How crypto winter could slow the challenge to Ethereum

How crypto winter could slow the challenge to Ethereum

Given Ethereum’s dominance and the current crypto bear market, it remains doubtful that L1s will flourish. This was highlighted recently in a Chainalsys blog post titled “New layer 1 blockchains are expanding the DeFi ecosystem, but no ETH killer yet”. Chainalysis economist Ethan McMahon told Cointelegraph that Chainalysis released the report to raise awareness about the current L1 ecosystem:

While Ethereum allowed decentralized finance (DeFi) to flourish in 2020, a number of layer 1 blockchains (L1) have since been developed to address network-related challenges. For example, as Ethereum’s proof-of-work (PoW) consensus mechanism and high gas fees continue to impact transaction speed and scalability within its ecosystem, L1s such as Algorand, BNB Chain, Avalanche, and others aim to address these issues.

“Chain comparison is important because it seems that most crypto services are only offered on Ethereum, but that’s not the case. There are a few different blockchains with competitive offerings that have advantages that Ethereum doesn’t offer.”

To demonstrate this, McMahon explained that Chainalysis collects data from different blockchains to determine the strengths and weaknesses of the network. For example, the post notes that due to the high gas fees on Ethereum, many developers choose to build decentralized applications (DApps) on Algorand. Binance Smart Chain or BNB Chain is also recognized for its ability to support new tokens and DApps without the high gas fees of Ethereum. “It’s interesting that people pay high gas fees on the Ethereum network. Our findings suggest that transactions of less than $1,000 result in a significant amount of money being spent on gas fees,” McMahon said.

Source: Chain Analysis

However, based on Chainalysis’ overall findings, the post concludes that none of the L1 blockchains analyzed have successfully addressed all of the challenges associated with the Ethereum network. This also raises the question of whether L1 can survive in the long term. For example, the current crypto winter may slow down investment in these ecosystems. Additionally, the merger of Ethereum 2.0 — which is scheduled to happen this year, but may be delayed until 2023 — could lead to improvements in the Ethereum ecosystem, which could impact alternative uses for L1.


L1 development to drive adoption

In order to determine how L1 will evolve, it is important to take a close look at the latest developments in the various ecosystems mentioned by Chainalysis. For example, the report classifies Algorand as a top 10 L1 blockchain by market cap, stating:

“In Q3 2021, Algorand’s transaction volume increased by 65%, while Bitcoin and Ethereum’s transaction volume fell by 37% and 45%, respectively. This may reflect the growing hype of Algorand – Algorand in 2019 Launched in April, it is a relatively new blockchain and reached an all-time high price in September 2021.”

The findings also show that 10% of Algorand’s trading volume comes from retail investors, compared to 5% for Bitcoin (BTC) and 8% for Ether (ETH). In light of this, the report states, this could mean that Algorand has been successful in enabling a large number of small transactions.

Source: Chain Analysis

Staci Warden, CEO of the Algorand Foundation (the organization behind Algorand’s money supply economics, governance, and ecosystem) told Cointelegraph that Algorand uses a pure proof-of-stake (PPoS) consensus mechanism that allows the network to specifically address problems that require scale. “The most fundamental difference between Algorand and other L1s is the network’s ability to provide financial inclusion to the 2 billion people in the world who do not have access to a modern financial system,” she said.

Warden elaborated that Algorand’s PPoS consensus mechanism achieves this due to its low staking requirements. According to a Chainalysis post, only 1 Algorand (ALGO) token can be staked on the network. Warden also noted that Algorand is very focused on the development of decentralized finance (DeFi), noting that the network is capable of processing around 1,200 transactions per second with gas fees equivalent to .001 ALGO.

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“These requirements are necessary for network expansion,” Warden said. In comparison, the Chainalysis report mentions that Ethereum can only process about 15 transactions per second. However, it’s worth noting that once the upgrade is complete, Eth2 aims to significantly increase that number to around 150,000.

To stay competitive, Warden said Algorand is rolling out a new feature that will allow the network to complete a transaction in 2.5 seconds, compared to the 4.5 seconds it currently takes. Additionally, as multi-chain networks become more important, Algorand plans to provide “proof of state”, allowing users to transfer tokens from one chain to another.

“Algorand could end up being the router for all transactions across chains, as it can process fast transactions and has virtually no carbon footprint to cover subpenny fees,” explained Warden. While proof of state and other developments won’t roll out immediately, it’s worth noting Yes, FIFA recently announced that it will use Algorand to develop its digital asset strategy. “FIFA is building its wallet on Algorand and creating an NFT marketplace that can accommodate secondary ticket sales,” Warden added.

