- Ethereum created the decentralized finance (DeFi) ecosystem of Decentralized Applications.
- ETH resolves its congestion issues through The Merge, The Surge, and layer 2 scalability sidechains.
- It will take years before ETH 2.0 upgrade is fully completed, leaving plenty of space for Avalanche and Solana to step in.
- ETH holds nearly 60% of the DeFi market and 90% of the NFT market.
Ethereum is a perfect showcase for the first mover advantage. Ethereum blockchain filled the utility gap that Bitcoin left when it was the first to put thousands of smart contracts and DApps on the web.
At its highest point in November 2021, nearly $135 billion worth of ETH was locked up in Decentralized Applications that replace traditional financial services.
At that time, Ethereum had 62% of the smart contract platforms that made decentralized finance possible.
Although that market share slightly decreased to 59%, as of August 2022, ETH 2.0 upgrade is already having a rallying effect on the crypto market. Will Ethereum emerge as the champion of the smart contract wars?
What Is Ethereum?
Launched in July 2015, Ethereum began as an ICO (Initial Coin Offering) blockchain project, similar to how private companies go public. Proposed and developed by:
- Vitalik Buterin
- Joseph Lubin
- Charles Hoskinson (who later left to launch Cardano)
Ethereum blockchain uses ETH tokens to monetize a peer-to-peer (P2P) network. When ETH launched via ICO, it was sold at $0.31 per ETH.
At a total of 50 million ETH sold, they raised over $16 million to start developing Ethereum. It’s native token is at the core of the network’s self-monetization and governance, used to pay transaction fees and to vote on upgrade proposals.
Even though ETH gas price can be high, the chart below shows that Ethereum’s first-mover advantage is still unmatched by other platforms.
By writing smart contracts with Blockchain and Solidity. The Ethereum network makes it easy for anyone to build permissionless, decentralized applications (DApps).
This means they can recreate any financial logic like:
- markets — but without any central authority, such as clerks and bankers.
Top 10 Ethereum Decentralized Applications are dominated by financial services — loaning and token swaps. Image credit: DeFiLlama.
Without exaggerating, Ethereum is a revolutionary new way to make money that has never been seen before in human history. After all, people’s financial affairs always depended on some mediators, for better or worse.
Since then, Ethereum blockchain has attracted thousands of developers who deployed thousands of DApps, covering:
- Gambling, and
- NFT trading
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Ethereum’s Congestion Problem
Like most blockchain networks in the first half of the 2010s, Ethereum secured its mainnet with a proof-of-work consensus protocol, just like Bitcoin. Likewise, this made ETH less scalable and more prone to congestions. After all, a proof-of-work consensus relies on miners to invest computational power.
In turn, computational power to validate transactions across network nodes requires electricity. As a result, whenever Ethereum’s traffic surged, its ETH gas price surged as well.
At a time when Robinhood was pioneering zero-commission trading, this meant that Ethereum, as the frontline of decentralized finance, was making decentralization randomly and prohibitively expensive.
This was the opposite of Ethereum’s original ICO goal, which was to give people without bank accounts access to money.
Ethereum’s roadmap includes two approaches to deal with the congestion problem:
- Investing in the development of layer 2 scalability solutions such as Polygon, Optimism, Arbitrum, and others. These are sidechains that use Ethereum’s decentralized security but offload some of the traffic by rolling multiple transactions into single, cost-effective batches. In a similar way, Bitcoin uses Lightning Network for the same purpose.
- Upgrading the Ethereum blockchain as layer 1 itself, by transforming it into a proof-of-stake (PoS) blockchain. PoS networks remove miners from the equation; in their place step validators to secure transactions in exchange for a small fee.
In other words, PoS validators have an economic stake in the network, instead of using mining machines to receive block rewards. Such a PoW-PoS transition would lower Ethereum’s energy expenditure by 99.95%.
What ETH 2.0 Is and What It Isn’t?
Dubbed the Merge, Ethereum’s old PoW chain will dock with Beacon Chain, as the new Ethereum 2.0 running PoS protocol. Presently, Beacon Chain has over 411k validators who have staked around 13.17 million ETH (or $22 billion). The Merge should complete sometime in the second half of September 2022.
Interestingly, because miners will be gone from Ethereum’s ecosystem, Ethereum Classic (ETC) is seeing a massive performance in the last couple of weeks. Reminder, ETC is the original PoW Ethereum, from which present Ethereum hard-forked in order to secure funds from the 2016 hack.
However, even if the Merge proceeds as planned, this is just the first step in scaling up the Ethereum Blockchain. Therefore, one should not expect to see lower gas price or drastically faster transaction speed beyond the current 15 tps. That will come in the following upgrade phases:
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In late 2023, the biggest scaling upgrade will come into play — sharding. This is an old concept in computer networking by which individual networks are broken down into smaller pieces.
These smaller shards are then capable of spreading out traffic load more evenly, making the network scalable for DApps.
Image credit: vitalik.ca
Likewise, there is the possibility this upgrade phase will include danksharding. In addition to breaking the network into shards, which increases transaction speed, danksharding increases data capacity.
Moreover, the Surge could include the implementation of rollups on Ethereum’s layer 1. As mentioned previously, either Optimistic or ZK rollups have been used in various layer 2 sidechains.
It seems that the current consensus is that ZK (zero-knowledge) rollups are superior because they offer instant transaction validation via validity proofs.
In contrast, Optimistic rollups require a waiting period on whether a transaction is rejected or accepted.
In any case, the sharding itself should significantly upscale Ethereum, bringing its tps above 1,000 to theoretical 100,000. Even if it goes above 1k tps, it would be a massive improvement over the current 15 tps.
