The popularity of DApps, DeFi tokens and their increasing market share of the Ethereum ecosystem as a result of platform’s evolution?
Ethereum’s dominance as the preeminent smart contract blockchain platform has been boosted by the popularity of decentralized finance and decentralized applications tokens in 2020, with ERC-20 tokens now accounting for nearly half of the assets on the blockchain.
The smart contract platform has been in existence for just under five years and, in that space of time, has established itself as the blockchain of choice for DApp developers. Adding substance to that claim is data indicating that Ethereum has overtaken Bitcoin as the blockchain with the highest daily settlement value.
This is largely due to the sheer amount of capital that has been raised by various blockchain projects that have been built on the Ethereum blockchain. Ethereum itself raised over 31,000 Bitcoin (BTC) in its 2014 initial coin offering — worth around $18 million at the time. Now, Ethereum occupies second place in the overall cryptocurrency market cap at around $30 billion.
It’s a feather in Ethereum’s cap, shining a light on the utility of the platform as a means to build new, blockchain-based projects and products that are improving a number of industries around the world. In the same breath, the rise of DApps and DeFi applications could affect the future of Ethereum as a platform, as developers look for platforms that are best suited for whatever project or system they need to build.
Enter the competitors
Ethereum is not the only smart contract blockchain platform out there. As analytics firm Messari pointed out in a recent newsletter to subscribers, rival platforms have been netting sizable amounts of capital during initial investment rounds. Proof-of-stake-based smart contract blockchain platform Algorand, EOS and Tezos are perhaps Ethereum’s biggest competitors, commanding a sizeable portion of the overall smart contract platform market share.
Furthermore, Messari indicated that in the past 12 months, over 13 smart contract blockchain projects have raised over $300 million in fundraising rounds. The inherent trust placed in these projects is evident in the amount of capital pouring into their coffers.
Cointelegraph reached out to Messari research analyst William Withiam to delve deeper into the ramifications of these new industry players entering the smart contract space. He believes that it is somewhat surprising to see Ethereum-like projects raising high valuations, given that the smart contract market is crowded. However, there is space for others to stake a claim to some of the market share according to Withiam:
“The total addressable market (TAM) for these platforms, which are vying to be monies, is potentially huge. It might make sense for investors to turn to greener Smart Contract Platforms as a hedge against ETH. As for longevity, while funding is a factor for attracting new users and developers, the more determining factor might be the application and developer ecosystem. Composability standards are sticky. Ethereum’s ecosystem is far more robust than others at this point.”
ERC-20 popularity is a product of Ethereum’s success
Ethereum’s success as a platform is also observable in the popularity of ERC-20 tokens and their climbing share of the overall market cap in the blockchain’s ecosystem. Ether (ETH), the native currency of the smart contract platform, now accounts for just 51% of the total value of the Ethereum network. The other 49% is made up of the various ERC-20 tokens that power the plethora of projects built on the platform.
Withiam believes that the growth of ERC-20 tokens and their share of the market cap in the Ethereum ecosystem is a natural process in the evolution of the smart contract platform: “It’s the natural evolution of these general development platforms. Value will eventually travel up the stack and into the application layers, where projects might have more traditional revenue-generating business models.”
The dilution of Ether’s share of the overall market cap also adds an additional layer of security to the network. Potential attackers are far more inclined to attack second-layer projects than the Ethereum blockchain itself. As EthHub founder Anthony Sassano put it: “There are ‘attacks’ happening all of the time on individual smart contracts and these attacks are both easier to engineer and much cheaper to pull off than attacking the entire network.”
ETH on top, but scalability is still a concern
Even as competitors enter the market and threaten to steal a slice of Ethereum’s virtual pie, the preeminent smart contract platform continues to be a leading force in the blockchain world. Once again, Messari produced data this month showing that Ethereum has become the most used blockchain platform worldwide in terms of settlement value. It has even surpassed Bitcoin, thanks to the surge in popularity of DeFi and DApp tokens that are based on the Ethereum blockchain.
Ethereum has Tether (USDT) to thank for this trade volume milestone, with over $500 billion in settlements made in 2020 solely by stablecoins on the platform. The Ethereum blockchain handles nearly 60% of the circulating supply of Tether tokens.
Adding kick to the proverbial cocktail of Ethereum’s wide-ranging utility is the surge of DeFi projects running on the platform. This raises some interesting questions about Ethereum’s ability to handle the ever-increasing volume of platforms and users on the blockchain. Ethereum has been experiencing sky-high transaction fees due to the popularity of USDT, DeFi platforms and DApps on the network. While this gives credence to the efficacy of Ethereum, it means that users are being hit with high fees and longer waiting times for transactions to be processed.
This puts a spotlight on the highly anticipated move to Ethereum 2.0 in the next 12 months. The transition from a power-hungry, proof-of-work system to an energy-efficient PoS, sharding system promises to alleviate much of the stress currently placed on the Ethereum blockchain. As Withiam explained, the switch to Serenity could hold the key to ensuring Ethereum remains the smart contract blockchain of choice for developers in the space, if everything goes smoothly:
“From an optics standpoint, an unsuccessful switch wouldn’t look great. But Ethereum might be able to function at a high level if layer-2 scaling solutions and stateless client research continue to progress.”
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