At this moment, the throne (undeniably) belongs to Ethereum, but is there a true "Ethereum Killer" in the making? In this week's Hawk Letter we'll take a deeper dive on the state of the smart contract platforms in the blockchain world, and which makes the best investment case.
What are Smart Contract Platforms?
Very quickly, smart contracts are computer programs that operating on a predefined set of conditions. Think of a vending machine... you deposit money into the machine, which acts as intermediary to validate your payment, which then dispenses your soda can. The machine, after taking its cut, sends the payment back to the vendor. Applying that example to the blockchain, think of vending machine as the smart contract platform and the fee it receives goes to miners who are securing the network. Now instead of limiting ourselves to consumer goods (as the in the case with vending machines), this can be applied to anything in the digital world – also known as web 3.0.
The revolution in NFTs and DeFi is all about these decentralized applications (dApps) built on an additional layer of a smart contract platform. Hence why smart contract platforms are called Layer 1 networks, and anything built above it is considered Layer 2. Makes sense, right? The security of the network is all programmed in Layer 1 through mechanisms such as Proof-of-Work (PoW), Proof-of-Stake (PoS), and Proof-of-Authority (PoW).
Without getting into the specifics, I am sure you're at least aware that dApps are creating very intriguing and exciting developments and innovation, especially in the world of finance. Any serious investor needs to be educated on blockchain technology at this point.
What about Bitcoin?
It's important to start off with Bitcoin, because it is the pioneer of blockchain technology and considered to be the "gold standard". As you may know, it was originally envisioned by Satoshi Nakamoto as a legitimate alternative to fiat currency – not necessarily smart contracts.
That narrative, for Bitcoin, has shifted in the mainstream to being a store of value or "digital gold" mainly due to issues surrounding scalability and volatility. However, I do believe that we are in the early stages of that currency narrative being revived as Bitcoin's scalability is being resolved with the development of "layer 2" payment protocols, such as the Lightning Network. These are technically complicated subjects, which I won't dive into, but wanted to make you aware of so that you (at least) consider Bitcoin in this smart contract race, because there is (though very conservatively) development happening with that regard.
Rootstock (RSK) is a sidechain to Bitcoin network, which is compatible with the Ethereum Virtual Machine (EVM), and enables smart contracts. Basically any application on Ethereum can be built on RSK, which secured by Bitcoin. This function will be further enhanced with Bitcoin's Taproot upgrade – it's biggest in 4 years. Again, I won't go in to the technical details of Taproot, but it will enable the inherent support of smart contracts on the Bitcoin blockchain – which is a pretty big deal, imo. This update is scheduled to go live in November 2021.
As someone who doesn't identify as a Bitcoin (or any crypto) "maximalist", I personally think this is being overlooked by the market. We saw what happened to the price of Cardano (ADA) leading into smart contract integration. Yes, Ethereum is the pioneer of smart contracts and there are a ton of new projects looking to take that throne; but, Bitcoin isn't mentioned as a contender anywhere. I can understand why, but I wouldn't be so quick to dismiss Bitcoin.
What's wrong with Ethereum?
The main issue with Ethereum today, like Bitcoin, is scalability. Vitalik Buterin, Ethereum co-founder, best-described this as the trilemma where scalability is always compromised for increased security and decentralization (and vice versa). It's better visualized below.
The lack of scalability has led to congestion on the Ethereum network as it grows in popularity. This congestion has led to longer transaction times and higher fees. The London Hard fork (EIP-1559) helped make fees less volatile and the native token (ETH) more deflationary, but didn't solve the inherent problem.
That's perfect balance of security, decentralization, and scalability is the challenging to achieve on one blockchain. However, in the interim, we have Layer 2 scaling solutions. Which, as you now know, are additional protocols designed to increase the speed and efficiency of Layer 1 blockchains – like Ethereum. But, for now, consider them "hack-jobs".
