- Decentralization is expensive. Incentivization of parties and Economic balance costs a lot and it is reflected in every transaction.
- There is a possibility to use accounts and create new algorithms of interactions without asking anybody. Interactions can be algorithmized, coded and planned with the help of smart-contracts
- Tokens are the “footsoldiers” of smart-contracts. They’re programmable, traceable money that cannot exist outside of a blockchain. They play a decisive role in supporting and expanding the economic systems of these blockchains and act as units of trade.
- If the tokens are units of exchange, dApps are the “operation centers” for the tokens. They allow users to interact with other users or with smart-contracts on blockchain to exchange, borrow, lend or utilize tokens, play games, gamble and so much more. Using a dApp doesn’t require a middleman and is completely permissionless, which is the core of business on the blockchain.
Ethereum has pioneered and over the past years established itself as the go-to blockchain-based software that has smart-contract functionality and a possibility to build dApps. And there’s a reason for that. When it comes to Ethereum, it really checks all the boxes. It amplifies the concepts we have been discussing in our previous materials. Moreover, the practices Ethereum brought to the table largely became the industry standard for the crypto-world.
But it doesn’t mean that Ethereum is without its setbacks, and quite tangible ones. But more on that later.
First of all let’s break down what Ethereum brought to the table?
You already know the deal with smart-contracts, the immutable and transparent self-executing programmes, that allowed to deeply algorithmize interactions, breaking free from limitations of the transaction-only system. And it is Ethereum who we have to thank for that as it was its selling point when it came on to the market.
Ethereum has also entered the stage with its integral accessible programming language called Solidity. It allowed for developers to easily write these smart-contracts and thus, to quickly and effectively create dApps. You don’t even have to be a software developer, computer-science major, or even be involved in tech at all to dive into the development of dApps on Ethereum. All you have to have is understanding of how your dApp fits into the larger scheme of things and how to create a business use case for it. Or you can even take and fork any existing one and make GUI for your fork.
This programming language as itself was adopted by the broader crypto-community and became an almost essential part of dApp creation as the popularity of Ethereum grew and launching your project elsewhere became less and less of a practical move.
A platform to run all the smart-contracts in Ethereum is EVM, a computation engine which acts like a decentralized computer that has millions of executable projects. It acts as the virtual machine which is the bedrock of Ethereum’s entire operating structure. Every Ethereum node runs on the EVM to maintain consensus across the blockchain.
Metamask is another unskippable milestone in the crypto evolution driven by Ethereum. It became a staple among wallet-dApps. Being an Ethereum based wallet it took the role of a transactions operator which helped users to implement transactions without a need to hold a Node. It runs all the code that the user would need to do to complete a transaction automatically. Metamask also made it easier for the competition to bite into the Ethereum user-pie. The wallet is compatible with all the EVM-clones and allows users to alternate between different networks.
Metamask made accessing, spending and receiving your funds in Ethereum dApps as easy as it can be with just a couple clicks of a button. This immensely helped in growing popularity of dApps.
This situation allowed for important use-cases to emerge on Ethereum. Use-cases, which in turn formed today’s crypto-world.
Ethereum use-case #1 – dApps
Today, Ethereum enables the smart contracts and applications built on its blockchain to run smoothly without fraud, downtime, control, or any third-party interference. The decentralized fashion of these apps is hugely popular, with dApps such as Aave already having over $30b of TVL (total value locked). That’s billions with a B. As of right now, 60% of all value locked resides in Ethereum.
Introduction of smart-contracts meant that developing your own blockchain for a project to issue your own coin stopped being a necessity. Now all you had to do to employ the potential of the EVM in a form of dApp was to write a smart-contract in Solidity and issue a token. This way, support for smart-contracts cut off a good 80% of the workload for developers, compared to working before smart-contracts.
In the pre-Ethereum era, If you had a decentralized application, it was usually built on top of a new specific “standalone” blockchain. And to use this standalone blockchain, users had to engage in cross-chain exchanges, undergo a lengthy onboarding process and at the end of the day, still take a big risk of losing liquidity in case of buying your token.
