The Fast-Changing Blockchain Environment
Ethereum is still the largest Layer 1 blockchain, but its other ecosystems are catching up. How does this affect the future of crypto?
Over the past few years, crypto has seen a rise of alternative financial systems, known as DeFi (decentralized finance), which are smart contract protocols offering people new ways to store value and generate income.
Before 2020, the term decentralized finance circulated only in small crypto enthusiast circles. To be precise, it was invented in 2018 when a few Ethereum developers and entrepreneurs were brainstorming the names for this new financial system powered by Ethereum:
Soon, DeFi became an increasingly important topic in the crypto narrative. The amount of value in DeFi protocols went from $700 million at the start of 2020 to $240 billion at the end of 2021. The number represents all deposits locked in the form of cryptocurrencies for lending, farming, or staking.
So, how did it all start, and why does DeFi play an essential role in shaping the crypto environment?
The DeFi boom
DeFi started to take off in the summer of 2020, known as Defi Summer when lending and borrowing platform Compound introduced its COMP Governance Token.
Protocol rewards paid out in the COMP token allowed users to increase yields and make more complex yield farming strategies.
Unsurprisingly, other protocols mimicked these concepts. DeFi products, like Aave, Maker, and Yearn.finance, launched their own tokens. New yield generating possibilities attracted users into DeFi ecosystems, which led to increased token prices, and DeFi activity started to explode.
As user adoption continued, many new blockchain networks were introduced to the crypto community. While in 2020, Ethereum was the only significant player accommodating most DeFi products, 2021 was a massive year for competing blockchains.
Ethereum losing the ground
Today, Ethereum is still the second-largest cryptocurrency by market cap, which is $345 billion at the time of writing. The blockchain generated more than $11.6 trillion in transaction volume in 2021, surpassing Visa, the second-largest payment processing company.
Ethereum is still king, but the increase in gas fees has allowed several alternative chains to gain ground.
TerraLuna was one of the most important on those terms alongside Polygon, a scalability platform for the Ethereum ecosystem. Another major player, Solana, was at an infancy stage 2 years ago. Today it is one of the biggest Ethereum competitors by transactions per second (TPS) and user adoption.
TPS is a super important chain scalability and speed metric. Ethereum network takes 10-15 seconds to process a single transaction (mine is a block) and can only handle 15-45 TPS. Meanwhile, Solana can process up to 50,000 TPS, and only 400 milliseconds are needed to mine a block. Developers quickly noticed Solana offering such an advantage in computing power, and many teams started building high-performing Dapps and products powered by this new blockchain.
As a result, 2021 was a massive year for Solana. While it is a relatively new blockchain, Solana is far ahead of Ethereum by transaction count. As per data of Solscan, the daily transactions peak on the network was 57 million on December 24, 2021, while Ethereum recorded 1,7 million transactions on the busiest day of 2021 in May.
Another honorable mention is Fantom, #30 blockchain by market cap (15 times smaller market cap compared to Ethereum). Fantom recorded 1.2 million daily transactions at the end of January 2022, slightly surpassing 1.1 million transfers on Ethereum. The surge in transaction count is a result of the DeFi products offering high yields fueling the Fantom ecosystem.
Many other great Layer 1 networks are grabbing the market share and competing against Ethereum and also each other. Good examples are the Binance Smart Chain, Avalanche, Near, Harmony, Cosmos, Tron, Tezos, and Algorand. They have great technology and have grown in popularity in recent years.
Layer 2 networks, such as Arbitrum, Optimistic, and Polygon, shouldn't be left aside either. These projects that target the biggest problem of Ethereum, high gas fees and slow transactions, are also becoming increasingly important.
Polygon, which became the leading Layer 2 network last year, is now processing almost half of the amount of transactions on Ethereum.
Locked value shift
TVL is another great metric to evaluate the popularity of blockchain. TVL stands for total value locked and defines the value, usually in US dollars, of crypto assets deposited in a decentralized finance (DeFi) protocol. TVL of different projects on a particular ecosystem combined shows the total value locked in one or another blockchain.
As per data recorded by Delphi Digital, the top 10 chains by TVL showed the locked value rising throughout 2021. The growth in other ecosystems adds up to the thesis that emerging chains are becoming more and more relevant players in the crypto field.
For even better visualization, below is a chart from Defilama with the two-year blockchains TVL data.
The red color shows the portion of value locked in Ethereum's network. While in August of 2020, the most dominant smart contract platform had 95% TVL share, today it amounts to only 55%.
The future is multi-chain
Regardless of the growing popularity of other chains, Ethereum is still standing strong and will not go away soon. In fact, many of Ethereum's competitors are EVM (short for Ethereum Virtual Machine) compatible blockchains that allow developers to create dApps using Ethereum based infrastructure. This shows how Ethereum, the earliest smart contract blockchain, has a firmly established significance in the crypto space.
However, due to the abilities of various blockchains to handle transactions at a much higher rate and the ever-growing number of high yield generating DeFi products popping out in multiple ecosystems, it is becoming evident that there will be more than a few smart contract blockchains people will use.
With multiple networks gaining relevance, there's also a growing need for tools to help users navigate the fast-changing environment. Aggregated data from different ecosystems can help people spot the changing trends and reap the highest rewards everyone is looking for.
Our vision at Dexterlabs is to offer precisely that. We aim to provide users with the tools and help them understand the market by looking at our user-friendly dashboards filled with cross-chain metrics.