The concentration risk on the Ethereum network is significant as most of its ether (ETH) currency is held by a small number of accounts, Morgan Stanley Wealth Management wrote in a note entitled “Cryptocurrency 201: What Is Ethereum?”
- The network is less decentralized than Bitcoin, with the top 100 addresses holding 39% of ether compared to just 14% for bitcoin, analysts led by Denny Galindo wrote in the report published last month.
- Ethereum currently enjoys a dominant market share in the decentralized finance (DeFi) and non-fungible tokens (NFT) sectors, but this could decrease over time as challengers emerge, the report said. Prominent Ethereum competitors include Binance Smart Chain (now BNB Chain), Solana and Cardano.
- DeFi and NFTs - which constitute most of the activity on Ethereum - are subject to rapidly evolving regulations, and any new rules that restrict areas, such as finance, could see reduced demand for transactions on the network, Morgan Stanley said.
- The other major Ethereum-specific risk is “blockchain bloat and scalability,” it added. As a global smart contract platform, Ethereum needs to store a huge amount of data, and the network needs to be faster and less expensive to use per transaction than its competitors, the report said.
- The Ethereum network is growing faster than Bitcoin and its memory requirements have exceeded Bitcoin’s in half the time. Unless changed, its storage demand will likely outstrip its resources, the report added.
- “High transaction fees create scalability problems and threaten user demand,” the analysts said, adding that high costs make the platform too expensive for small-value transactions.
- Volatility is also an important risk factor for ether as it has been more volatile than bitcoin, Morgan Stanley said, adding that since 2018 ether has been about 30% more volatile than bitcoin.
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