Ethereum killers are generally open-source blockchain protocols that capitalize on improving one or more of Ethereum's main shortcomings
There are a ton of Layer 1 platforms emerging, and I can't cover them all... and, truthfully, nor do I know about all of them. If I'm missing something, I'm more than happy to have a discussion and learn. But, for now, I will consider the consider the top contenders based on the fundamental criteria and analysis below. For the purposes of this comparison, I will consider Ethereum 2.0 an "Ethereum killer" as well.
Decentralization is an important element because we want to ensure that there is no major player that can attack or compromise the blockchain. Unlike PoW (i.e. concerned with 51% attack), a 33% control of the validators in PoS consensus is enough to halt the blockchain. We can assess and quantify the decentralization of smart contract platforms with a few metrics. The first one is the number of validators.
A blockchain validator is someone who is responsible for verifying transactions on a blockchain. Once transactions are verified, they are added to the distributed ledger.
From the chart below, we can see that Ethereum 2.0 has the largest number of validators by far. But, before we conclude that Ethereum 2.0 would be most decentralized we'd have to dig deeper in this data, and ask a few more questions.
The total number of validators can be quite misleading. So, we want to ask, "what is the number of unique validators?" Based on research by The Block, about 30,000 of the Ethereum validators are unique. So, Ethereum still has a significant lead against any competitor.
But, another relevant data point, in terms of decentralization, to consider are the the minimum stakes. In other words, how easy is it for the average person to be come a validator? After analyzing the minimum hardware specs, I came to conclude that Avalanche and Cardano are the most democratized; whereas Solana, Polkadot and BSC are the least democratized with high minimum node specs and/or validator caps. On top of minimum hardware requirements, there is also minimum stake amount to be a validator. This is where Ethereum's minimum 32 ETH staking puts it at a disadvantage among the top competitor, because most people don't have ~$70k to invest in ETH. This naturally reduces the number of validators and staking pools.
Initial token distribution gives us further insight on the blockchains, where we can see that Ethereum and Cardano are the most decentralized.
Decentralized governance is typically looked at separately, but I found token distribution is a good indicator of what governance looks like for any specific blockchain.
To compare scalability I won't deep dive in to the technical operations of how each blockchain operates, rather we'll assess the most important metric of transactions per second (TPS).
Just for comparative purposes, Visa currently transacts about 2,000 TPS and has a max capacity around 65,000. Once we understand that, we can see why Ethereum's current 20 TPS is a problem, and why we need to achieve more scale.
A lot of projects like to boast about their potential TPS based on testnet results or even theory. So, we have to take that with a grain of salt and determine how much weight we put on those projections.
Cardano currently processes about 7 TPS, but has the potential to do millions based on theory – it isn't operational or live yet. So, we are buying into the story (or the technology). As smart contracts roll out on this platform, we'll have a better understanding of the scalability in practice. But, Cardano seems to have the highest potential TPS – which are way beyond the needs of today.
Based on the potential needs, I do believe Ethereum 2.0 suffices with 100,000 TPS. However, there are other platforms that are closer to achieving and proving that number, like Solana. This takes me to the next part of my analysis, which is more practical and adoption-based metrics – my favorite.
Based on actual transaction data taking place on the blockchains, Solana is the winner by far with 60-70M transactions per day. BSC, at second place, records about 6-7M daily transactions. There are currently anywhere from 1.0-1.5M transactions per day on the Ethereum network. For comparative purposes, Cardano is at about 200-300K transactions per day.
However, before concluding that Solana is the most efficient by a longshot (which it probably is), we have to understand that they are recording a lot more transactions on the chain than actual transfers of value. It's a bit misleading if you don't look at the details, which is why daily transacted value is a better metric if you are trying to determine the actual adoption of the platform – where Ethereum is (unsurprisingly) is the clear winner.
