Why Institutions Still Prefer Ethereum Despite Faster Blockchains

While technological advancements in blockchain technology constantly push the boundaries of transaction speeds, measured in Transactions Per Second (TPS), a crucial question arises: why do traditional financial (TradFi) institutions still gravitate towards Ethereum, a blockchain often perceived as slower compared to its newer counterparts?

According to Kevin Lepsoe of ETHGas, the answer lies primarily in liquidity. Despite the allure of faster blockchains, the established liquidity pools and mature financial infrastructure built around Ethereum make it the preferred choice for institutions entering the digital asset space.

Expert View

The focus on liquidity over raw speed highlights a key difference between the priorities of engineers and financial institutions. While developers are naturally drawn to optimizing technical performance metrics like TPS, TradFi firms prioritize factors that directly impact their bottom line and operational efficiency. Liquidity provides the ability to enter and exit positions quickly and efficiently, minimizing slippage and execution costs. This is far more critical for large institutional investors than a marginal increase in transaction throughput.

Furthermore, the established ecosystem surrounding Ethereum offers a wider range of financial tools and services. This includes decentralized exchanges (DEXs), lending platforms, and stablecoin infrastructure, all of which are vital for institutional participants seeking to deploy capital and manage risk within the crypto market. The network effect is strong with Ethereum; its first-mover advantage has led to a deeper pool of developers, resources, and established best practices.

What To Watch

The situation is not static. The rise of Layer-2 scaling solutions on Ethereum, designed to improve transaction speeds and reduce fees, could further solidify Ethereum's dominance among institutional investors. Technologies like optimistic rollups and zk-rollups are actively addressing Ethereum's scalability challenges, making it more competitive on a performance basis while maintaining its robust security and decentralized nature.

It's also crucial to monitor the development and adoption of alternative Layer-1 blockchains. While Ethereum currently holds a significant lead in terms of institutional adoption, other platforms are actively building out their ecosystems and attracting developers. A significant breakthrough in scalability, combined with growing institutional interest, could shift the landscape over time.

Finally, regulatory clarity will play a major role. As regulations surrounding digital assets become clearer, institutional adoption across the board is likely to increase. The regulatory framework's impact on different blockchains, particularly Ethereum, could also impact institutional preferences.

Source: Cointelegraph