The cryptocurrency market has seen a shift in recent years, with Ethereum (ETH) emerging as a strong contender to Bitcoin’s (BTC) dominance. While both networks have different goals, the likelihood of them gaining their respective market share in the industry is worth exploring.
Ethereum, unlike Bitcoin, aims to be the infrastructure of the global digital economy, and it’s rapidly achieving that goal. The network has become the base layer for the largest decentralized application (dApp) ecosystem and boasts the best economic system in the cryptocurrency space. It currently holds $24.6 billion in Decentralized Finance (DeFi) Total Value Locked (TVL) and $84.7 billion in stablecoins. In 2022, Ethereum contributed to over $1.2 trillion in decentralized exchange (DEX) spot trading volume and $52.6 billion in non-fungible token (NFT) trading volume.
On the other hand, Bitcoin’s goal is to be the global reserve currency. However, the network’s current model may undermine its chances of achieving that goal. The heavy subsidization of security with block rewards and lack of meaningful transaction revenue in relation to its security budget may be unsustainable in the long-term.
When it comes to miner revenue, Bitcoin appears to be performing better. Since 2016, miner annual revenue has been on the rise. However, a deeper analysis of the composition of revenue reveals an underlying problem: Bitcoin heavily subsidizes security through block rewards. 95% of Bitcoin miner rewards come from inflationary block rewards, while only 5% are real income from transaction fees.
Additionally, the energy-intensive Proof-of-Work (PoW) algorithm used by Bitcoin creates forced sellers, as miners need to offset their production costs. This results in almost no income from transaction fees and relies heavily on block rewards. This is problematic as Bitcoin does not support smart contracts, and therefore BTC is the only form of value that can exist on the network, leading to low transaction volume and limited use cases.
In contrast, Ethereum is traded in the digital economy as money, and its network allows for the transfer of ETH, stablecoins, and other tokens, as well as interactions with DeFi applications. This diversity of use cases leads to higher transaction volume and income from transaction fees. Additionally, Ethereum’s move to Proof-of-Stake (PoS) consensus in 2020 resulted in a significant reduction in emissions and increased value for stakers, even in bear markets.
Ethereum’s market cap currently lags behind Bitcoin by roughly $150 billion, but its outperformance in various metrics may drive its fundamentals in the long-term. This, combined with its growing dominance in the DeFi and NFT markets, could potentially lead to Ethereum overtaking Bitcoin by the end of the next cycle.