Average Fee Per Transaction
Ethereum currently has the highest average fee per transaction, which is currently around $25. Solana has the lowest at $0.00025 per transaction. However, again, this is likely a deceiving metric if it includes validator votes and other non value-producing transactions. Nonetheless, it is clearly a very powerful and scalable blockchain. There's no denying that. Cardano, sits at about $0.50 per transaction, which is very impressive considering its decentralization. I will say the BSC is impressive in this category as well, considering how many transactions they're processing; but, the scalability trilemma of trading off decentralization applies.
Total Value Locked (TVL)
TVL has become the most common metric used to measure the growth of the decentralized finance (DeFi) industry. It basically measures how much is locked up in dApps in liquidity pools, lending, etc. The higher the number the better. But, rather than look at the number – which can be skewed based on crypto price – I want to focus on the relative dominance. As you can see, below, Ethereum is the undisputed leader. Solana is picking up some steam, but its much further away from being considered "competition". Cardano is not yet on the map. We're still early in the game, and things can change quickly.
Total Value Staked
Staking is different from TVL because it is locking up tokens for securing the network, rather than for use in DeFi. This can give us an indication in the community's confidence in a PoS protocol. Solana and Cardano are neck-in-neck as the clear leaders here. However, we do have to consider that Ethereum 2.0 PoS has not been rolled out yet; which is why they are lagging in this category.
In terms of social metrics, Ethereum and Cardano have the most followings across Twitter and Reddit, with 2.6M and 1.5M combined respectively. Binance is definitely up there. Solana is picking up some steam, but we don't know how much of this is sustainable vs. hype.
What I'm more interested in are developer networks like GitHub, because that's where the wheels on the bus are made.
- The most actively developed protocols are Ethereum and Cardano, in a league of their own considering code commits with 866 and 761 average weekly commits.
- Looking at the monthly active developers, Ethereum leads with 220 monthly active core developers on average, followed by Hyperledger (149), Cardano (144), Bitcoin (103)
- Ethereum leads with the number of "Star" developers on GitHub, followed by Bitcoin.
Interestingly, Polkadot doubled their monthly active core developers and Cosmos increasing by 60%. They have also been steady in core development metrics and maintaining their growth achieved over the past year. Polkadot increased its level of code commits by 53%. I consider these two in a league of their own to be honest, but just wanted to mention them since some consider them in the smart contract war. I don't, however. I'll explain another day.
Another interesting graph in my analysis showed the relative Discord members vs. GitHub developers of a project. Any "moon boy" can join a Discord, but the real development happens on GitHub. If there is a huge divergence of members in Discord vs GitHub, it should tell you something... it tell me that there's more bark than bite (or more talking than walking). Basically, there's more hype. Just trying to be fancy with my metaphors, lol.
In conclusion, as you can probably see, it's very difficult to say who wins the smart contract war. They all have unique propositions, advantages and challenges. It is undeniable however, that Ethereum is leading the pact (for now). I think ultimately the coins should be valued based on their staking yield. It makes sense from a fundamental perspective. But, right now, it's all driven by speculation so it doesn't make sense. There is no stronger fundamental case than there is for Ethereum. Buying any other platform is the equivalent of buying a pre-revenue startup with very little proof of concept. But, this is, by nature a very risky space. So, it doesn't make sense to play it just play it safe.
So, for me, the top two coins here are really Ethereum and Cardano. I understand the case for Polkdaot and Cosmos, and why decentralization might be less important there (topic for another day). But, I do believe that for a Layer 1 protocol to be a successor to Ethereum should be equally (if not more) decentralized). I could be wrong... Like I said, I do believe there is a place for decentralization, but not at Layer 1. For that reason, I'm not a long-term believer in Solana, though the case for it is very strong. I'm also a non-believer in BSC for the same reason.
I'd love to hear your thoughts. As this is a new space, I think we can all benefit from learning from each other... rather than being toxic (I see it a lot in this space). As always, happy investing! Don't forget to subscribe if you like the content :)
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