Ethereum as a market leader.
Ethereum is not a DeFi; instead, it is a DeFi industry enabler as it is the most popular smart contract platform that supports DeFi applications. Ethereum created the conditions for explosive growth in the DeFi space by offering a trustless, decentralized infrastructure with Ethereum’s blockchain serving as the settlement layer.
Unlike Bitcoin, the first modern-day cryptocurrency to enter the mainstream spotlight and attract institutional interest, Ethereum slowly developed into an industry leader thanks to its ability to increase digital blockchain utility. The differentiating factor between Bitcoin and Ethereum is Ethereum’s capacity to create programmable smart contracts that are executed on the blockchain.
Conferring Ethereum developers the opportunity to decentralize financial processes under DeFi removed dependency on third parties, allowing for increased access to more complex financial services. In 2020, Ethereum’s smart contract capabilities ignited the first wave of DeFi applications which were considered part of the DeFi summer of 2020.
In 2020, all DeFi applications were built on Ethereum, and platforms such as Curve or AAVE have created new DeFi mechanisms to provide financial services for the unbanked.
Ethereum’s first-mover advantage, major ecosystem support, and extensive developer community make it the clear market leader in the smart contract space and increased the value of the cryptocurrency.
Ethereum’s dominance in the cryptocurrency market is further reinforced because most DeFi applications are built on Ethereum.
Ethereum’s TVL dominance started to decline at the start of 2021. According to DeFiLlama, Ethereum’s TVL currently stands at $13.81B, which is 58.67% of the total DeFi TVL. By contrast, Ethereum held 95% of the TVL in early 2021.
In mid-2021, at the peak of the DeFi bubble, Ethereum accounted for over 800,000 daily transactions on DeFi platforms, putting a strain on the network’s ability to cope with the growing demand. The main problem with Ethereum is its scalability. Ethereum can only handle a few transactions per second, limiting its use cases. Ethereum is also very expensive to use, and ETH gas fees can be quite high.
While new DeFi products such as lending, stablecoins, borrowing, swapping, and asset management were gaining popularity, Ethereum was losing ground simply because it could not handle the network load. One of the main issues with Ethereum was its inability to keep transaction fees low as more users interacted with the protocol.
The network’s proof-of-work consensus mechanism made DeFi inaccessible to most users. It also created frustration among Ethereum miners and developers as Ethereum started implementing the controversial EIP-1559, which reduced miners’ rewards, yet it did not solve the issue of high network fees.
Ethereum’s answer to network congestion is a shift to a proof-of-stake consensus called ETH 2.0 and is working hard to address them. Ethereum’s developers are working on several solutions, including scaling solutions like Ethereum’s Plasma and Sharding. Additionally, they are exploring new ways to make Ethereum more efficient and cheaper.
Its shortcomings gave way to new protocols called “Ethereum-killers’ to challenge its cryptocurrency market dominance.
An opportunity for Ethereum-killers
DeFi is no longer only associated with Ethereum. Ethereum has kickstarted the DeFi movement, yet other protocols are faster and more cost-effective. As a result, Ethereum’s TVL and market dominance have been redistributed among several other protocols.
Several Ethereum-killers are chipping away at Ethereum’s dominance. While some of them are yet to be battle-tested, DeFi users are redistributing their assets towards protocols such as Solana, Polygon, or Polkadot that provide similar if not higher yields, cheaper and faster transactions, and a new interoperability prospect.
Smart contract platforms such as Layer 1 focus on optimizing transaction output and developing bridges to increase DeFi’s ability to interact with multiple chains simultaneously. Still, this comes with an imminent security risk which is hard to ignore.
Solana’s bridging functionality, the Solana Wormhole, which helps bridge Solana and Ethereum, suffered a hack, losing almost $320 million worth of users’ funds. In addition, Thorchain, another Layer 1 protocol, suffered a hack worth $7.6 million, while Poly Network, a sidechain protocol, was hacked with more than $600 million.
With so many unknowns still hovering around the DeFi industry regarding which protocol provides the best price/stability/security ratio for DeFi users, only one will dominate the DeFi space in the future. Therefore, it’s up to developers to find the best solution that addresses the end user’s interoperability and security demands.
Can Ethereum still be the DeFi king?
Ethereum can still retain market dominance despite its slow rollout of ETH 2.0, which is expected to solve most of the protocol’s congestion and scaling issues. If Ethereum successfully achieves its PoS migration, then the chance for Ethereum-killers like Solana, Polkadot, or Polygon will subside.
Resources to learn more about DeFi
DeFi is reaching beyond Ethereum. You can learn more about DeFi usage by understanding the difference between crypto and DeFi.
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