Why 'Expensive' Ethereum Will Dominate Institutional DeFi

With over 100 layer-2 (L2) blockchains, you’re excused for thinking Ethereum is too expensive and too slow. But ask any institution preparing to settle a $500 million interest rate swap where they'll build, and the answer is Ethereum. The reason reveals everything about how institutional DeFi is likely to develop.

The metrics that matter for institutional adoption are entirely different to retail. While retail users flee Ethereum's transaction fees for cheaper chains, institutions will gladly pay that premium for security when moving hundreds of millions. The premium that people are willing to pay for a safe infrastructure is not an issue. Ethereum's “weaknesses” are actually its institutional moat.

A tale of two markets

Examining the numbers, the difference in perspective between retail and institutional investors makes sense. If you are buying a memecoin for $50, you don’t want to pay $10 in transaction fees. But when it comes to settling a $500 million interest rate swap, shelling out $10 to ensure a secure transaction is a small price for that peace of mind.

One needs to look no further than TradFi to see this perspective is not new, and the security premium to transact on Ethereum is actually the product. There’s a reason why institutions pay more to trade on the NYSE than the Pink Sheets (securities on OTC exchanges), and why they continue to transact through SWIFT, despite its costs. It’s all about legitimacy and a proven track record of conducting transactions in a secure and compliant manner. The same will apply to blockchains.

The idea of having hundreds of millions of dollars in funds stuck on an inoperable network is the definition of a nightmare for institutions. Many institutions value the battle-tested security of chains like Ethereum rather than ones that focus on speed. If you take one thing away from this op-ed, understand that traditional finance always pays for infrastructure reliability.

Preparing for regulations

What investors need most is a robust, market tested base-layer blockchain that is widely accepted among financial institutions as a neutral settlement layer. Ethereum gets serious institutional engagement because the network is properly integrated with existing infrastructure. It’s what it was built for.

One proof point is the number of major banks building on Ethereum, who get regulatory comfort with Ethereum's decentralization, as well as from the pool of developer talent that has been, and will continue to be, concentrated within the Ethereum ecosystem. This just might be a self-reinforcing cycle of institutional adoption.

A feature, not a failure

We need to stop seeing Ethereum's high fees as a failure – they're a feature that naturally segments the market. Some chains are intentionally optimized for low cost, fast, micro transactions. Institutions need, and will pay for, the digital equivalent of Fort Knox for large ones, where liquidity is available.

Instead of looking at metrics like daily active users or translation counts, institutions are taking a more fundamental approach. They are watching where regulated entities are building their infrastructure, and are focused on the big game of institutional settlement.

So the next time someone declares Ethereum dead, ask them where they would rather settle a $500 million transaction? The answer reveals why reports of Ethereum's demise are greatly exaggerated – and why institutions betting on “boring” Ethereum infrastructure will capture the real value in DeFi's institutional future.

Read more: Paul Brody - Ethereum Has Already Won