As the competition between blockchains for developers and users picks up, investors have to decide which cryptocurrency is a likely winner in the future. Ethereum (ETH -1.78%) has long had a big lead as a utility blockchain with smart contracts and non-fungible tokens (NFT), but it's struggled with scaling transactions and extremely high costs.
This week a major figure in Ethereum development said that an anticipated "merge" that would bring Ethereum from costly proof-of-work (PoW) transaction validation to proof-of-stake (PoS) validation would be delayed. Once again, the delay is only expected to be a month or two, but that's another opening for competitors to take market share.
What's the merge about?
Ethereum developers reported that a "shadow fork," or test of the transition to PoS, has been going well, moving another step closer to the merge. The PoS Beacon Chain has been running alongside the Ethereum mainnet, and this test processed mainnet transactions on nodes that had been merged with the Beacon Chain.
Various tests have been going on for months as developers test the Beacon Chain, but there are enough updates needed that the official merge is expected to be pushed off from its anticipated June 2022 rollout.
Tim Beiko, who manages Ethereum developers, recently confirmed the delay on Twitter.
The merge will not happen in June-- Tim Beiko | timbeiko.eth 🔥🧱 (@TimBeiko) April 11, 2022
There are a number of impacts from this, such as the likely continuation of high-cost transactions on the Ethereum blockchain. But in the long term, the problem is that other blockchains are catching up and may eventually pass Ethereum.
As Ethereum works through upgrades, blockchains like Solana (SOL -1.47%) continue to develop. Solana is a blockchain built for low-cost transactions and higher speeds. There are trade-offs for speed that include security and reliability, but hundreds of millions of dollars have flowed to the Solana ecosystem, and NFT market share is moving to Solana.
While it's clear that Ethereum has a lead, delaying the merge gives these blockchains time to mature and attract developers who build on top of the blockchain. In other words, they're catching up every day.
Network effects matter
The concern if you're an Ethereum cryptocurrency or NFT holder (like me) is that network effects eventually kick in for competing blockchains. Users want to go where the innovative developers are building, and builders need to have users. Solana, for example, seems to have a flywheel going as it's attracted millions of users over the last year. It's possible that over the next six months, Solana will continue to take share, and other blockchains will improve as well.
Ethereum has a first-mover advantage, but that doesn't guarantee success. The merge needs to happen soon, and if it doesn't, I'm concerned that the future of cryptocurrency innovation will happen on other blockchains.