Institutions are Betting Big on Bitcoin, But Ethereum and Coinbase May Hold the Keys to the Future

Bitcoin has been leading this bull market in a big way, up over 200% since last October. While up over 100% in the same period, Ethereum has not received the same level of attention or excitement and is outshined by meme coins and other speculative assets. Let’s explore Ethereum’s trajectory during this bull market, how its March 13th upgrade could help, and the missing pieces to mass Ethereum adoption.

With the Bitcoin ETF approved in early January, all eyes have been on the original cryptocurrency as it soars to new heights, reaching an all-time high of $69,000+ on March 5 before correcting slightly. Institutions and retail investors alike have been flooding into digital gold and hoping to capture some of its fixed supply before the era of “hyperbitcoinization” when everything is based on a Bitcoin standard and becomes the global asset of value. 

While this vision is certainly captivating, it is still far from happening, and many in the blockchain space argue that the innovation that Ethereum, smart contracts, and DeFi allow outweighs the short-term benefits or value in holding Bitcoin. While this is by no means an argument for or against Bitcoin versus Ethereum, and a good portfolio will include both, there is the question of why Ethereum has not received the same level of interest as the global settlement layer and when, or if, this will happen.

To start, the lack of an Ethereum ETF cannot be overstated. Since Bitcoin’s ETFs have released, they’ve been the fastest-growing ETFs in history, surpassing billions of dollars in inflows within a few weeks of launch. Blackrock, the largest asset manager in the world, is touting Bitcoin to their clients as a must-buy asset to hedge against inflation and excess government spending, and funds are buying into this vision. Ethereum ETFs are scheduled to be approved sometime in May, and like Bitcoin there has been a small ETH price runup in anticipation of its institutionalization.

Ethereum differs from Bitcoin in that it is meant as a store of value and a utility token to pay fees to interact with a global computing network. All of decentralized finance and its associated tokens and NFTs are powered by Ethereum, and every transaction uses ETH to pay fees, a portion of which is burned from the overall supply to create a deflationary asset. 

Ethereum demonstrates its weakness to the world in every bull market: high congestion and activity leads to ridiculously high transaction fees. Interacting with the Ethereum mainnet right now would cost hundreds of dollars, if not more, to do a simple transaction. This is completely unusable for the average person and is why protocols like Solana and Avalanche have gained traction. In this market, however, Ethereum has a major advantage: the rise of layer 2 rollups - protocols that derive security from Ethereum but are exponentially cheaper by moving transaction execution to a more efficient environment.

On March 13th, Ethereum is set to roll out its latest upgrade - Dencun - that will lower transaction fees on L2s by 10-100x. Swaps on Optimism or Arbitrum will go from around 50 cents to less than a penny, finally making Ethereum competitive with alternative layer 1s while providing stronger decentralization and security guarantees. This cycle, it’s likely that most onchain activity will take place on L2s for the first time, representing a significant milestone for the rollup-centric roadmap that Ethereum as adopted. 

Another key driver of Ethereum adoption this cycle will be Base, Coinbase’s L2 built in collaboration with Optimism. Base has seen lots if interest from retail users and developers alike, thanks to the brand recognition of Coinbase and the hope of support from one of the largest and most established cryptocurrency exchanges. After Dencun, Base may begin a massive adoption campaign to bring tens of millions of account holders onchain. With transaction fees less than a penny, Coinbase can easily subsidize user transaction fees, and their expertise in user experience will make the onchain experience feel no different than the centralized exchange. If this plan happens and succeeds, it will create a flywheel effect, bringing more developers and applications, thus more user interest, to Base, and it may quickly become the hub of Ethereum activity.

The primary area that Ethereum struggles with, yet is improving, is user experience. Creating a wallet and storing private keys is a frustrating and confusing process that leaves many users with lost funds and no way to recover them. Similarly, hacks and scams are commonplace, and many users cannot tell the difference between a legitimate website and a phishing scam waiting to steal all their funds. Fortunately, this process has been greatly improved, largely due to adopting account abstraction standards like ERC-4337. This allows for wallets to effectively act as smart contracts, and include features like sign-in with Google, two-factor authentication, social recovery, and allowing others to subsidize transaction fees. Coincidentally, these features will all be part of Coinbase’s recently-announced “smart wallet,” which will likely play a key role in bringing their users onchain.

Though Ethereum has yet to see as much investor interest as Bitcoin, its day may be coming soon. Its promotion and adoption by Coinbase, largely seen as the crypto industry leader, and its massive transaction speed and cost improvements make the Base L2 a compelling choice to onboard tens, if not hundreds, of millions of users. Though there is still a lot of work to do in making a seamless user experience, development in the bear market may have done enough to give the average person an introduction to the world of decentralized finance and all the benefits that come with it.

By Lincoln Murr

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