Each implementation of a smart-contract in a dApp is paid for by users in the native currency of Ethereum – ether. This fraction, used to facilitate the transactions is what’s called “Gas”. And the more complex the smart-contract, the more gas they require.
Moreover, the greater the demand for Ethereum, the pricier the gas fees are.
Right now Ethereum can only perform around 15 transactions per second, so when the network is busy, the gas fees skyrocket. And today we have a situation, where gas prices for operations within Ethereum became, some might say excessively expensive. And this factor is driving the evolution within the crypto-world away from small-time transactions and dApps operating these small-time transactions. Meanwhile, this leads to a lot of missed business opportunities.
We’ve also talked extensively about dApps themselves and their role in our previous installment. Feel free to go and take a second look, if you’d like.
Ethereum use-case #2 – Ethereum ICOs
If you’re starting a new project in crypto, just like in the fiat world, you have to raise some funds. Building a blockchain, token issue, marketing, all of this costs money.
ICOs (Initial coin offering) became a staple solution for this. It’s a hybrid of crowdfunding and Initial Public Offerings. ICOs allow fundraising in a fast, secure and effective way, by providing investors of any size with tokens of your project. Companies in the crypto space also use ICOs to raise capital and fund development without having to go through the arduous and regulation-intensive process of a traditional IPO.
Just as in case of dApps, Ethereum ICOs allowed to make this process fully transparent, secure and concentrated within its ecosystem, which led to high liquidity, fair distribution and gave companies access to a wide already-onboarded user-base of Ethereum community.
So how does an Ethereum smart-contract handle an ICO? It generates an Ethereum address that users can send in Ether or other assets. The smart contract is programmed to then send an equivalent amount of tokens back to the address that it received immediate funds from. The whole transaction is completely trustless and does not rely on any central authority and doesn’t require a permission to function. And by staying within the Ethereum ecosystem, the token has an almost guaranteed liquidity and exchangeability.
Ethereum use-case #3 – DeFi
Hundreds of dApps with their own tokens, thousands of simple utility tokens. All of this between user-accounts in all parts of the world. This led to demand for special settlement applications that would allow users to exchange one token for another, make them available for loans and take loans when needed. Traditional centralized exchanges and dApps are obligated to follow regulation and do not allow for full economic freedom and for fully utilizing the transparency of blockchain.
So when the Ethereum market reached a critical mass, a lot of dApps which duplicated the functionality of conventional exchange but in the blockchain iteration began to gain traction.
Decentralized Finance is essentially a category of dApps, which serve as financial products and services, accessible with blockchain technology. They make up a booming crypto economy, where you can lend, borrow, long/short, earn interest, and more.
And Since the largest number of different assets has accumulated on Ethereum, it became the largest platform for DeFi.
Ethereum use-case #4 – NFTs
Ethereum was the first blockchain to support NFTs with its ERC-721 token standard and this is still currently the most widely used.
We’ve talked about NFTs in more detail in our previous installment on Tokens.
NFTs or non-fungible tokens are the tokens that represent a unique piece of content. This content basically could be anything, from pictures and videos to even lines of code, compatible with smart-contracts.
NFTs on Ethereum are link-based. Size of Ethereum blocks does not allow for emitting non-fungibles with the content embedded in them, but instead the NFT on Ethereum contains a link that redirects to the content. Issue of NFTs on Ethereum is very cost-demanding. Thus the usage of Ethereum NFTs is effective only in a really small number of biggest use-cases: such as expensive with highly-acclaimed collectibles. This means that the scalability of NFT usage on Ethereum is pretty low as it is right now.
The (promised) future of Ethereum
There are developments underway in Ethereum aimed at solving the existing problems of scalability, security and high energy-demand.
The next evolution stage of Ethereum, widely known as Ethereum 2.0 is promised to have mechanisms in place that allow the network to perform up to 100.000 transactions per second instead of the current 15 transactions.
