated advantages that will be attractive to many development teams.
The compounding effect of all of these factors leads me to believe that it is unrealistic to expect Ethereum to dethrone Bitcoin anytime in the near future.
Tom is a founder of Blockstake and has been an active investor in cryptoassets for several years. Connect with him via Earn or Linkedin.