Another scalability upgrade after the Surge, but focused on Verkle trees. They are an innovation on Merkle trees. Specifically, for Merkle proofs as they record all transactions within a block to create a digital ID. This way, Merkle proofs make it possible to verify blockchain data.
Verkle proofs improve on this concept by allowing for more data to be stored and verified within blocks. However, it bears keeping in mind that Verkle trees are still novel in the cryptography scene.
Because the Ethereum Blockchain is so patchworked, having hard-forked from Ethereum Classic and transitioning between proof-of-work and proof-of-stake, the network holds excess data. The Purge phase is aiming to purge that waste to make validators more efficient.
At this point of ETH 2.0, it is projected to operate as one of the fastest blockchains in the world, at 100,000 tps.
After all the scaling work is done, the Splurge phase is all about maintaining the network, resolving issues from previous stages, and adding updates as the Ethereum Foundation sees fit.
Overall, after the Merge is finalized, Vitalik Buterin noted that ETH 2.0 will be about 55% complete. This alone tells us that the Surge is a much more relevant upgrade, set to take place next year.
However, many alternative layer 1 blockchains are already in the game. Can Ethereum afford to release such long-term updates?
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Ethereum vs. Competition
In July 2022, Bank of America issued a report stating that after the Merge, Ethereum could attract even more developers and investors as the dominant DApp network host. However, it would be the Surge upgrade that would cement that position, at present 59.42%.
The next in line are Binance Smart Chain (BSC) as the pink slice at 9.31%, Tron as the orange slice at 7.55%, Avalanche as the purple slice at 3.94%, and Solana as the beige slice at 2.51%.
In the meantime, competition is not resting. Case in point, the Swiss Sygnum Bank recently added Cardano (ADA) for staking in its digital assets portfolio.
This would be in addition to the already existing offerings of ETH, Internet Computer (ICP), and Tezos (YTZ). However, when it comes to NFT marketplace competition, Ethereum’s two biggest competitors are Avalanche and Solana.
Although launched as a PoS network with lightning 65k (theoretical) tps speed and negligible fees at $0.00025, Solana has had four network shutdowns and three traffic stalls due to overloading.
It is also one of the most centralized networks, in which VC investors hold at least 30% of SOL tokens stake. With that said, Solana has exhibited steady NFT growth.
At the end of June 2022, daily minted NFTs on Solana topped 7 million, which is a 46.4% growth amid a harsh bear market. Likewise, Solana’s NFT secondary sales reached nearly $500 million in those three bearish months, according to Messari research.
No doubt, this can be attributed to Solana’s exceptionally low fees and sleek NFT marketplaces — Solanart and Magic Eden. Interestingly, as the leading (90% dominance) NFT marketplace on Solana, Magic Eden recently expanded to Ethereum to potentially counter OpenSea.
Lastly, Solana also has exclusive play-to-earn games, such as Battle of Guardians, a next-gen sci-fi game built in the cutting-edge Unreal Engine.
As for Avalanche (AVAX), this is another PoS network that resolves its scalability on layer 1, instead of relying on layer 2 sidechains. Avalanche transaction speed is on the level of Visa network, at a respectable 4,500 tps and with equally negligible fees at around 58 nAVAX.
Considering that 1 nAVAX is 0.000000001 AVAX, the average transaction fee on the Avalanche network is a fraction of a cent. This makes Avalanche capable of countering both Solana and Ethereum’s Polygon.
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Indeed, during Q1, secondary NFT sales on Avalanche surpassed both Polygon and Axie Infinity’s Ronin. However, they saw a downturn in May when the bear market started.
Nonetheless, considering that Avalanche launched in late 2020, it is one of the youngest “Ethereum killer” networks that have achieved impressive growth in such a short time. Having entered the top 10 all-time sales volume, Avalanche’s secondary NFT market is mainly conducted on marketplaces like:
Top 3 NFT Marketplaces on Ethereum
As we have already noted, just as the Ethereum blockchain holds dominance among PoS chains, so does OpenSea, which holds 90% dominance among NFT marketplaces on ETH. It charges 2.5% on every sale, while offering feeless minting if one connects to it via the Polygon network.
The next big one is SuperRare, a more exclusive NFT marketplace with heightened curation. Therefore, one should expect to go through a comprehensive vetting protocol before minting, mainly to prevent copymints. For this exclusive privilege, SuperRare charges 15% for primary NFT sales, only on Ethereum.
Rarible was once considered to become the dominant NFT marketplace thanks to its RARI token that is earned by trading and collecting NFTs. Just like OpenSea, Rarible charges 2.5% per transaction. Outside of Ethereum, Rarible also supports Tezos, Flow, Solana, and Polygon.
Top 3 NFT Projects on Ethereum
It is safe to say that, without Ethereum, there wouldn’t be much of an NFT marketplace, to begin with. Yuga Labs continues to dominate the NFT market. Specifically, with Bored Ape Yacht Club, at $2.3 billion total sales at an average floor price of Ξ82, and its derivative Mutant Ape Yacht Club at $1.7 billion total sales and at an average floor price of Ξ17.
In a bear market, such blue-chip NFT collections have proven to be most resistant to market headwinds. This includes one of the pioneers, CryptoPunks, sandwiched between BAYC and MAYC at $2.34 billion in total sales, at an average floor price of Ξ77.
Rising stars that are becoming solid blue-chip NFTs are Azuki, Moonbirds, CloneX, Doodles, and Art Blocks. However, given the current lack of activity in the NFT market, compared to the previous year, one should expect these rankings to reshuffle.
In the next NFT cycle, we are bound to see NFTs as integrated utility tokens for play-to-earn (P2E) games to take a more prominent role. After all, it was Axie Infinity that spurred NFT growth in the first place.
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