February 27, 2024 at 13:42 GMTModified date: February 27, 2024 at 13:43 GMT
February 27, 2024 at 13:42 GMT

Ethereum outperforms Bitcoin as DeFi and upgrades fuel growth

ETH has made stronger gains in 2024 compared to its main rival Bitcoin.

Ethereum outperforms Bitcoin as DeFi and upgrades fuel growth

Ethereum ($ETH), the second-largest cryptocurrency by market capitalization, has outperformed Bitcoin ($BTC), the leading digital currency. Year-to-date, Ethereum has seen a 42% increase in value, surpassing Bitcoin’s 33% rise. 

According to a research report by Bernstein released on Monday, this growth in Ethereum’s value can be attributed to factors beyond the potential approval of a spot exchange-traded fund (ETF).

Potential catalysts include Ethereum’s greater utility in the decentralised finance (DeFi) world and its upcoming Decun upgrade. 

DeFi drives Ethereum growth 

The DeFi sector is highlighted as a significant contributor to Ethereum’s recent performance. Bernstein’s report points out that the percentage of Ethereum held on exchanges has dropped to an all-time low of 11%, indicating a trend of more ETH being locked in staking pools, DeFi smart contracts, and on Layer-2 solutions.

Analysts Gautam Chhugani and Mahika Sapra from Bernstein note the increase in ETH transaction fees due to heightened blockchain activity, primarily from DeFi applications, NFTs, and token launches. This uptick in activity encourages more ETH holders to stake their assets. 

The growth of financial smart contracts on Ethereum’s Layer 2 networks like Arbitrum, Optimism, and Polygon further reinforces this trend with more ETH locked up in smart contracts.

The report also mentions the Eigen layer protocol, which has seen an uptick in staking demand. This protocol allows ETH holders to restake their assets and benefit from new tokens and services, enhancing the staking appeal.

Since its launch, Ethereum has been praised for these added use cases compared to its rival Bitcoin. While Bitcoin is often seen as a store-of-value where investors speculate about its price, Ethereum has greater utility. 

Decun upgrade set to boost Ethereum further

Another crucial element contributing to Ethereum’s growth is the upcoming Decun upgrade, scheduled for March, according to Bernstein. 

This upgrade is expected to reduce Ethereum Layer 2 transaction costs by up to 90% and improve the profitability of these networks. This will alleviate congestion on the main Ethereum network and boost transaction volume in the ecosystem.

The Decun upgrade is notably introducing “proto-danksharding,” aimed at reducing transaction costs on Layer-2 networks by providing dedicated space for data storage. 

The upgrade is set to occur when the Ethereum blockchain reaches slot 8626176, which is forecasted for 13:55 UTC on 13 March.

Ether ETF speculation 

Following the introduction of spot Bitcoin ETFs, the cryptocurrency community has shifted its focus to the potential approval of a spot Ether ETF. There is growing speculation that the United States might approve spot Ether exchange-traded funds by May, with Bloomberg’s ETF analyst Eric Balchunas suggesting a 70% approval chance by 23 May, based on the filings by Ark and 21Shares.

Despite the optimistic forecasts, scepticism remains among some institutions. Investment bank TD Cowen and financial services giant JPMorgan have previously expressed reservations, pointing to the Securities and Exchange Commission’s (SEC) traditionally cautious stance on cryptocurrency products.