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Ether outshines Bitcoin in whipsaw year, rises to the top in crypto’s ‘cloud wars’

Ether outshines Bitcoin in whipsaw year, rises to the top in crypto's 'cloud wars'
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A year full of cryptocurrency ups and downs ends with two surprising winners – none of which were Bitcoin (BTC-USD), Dogecoin (DOGE-USD) and Shiba Inu (SHIB-INU), the three cryptocurrencies that captured the most cryptocurrencies. Headlines in 2021.

Ether (ETH-USD) was one of the biggest winners of the year, with Bitcoin more than quadrupling as an investment. Despite the big investor hype and new exchange-traded funds, the leading cryptocurrency jumped to a new record near $69,000 – only to fall in dramatic fashion this month, currently below $50,000.

As of Friday, Bitcoin has added more than 60% annually so far, and ETH is up 410%, according to Yahoo Finance/Coinbase data.

“Ultimately, I think there is a bit of a disappointment right now in the cryptocurrency,” DailyFX analyst Chris Vecchio told Yahoo Finance on Friday. “I would be very surprised if Dogecoin and Shiba Inu had a good year unless someone like Elon Musk pumped them up on Twitter.”

Meanwhile, many smaller cryptocurrencies are fueling a new generation of blockchain protocols, challenging Ether.

Cardano’s original cryptocurrency, ADA (ADA-USD) jumped 657%Solana (SOL1-USD) price jumped more than 9,258.2%, according to Yahoo Finance/Coinbase data. Meanwhile, Polygon (MATIC-USD) and Terra (LUNA-USD) both overtook SOL with staggering price gains of over 13,000% all.

Since the cryptocurrency Ethereum is fueled by Ethereum, each of these lesser-known cryptocurrencies offer something similar to their own protocols, most important of all paying transaction fees.

Similar to the way Tesla (TSLA) has market capitalization outperforming more established auto companies producing more cars, the outperformance of these new icons comes with an “expectation of growth,” Gil Luria, technology strategist at DA Davidson Companies, told Yahoo Finance.

Despite the current decline of cryptocurrencies, and the belief that crypto trading is becoming overcrowded, Luria and others remain bullish, with increased demand and competition for Layer 1 protocols compatible with smart contracts (such as Ethereum) driving growth in 2022.

“New Cloud Wars”

The Solana logo is displayed on a phone screen and a representation of cryptocurrency in this illustrative image taken in Krakow, Poland on August 21, 2021. (Illustration image by Jakub Porzycki/NurPhoto via Getty Images)

Driven by demand for two of this year’s hottest cryptocurrency frontier, decentralized finance (DeFi) and non-fungible tokens (NFTs), transaction fees on Ethereum have skyrocketed to — at times infamous — highs.

Exorbitant costs are a barrier for retail investors, as well as developers who aim to create enterprise-grade applications, such as a streaming platform or video game.

That’s why Luria analysts and others believe that smaller protocols “would benefit [market] Participation on the Ethereum account” by absorbing the unmet demand of investors and developers.

Similar to the fierce competition between the world’s tech giants such as Microsoft, Amazon and Google (MSFT, AMZN, and GOOG) over the past decade, the DA Davidson team considers this crypto competition the “new cloud wars”.

It’s the latest installment of the “scaling wars,” a topic that crypto developers and investors have been discussing for years. Bitcoin essentially functions as a decentralized ledger of money rather than a smart contract platform like Ethereum.

Mauricio Di Bartolomeo, co-founder and chief strategy officer of crypto lender Leiden, described the latter as a “deadlock” due to high fees and increased demand. “It’s like Bitcoin was in 2017 where transaction fees were exorbitant,” he told Yahoo Finance in an interview.

Currently, Bitcoin processes about 7 transactions per second (TPS) at a cost of $3.34 per transaction. Ethereum can make up to 15, but at an average cost of $20-40 per transaction. For context, Visa is capable of 24,000 TPS with fees ranging from 1.4 to 2.4%.

Anything over a dollar is way too much, and it’s a tough sell for anyone using an enterprise-wide blockchain implementation, Baxter Haynes, chief investment officer at Honeycomb Digital Investments, told Yahoo Finance.

Effective scale competition takes many different forms, designed to improve network speed, decentralization, and security. This three-part “trilogy” — a term coined by the creator of Ethereum, Vitalik Buterin — entails that all three cannot be achieved simultaneously.

To improve volume, Ethereum began implementing the ETH 2.0 upgrade in August. The fee optimization part of the upgrade – a transaction innovation called “hashing” – isn’t expected to end until 2023.

Kevin Woicki, co-founder of Gitcoin, a fundraising app for developers and a DAO (Decentralized Autonomous Organization), explained that Ethereum’s strategy is to become a “blockchain of the blockchain,” with much of the scaling simplified by Layer 2 applications and service providers like Polygon.

Woicki said investors worried about Ethereum losing market share should weigh whether the protocol’s current transaction fee issue could overshadow the effects of its massive network.

“Smart contract platforms are all about being able to create financial applications like legos. Every new LEGO added on Ethereum makes building on the network better. If I go into an Ethereum hackathon, I’ll be able to build something over the weekend that would have taken a bank 10 years ago 30 million dollars and a team of thousands of developers to build it,” Wiki told Yahoo Finance.

For 2022, a lot of high-value applications will be built on Ethereum. Things that are more forward-looking, ambitious and of less value will be built on other chains because Ethereum is getting too expensive.Jill Luria, Da Davidson

Solana is another emerging competitor, whose design allows for faster and cheaper transactions. Still in beta, its protocol currently processes 2,682 transactions per second (TPS), with average costs on the order of fractions of a penny. However, Solana’s White Paper states that “up to 710 thousand TPS is possible.”

A report by The Block Research revealed that another biggest advantage of Solana is fundraising. Amid the DeFi and NFT boom this year, projects based on Ethereum accounted for 26% of all funds raised; Solana ranked second, with 73 deals (9%) of the total deal flow.

Better fundraising is essential to building a richer network faster because it can attract more developers.

“Our primary customer is not the end user. They are developers, engineers, app developers — trying to build the next generation of apps,” Anatoly Yakinvinko, co-founder and CTO of Solana Labs, the company that built Solana, told Yahoo Finance.

However, there are concerns with authenticators, that is, the protocols that verify blockchain transactions. The top 19 companies control a 33% stake in the network according to Solana Beach, which means that together they can shut down the network or monitor transactions.

Because it is still in its infancy, Solana’s relatively low number of validators makes it easy to confuse the network with denial of service (DDOS) attacks. In September, one of these attacks shut down Solana for 17 hours, and caused the icon to stagger. The protocol explores the “auditor delegation strategy” to mitigate the problem.

“We’re still in the first half,” said Laurea Da Davidson. “For 2022, a lot of high-value applications will be built on Ethereum. The most forward-looking, ambitious, and less-valued stuff will be built on other blockchains because Ethereum is getting too expensive.”

In Messari’s 2022 Trend Report, CEO Ryan Selkis calls the new cryptocurrency “Ethereum Killers” who “all have the money to compete aggressively… Either way, these assets are tied to ETH.”

David Hollerith covers Yahoo Finance’s cryptocurrency. follow him Tweet embed.

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