Ether (ETH) has lagged behind the broader crypto market this year, but Coinbase's latest research report suggests that it has the potential to surprise on the upside. The report highlights several key factors that could drive Ether's performance in the near future.

Despite underperforming compared to Bitcoin (BTC) — with Ether up 29% year-to-date against Bitcoin's 50% surge — Ether's long-term outlook remains strong. The CoinDesk 20 Index (CD20), which tracks the broader crypto market, has risen by 28% in the same period.

Coinbase notes that Ether is free from "major sources of supply-side overhangs," such as significant token unlocks or sell pressure from miners. Analyst David Han points out that staking and the growth of layer 2 solutions are effectively reducing ETH liquidity, acting as growing sinks for the cryptocurrency.

"Ether's position as the center of decentralized finance (DeFi) is unlikely to be displaced," Han wrote. This is largely due to the widespread adoption of the Ethereum Virtual Machine (EVM) and innovations in layer 2 technologies. The EVM is Ethereum's native processing system, enabling developers to create smart contracts and facilitating interactions with nodes. Layer 2 solutions, built on top of the base layer (layer 1), help to alleviate scaling and data bottlenecks.

Another potential catalyst for Ether's price is the approval of spot U.S. ether exchange-traded funds (ETFs). Coinbase believes the market may be underestimating the timing and likelihood of such an approval. The first deadline for a decision is May 23, 2024. Even if this initial deadline results in a rejection, Coinbase sees a high chance that litigation could eventually overturn the decision.

In the meantime, structural demand drivers for ETH, along with ongoing technological advancements within its ecosystem, are expected to support its growth across multiple narratives.

In summary, while Ether has not matched Bitcoin's gains this year, its foundational strengths and the absence of significant sell pressures position it well for potential upside surprises in the coming months.