Ethereum could lose out to rival blockchains that power crypto apps as its much-vaunted upgrade might come too late, JPMorgan says

Ethereum's market value stands at $405 billion, about half of bitcoin's $813 billion.

Dado Ruvic/Reuters

The final "sharding" stage in the upgrade to ethereum 2.0 is at least a year away, JPMorgan analysts said.
That gives solana and terra and other rivals a chance to take more DeFi market share, they said Wednesday.
The final phase of ethereum's transition to a proof-of-stake mechanism "might arrive too late," they said.
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Ethereum is at least a year away from getting its key blockchain upgrade out into the world, and that could give rival networks a chance to eat away at its lead in crypto apps, according to JPMorgan analysts.

The ethereum network dominates in usage for decentralized finance, or DeFi, which aims to cut traditional intermediaries like banks out of financial services.

The blockchain is undergoing a long-awaited change to how transactions are processed, and the upgrade has drawn investors to ethereum because they believe it could reduce congestion and costs.

Many crypto watchers believe ethereum's shift from "proof of work" to "proof of stake" in mid-2022 will encourage more investors to bet on the network and its native token ether, JPMorgan analysts said in a note Wednesday.

But another key stage in the etherum 2.0 upgrade, known as "sharding," isn't expected to take place until 2023. That timeframe provides an opening for other crypto app networks, they pointed out.

"In our mind, this optimistic view about ethereum's dominance is at risk," the analysts, led by Nikolaos Panigirtzoglou, said.

"This is because the scaling of the ethereum network, which is necessary for the ethereum network to maintain its dominance, might arrive too late."

Over the past year, ethereum lost ground in DeFi market share at a rapid clip, the bank's team noted, though the pace has slowed in recent months. It has gone from close to 100% share at the start of 2021 to about 70% currently.

"The relative valuation of ethereum vs. its competitors has been echoing its declining DeFi share," the note said.

A new crop of upstart blockchains — terra, Binance Smart Chain (BSC), avalanche, solana, fantom and tron, as well as ethereum layer 2 chain Polygon — are the ones making headway. More funding and the use of incentives to boost adoption drove growth, JPMorgan said.

"The risk for ethereum is that by the time Sharding is implemented in 2023, competitors' ecosystems would have grown by so much that activity won't return en masse to the ethereum network."

"In other words, ethereum is currently in an intense race to maintain its dominance in the application space with the outcome of that race far from given, in our opinion."

Ethereum launched in 2015, giving it a head-start over other De-Fi tokens — solana only arrived in April 2020, for instance. The networks can be used to build crypto applications for financial services and to execute smart contracts, which complete automatically once preset criteria are met.

Progress on the transition to the new version of blockchain — also known as ETH2.0 and Serenity — is just "50% of the way there," ethereum cofounder Vitalik Buterin acknowledged this week.

Phase 1 of the shift was completed in late 2020, and the second — the shift to proof of stake — is due this year. The third and final phase, which will distribute execution to tens of "shard" chains was initially expected in 2022, but is seen as delayed until next year.

JP Morgan pointed to the interlude between now and the blockchain update being fully completed as a concern.

"We are at least a year away from the full scaling of the ethereum network. The risk is that during that period, the ethereum network will lose further market share against competing networks," its team said.

Ethereum's market value stands at $405 billion, about half of bitcoin's $813 billion, according to data from CoinMarketCap. Ether was down 12% at $3,364 at last check Thursday, according to CoinGecko, amid a broader crypto market sell-off.

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