Ethereum Is Losing Its Luster And Its Market Share

(Bloomberg) -- When Ethereum debuted in 2015, it was hailed as the more savvy successor to Bitcoin because it offered tools that allowed programmers to create apps that could perform transactions automatically rather than just serving as a means of exchange.

Now almost four years later, the network running the Ether cryptocurrency is losing market share. Long-promised projects touting better features are starting to be delivered on rival platforms and some startups are using coins such as EOS and Stellar to raise funds through initial coin offerings despite lingering regulatory concerns about the sales.

“The simple reality is that until the last six-to-nine months, there were no other options besides Ethereum," said Kyle Samani, co-founder of hedge fund Multicoin Capital Management in Austin, Texas. “Now there are.”

The migration to other networks may be weighing on demand for Ether, which has been range bound in recent months. Investors don’t always need it to buy into ICOs, which were traditionally issued over the network. Online video-game players don’t have to depend on Ether to purchase in-game merchandise -- such as weapons or even virtual cats -- that are now featured in many so-called distributed applications, or dapps.

“Owning Ethereum today is a call option on what you think the network is going to be in the future," said Travis Kling, founder of the Los Angeles-based crypto hedge fund Ikigai. “To the extent that Ethereum competitor projects get traction with developers, with users, with dapps built on top of the platform, that will be viewed by the market as being detrimental to the overall value of Ethereum, and that can have a negative price impact on Ether."

The market share for dapps has shifted already. Only 28 percent of dapps users were on the Ethereum network as of January, compared with 100 percent a year earlier, according to tracker DappRadar. EOS accounted for 48 percent of active dapps users, while Tron has grabbed 24 percent, DappRadar found. Of total dapps released in January, Ethereum was still ahead, with 40 percent of market share, according to DappRadar. EOS and Tron are already at about 30 percent each.

"The reason why they got so much adoption, those new protocols, is that they offer considerably better speed, transactions per second," said Patrick Barile, chief operating officer of DappRadar. “The volume of transactions they can do is considerably higher. That means if you have a dapp, then you have a much better user experience."

Ethereum’s average transaction confirmation time is around 13 seconds, though it has spiked much higher. Some other networks, meanwhile, brag of speeds of less than a second, allowing for new applications such as action gaming to feel like it’s happening in real time.

Ethereum co-founder Vitalik Buterin acknowledges the shift, though he says it’s not something to worry about.

“It’s definitely lost some lead to some extent, and I think that’s just because, first, it’s kind of inevitable and unavoidable because Ethereum really was the first general purpose, smart contract,” Buterin said during an Unchained podcast Tuesday. “That’s part of an inevitable part of the process.”

Ethereum’s slow speeds and high cost are also a reason why some startups are issuing their tokens elsewhere. Alpharetta, Georgia-based Ternio offered its coin, TERN, on Stellar last year, because it needed Stellar’s faster network, Ternio Chief Executive Daniel Gouldman said. The company is about to go live with its prepaid crypto debit card.

"If you are at a McDonald’s drive-through, and waiting 20 minutes because the Ethereum network is overloaded at the moment... With Stellar it’s fast and cheap," Gouldman said. "For what we were trying to accomplish, it was a much better product." Transactions running on Stellar costs less than Ethereum transactions, he said, making it much more attractive for users.

Ethereum may still face its biggest challenge. Binance, operator of the world’s biggest crypto exchange, plans to launchBinance Chain within several months. Binance has already lined up 10 projects whose coins currently run on Ethereum, but plan to migrate over, said Zhao Changpeng, Binance’s chief executive.

"This year we’ll work very hard to drive adoption," Zhoa said.

Don’t count Ethereum out just yet. The vast majority of token offerings still flock to Ethereum, where they believe they can raise the most funds. The project has a huge fan base and developer support.

More importantly, Ethereum developers are working to improve the network’s throughput and transaction speeds, with major improvements expected within months.

"Ethereum’s scaling plan is a multiyear process and exceptionally difficult to execute, so developers are trying out other options," Kling said.

To contact the reporter on this story: Olga Kharif in Portland at okharif@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Dave Liedtka, Brendan Walsh

©2019 Bloomberg L.P.