The BNB chain was also mentioned in the Chainalysis report and was praised for its ability to support new tokens and DApps without high gas fees. In fact, DappRadar found more L2 projects built on the BNB chain than any other blockchain. Gwendolyn Regina, investment director at BNB Chain, told Cointelegraph that the goal behind the network is to help builders create DApps that scale for mass adoption of cryptocurrencies. she says:

“This year, BNB Smart Chain will have 30 times the computing power of Ethereum and will also work on decentralized storage solutions. Therefore, blockchain technology will be increasingly integrated into real-world applications.”

According to Regina, areas of focus for BNB Chain’s 2022 roadmap include decentralization, faster transaction speeds, multi-chain integration, and a greater focus on supporting developers and sustainability. Specifically, Regina shared that the BNB Chain community recently released plans for further decentralization through the BEP-131 proposal, which would introduce candidate validators to the BNB Smart Chain.

“The proposal increases the number of validators on the BNB Smart Chain mainnet from 21 to 41, providing more decentralization and incentives for validators to continuously innovate their hardware and infrastructure,” she said. While this could create more decentralization, there has been criticism of whether DeFi is decentralized after Solend’s voluntary governance proposals related to whale wallets at risk of liquidation.

Decentralization aside, it’s worth noting that the BNB Beacon Chain — the blockchain developed by Binance and its community to enable decentralized trading of digital assets — has recently been open-sourced. “The BNB Beacon Chain is now available to developers,” Regina said. She further explained that the benefits of the BNB Beacon Chain are extensive, noting that its decentralized exchange based on high-speed order books ensures fast transactions. “Leveraging native secure cross-chain support will open the door to blockchain interoperability, meaning users can seamlessly navigate the chains they use,” she commented.

In addition to Algorand and BNB Chain, Avalanche was also mentioned in Chainalysis’ findings. According to the report, Avalanche focuses on customizability, extensibility and interoperability. John Wu, president of Ava Labs, the lead developer of the Avalanche blockchain, told Cointelegraph that the network is specifically designed to solve many problems in the Web3 ecosystem. He says:

“Avalanche has the fastest completion time in the industry, around 500ms to 2 seconds. This means that all cross-chain and subnet transactions are immortalized in an instant. Financial institutions building DeFi products and developing AAA shooters and RPGs Web3 game studios need near-instant certainty. It’s a prerequisite for success. Without it, their applications wouldn’t work.”

In Wu’s view, as more and more institutions enter the DeFi space, certainty becomes extremely important. In fact, Avalanche’s fast finalization time is likely to be much longer compared to Eth2’s finalization time, which some believe may never be lower than 15 minutes. Ethereum currently processes 15-30 transactions per second, with a finalization time of over a minute.

Wu added that the Avalanche community will continue to build regardless of market conditions. For example, Wu’s sharing of subnets—a group of validators working together to reach consensus on the state of a set of blockchains—will open new doors for DeFi. For example, he mentioned that the subnet’s ability to incorporate know-your-customer (KYC) requirements and circumvent possible bottlenecks on-chain shared with third-party applications appeals to institutions. “The first subnet designed specifically for institutional DeFi is currently in production,” he said.

Survival of the fittest?

Although the L1 blockchain is advancing, the Chainalysis report still states that Ethereum has the potential to become the “dominant” due to market conditions and expected network upgrades. For example, Raul Jordan, one of the core developers working on the Eth2 merger, told Cointelegraph that soon anyone in the world will be able to run an ETH node, demonstrating the true power of decentralization.

Alex Tapscott, author and co-founder of the Toronto Blockchain Institute, further told Cointelegraph that there are two reasons to question the longevity of L1:

“First and foremost, bear markets typically see interest in crypto-native applications drop, so if gas fees on ethereum go down on their own, why use a newer or less mature chain when you can use ethereum Second, the merger with proof-of-stake will improve Ethereum’s performance, so it may be able to handle new growth even if demand picks up.”

However, Tapscott added that he thinks the drop in interest in L1 will be short-lived. “In the long run, there will be a surge in demand for block space, and some developers and users are willing to trade off security (Ethereum) for speed and convenience. Also, I see many potential alternatives L1s are still fairly early technologies, and as they mature, they will become more reliable, useful, and widely adopted.”

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Tapscott further noted that “L1s were initially successful not because they attracted investor capital, but because they drove user adoption and interest.” And, if history has taught the crypto space anything, it’s a bear market is established The best time for a project. “As long as innovative teams continue to emerge to solve real-world problems using blockchain technology, bear markets will be an excellent way to evaluate and support projects that truly have an impact on the blockchain ecosystem,” Regina noted.

On the other hand, some projects also tend to fail in bear markets. Warden commented that several L1 blockchains will indeed be affected: “Crypto winter is a time when every component of the crypto ecosystem will be questioned and tired, not just DApps but all aspects of crypto infrastructure, Including L1.”

However, Warden added that projects that can scale and process transactions will continue to accelerate, posing a challenge to Ethereum: “In the meantime, businesses or projects built for long-term utility and real-world adoption will accelerate and gain traction.”


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