Will Ethereum keep dominating DeFi?

Let’s talk about Ethereum. If you didn’t know, it’s the number two cryptocurrency overall and number one when it comes to smart contracts and tokenization. While everyone knows about Bitcoin, the NFT craze is quickly catching fire in public consciousness and Ethereum is currently the biggest player in the NFT and DeFi space. But, there are some problems on the horizon for the home of smart contracts. Some people are of the opinion that Ethereum is about to be crushed under the weight of its own user traffic. Others think it will iterate and improve to keep its network dominance. Here’s the situation…

A brief history of Ethereum

Back in 2014, Vitalik Buterin was developing the Ethereum blockchain. He was an active member in the crypto community—even co-founding Bitcoin magazine. There were other altcoins back then but, more than today, nothing had come close to Bitcoin. Buterin recognized a problem, however. He said, “I went around the world, explored many crypto projects, and finally realized that they were all too concerned about specific applications and not being sufficiently general – hence the birth of Ethereum.”

Buterin’s scope of vision for crypto was much wider than just a peer-to-peer currency or a store of value like Bitcoin. He saw the original blockchain implementation as too limited in functionality and wanted to create a network that would facilitate a wider variety of applications. Enter: smart contracts.

Ethereum’s smart contracts

Smart contracts are automated programs that the Ethereum network uses to create new applications. They allow transactions executed without an intermediary, keeping the trustless nature of Bitcoin, but opening the possibilities for new use cases. It is possible to use smart contracts on Bitcoin, but Ethereum made smart contracts its main purpose and has done it better than Bitcoin in terms of function and popularity. Buterin and other developers who saw the potential of new but nonexistent applications hoped to expand the crypto ecosystem with smart contracts—and that’s exactly what they did.

The first-mover advantage

Because Ethereum expanded the capability to program smart contracts on the network, everyone who was interested in developing new uses beyond Bitcoin’s began experimenting with Ethereum. It was the first non-BTC platform to really gain traction. By August of 2017, just two years after it launched, the price of ETH hit $380 and by October of 2021, ETH was nearly $4,500 and had a market cap of more than $500 billion. Not only that, unique wallet addresses on Ethereum went from breaking 1 million in early 2017 to around 175 million by the end of 2021.

New technologies and implementations

All of the new money and users adopting Ethereum weren’t without reason. Excited developers were let loose to start creating new projects and use cases both on Ethereum and in competition with it. Some of them really took off (and many of them didn’t).

Stablecoins

One of the most common observations about crypto is how volatile it is. And while Bitcoin and Ethereum both regularly have wild swings, a new kind of coin cropped up—stablecoins—74% of which exist on Ethereum. These are cryptocurrencies whose value is pegged to another asset like fiat currencies, gold, or a basket of assets. They are useful for stabilizing a portfolio or making crypto payments in a denomination that is not liable to change its value at any second.

Tokens

There are different types of tokens like fungible tokens, non-fungible tokens (NFTs), and various others which you can read more about here. Tokenization, of course, has many uses but the most widely known and popularized are NFTs, which have gone viral outside the crypto world.

DeFi

In the DeFi summer of 2020, Ethereum became the hottest chain in town. DeFi applications were blowing up from AMMs, to yield farming, to new dApps. The outside world took notice. Institutions sat up and paid attention to the competition threatening their legacy financial services.

Criticism of Ethereum

But even though Ethereum has been the tip of the spear for developing new crypto technologies and use cases, it’s not a complete cake walk. Like with any rapidly evolving technological space, there are inevitably growing pains and hurdles, and the Ethereum skeptics are not shy about pointing them out.

Fees

Because of its popularity, there are a growing number of transactions happening on the Ethereum blockchain. And because the more congested the network is, the bigger commission miners get, heavy traffic means high gas fees. With the explosion of NFTs and DeFi, ETH gas is getting more expensive.

Slow

Heavy traffic is also making the network slower. More transactions use more computing power, which takes time. As people trade on DEXs, buy and sell NFTs, and use everything else in the DeFi space, slow throughput becomes a bigger frustration.

Delayed upgrades

There are plans to make an upgrade to Ethereum, however. Eth2.0 upgrades will transition the network from proof-of-work (PoW) to proof-of-stake (PoS), promising to solve the scalability and speed issues. The only problem is that the upgrade has been a long time coming—and it’s still not here.

Upgrading rather than building

Another criticism that Ethereum faces is the question of why it’s being upgraded at all. Many people think it would be better simply to build a new network from scratch, rather than try to modify the existing one. After all, the ship of Theseus paradox asks: if you replace all the parts on a ship, don’t you essentially have a new ship anyway?

Hard fork and Ethereum Classic

Some blockchain purists also criticize Ethereum for it’s history involving various soft and hard forks. When a project splits, it’s seen as less secure, reliable, and credible by many people. If a project can go off the rails with a hard fork, how can it be trusted for what it is today?

Ethereum’s potential to remain dominant

While there are plenty of criticisms out there, as of today, Ethereum is still the king of smart contracts. And despite the many calls for its failure since before it even came to fruition, it’s still gaining ground in many ways and there are solutions that may help it keep its crown in the future.

Eth 2.0

The Eth2.0 upgrade, though slow to roll out, promises to improve many of the main criticisms like high gas fees and slow transaction speeds. There are those who argue that PoS is less decentralized than PoW because it opens the door to an accumulation of network power. However, if Eth2.0 accomplishes everything it promises to, it will be difficult to overtake it’s already strong place in the cryptosphere.

Layer 2 solutions

There are other things on the way and already here that aim to smooth some of the complaints lobbed at ETH as a base chain. Layer 2 solutions like Polygon are becoming extremely popular. It’s used by platforms like OpenSea as a workaround when minting and selling NFTs to eliminate extra gas fees.

Network effect

While it’s not a super-punch-out killer play, having network effects in its favor can bode well for ETH in the future. Because there’s already so much infrastructure on it—so many ERC-20 tokens, NFTs, and DeFi platforms—with the help of other solutions, Ethereum definitely has a head start.

So, what will keep Ethereum at the top of the heap in the future? Fixing some of the current pain points for users like high fees and slow speed, keeping it secure and decentralized even with a shift to PoS, continuing to add layer 2 solutions, and continuing to find ways to integrate interoperability. And, continuing to burn ETH and making it deflationary and desirable as a coin. If it can succeed in these ways, Ethereum can serve the needs of DeFi, NFTs, and other new visions for the crypto future.

Competitors to Ethereum

But let’s say that Ethereum can’t hold on. Imagine it goes the way of the Dodo and Blockbuster. What potential replacements are out there waiting to leap into the crypto void that will be left if Ethereum fails?

Cardano

Cardano, another hopeful blockchain, was created by Charles Hoskinson, who helped Vitalik Buterin get Ethereum off the ground. Since then, they’ve had their criticisms of each other’s work. For example, Hoskinsin touted the fact that Cardano was created as a PoS chain from its beginning, unlike Ethereum.

Solana

As the NFT marketplace heated up and gas prices on Ethereum skyrocketed, people became frustrated. Solana started to emerge as a possible alternative chain, especially for the NFT market with platforms like Solsea and Solanart offering much lower gas fees for an NFT audience that is not as concerned about blockchain fundamentals as hardcore crypto enthusiasts.

Polkadot

Gavin Wood, another Ethereum co-founder, founded Polkadot, one of the projects people speculate could be an “Ethereum killer.” Polkadot’s angle on the market is aiming to be the first and best chain to make interoperability smooth and easy. It also looks to solve scalability in a way that older blockchains like Bitcoin and Ethereum weren’t able to do.

Summary

It’s extremely hard to make bets about the future with any kind of accuracy—it’s even harder in the crypto world. Because it’s such a fast-paced environment with constant changes, updates, and new ideas, no one knows what will ultimately succeed or fail. While Ethereum has been the leader in DeFi, NFTs, stablecoins, and a lot of other smart contract innovations, it’s still unclear if the #2 chain will stay at the top of the heap. Some are convinced that Ethereum will fail sooner rather than later and others go so far as to say The Flippening is imminent and ETH will even overtake BTC! What are your thoughts? Will Ethereum hang on to its position as the dominant smart contract blockchain?