One of the key developments for Ethereum 2.0 is switching to the PoS mechanism.
Yet, as we’ve already established, the “Ethereum 2.0” isn’t really the official banner of the project. Ethereum recently officially and decisively ditched the “2.0” from branding of this next step in its evolution and instead called the new development the Consensus layer. And the overall philosophy behind the evolution of Ethereum is actually reflected much better in the official project naming. However, the 2.0 name has already stuck within the community, so what can you do?
The approach Ethereum chose for the advancement and evolution of their network is actually similar to that of PolkaDot. It is the addition of the new ground layer to the network, which will allow to land level2 networks, such as the current Ethereum blockchain on top of it along with other existing networks. However, these blockchains on top of the Consensus layer would not be able to act as standalone blockchains as they will obviously lack the Consensus layer within them. That’s why they will actually have a different name – shards. There are exactly 63 of the “spots” for landing those semi-blockchains or shards to the Consensus layer, one of which is already “booked” by the current Ethereum network.
After the transition to the Ethereum 2.0 will be completed, the current Ethereum network will officially be rebranded as the “execution layer,” where smart contracts and network rules reside, while Eth2, referred to as the “consensus layer,” will ensure that devices contributing to the network are acting in accordance with its rules.
This also means that it will become much easier from a hardware perspective to run an Ethereum node, because there will be far less data that needs to be stored on a given machine.
The Reign of Ethereum
Ethereum is undoubtedly the leading platform for smart-contracts today, despite its dated infrastructure, high fees and slow transaction speed. And the competition is way behind community-wise. Because the first-comer privilege already works in a loop for Ethereum. Developers tend to use Ethereum because of its massive user-base and as a consequence – its liquidity. And with every new project on the network, this bond is only getting stronger.
And it is pretty understandable. We can compare this to an attempt of relocation of people to a new, but empty city.
You have people living in their familiar habitat. They are relatively comfortable, have their familiar shops, schools, offices and businesses – the whole infrastructure. Yeah, the pipes might be leaky in their apartment buildings, there is some heavy traffic on weekdays, but they’re mostly good and settled in. Apart from psychological stability, the old bustling city provides people with business opportunities by sheer mass of its population. And businesses are in fact the very thing that brings value to these people’s real estate.
Then you show up, drumming these people up to leave their habitat for a “land of opportunity” a few states away. Your empty city is small, semi-empty, there are a few if any businesses, but you promise that things are gonna be great, promise to give out a big piece of land in the new place for every crampy apartment in the old city, and whole villas for those who are willing to contribute to the cause even more heavily.
Folks are going to be understandably cautious and unwieldy. A land of opportunity might just as well turn out to be a land of failure and despair. But their crampy apartment will most likely stay a crampy apartment or even gain value as the city continues to grow.
In other words, blockchain has a pretty high entry threshold, and once the user is boarded on a platform, it becomes an increasingly difficult task to board that user to another platform.
Rise of EVM and the Paradox of Withdrawing Liquidity
Onboarding users to another blockchain today became such a difficult task, that the competitors had to build their way through the Ethereum. If they wanted a piece of a massive user-base, they had to allow Ethereum tokens on their network by installing Ethereum software to their systems. They did this by creating clones of EVM on their blockchain.
Going back to our new city – old city illustration, we can imagine a new city, where you might put on VR-glasses and plug into the digital copy of the old one.
Avrora, Moonriver, Avalanche – all of these blockchain created an EVM clone that could more or less run the Ethereum transaction and was compatible with Ethereum.
But running EVM on non-Ethereum blockchains is guaranteed deoptimization. It’s like running Windows OS on your Macbook. You’re basically getting a bad version of both. Yes, you’re now able to launch Windows-exclusives on your Mac, but you sacrifice a great deal of computing power. The code isn’t native to the Mac architecture – you run Windows on a virtual machine or interpret the core with some bottler software. Both ways, the code a-priory is not optimized for your hardware, you always lose some bits and pieces in an interpreting process. It’s a kludge, a workaround never meant to be a fulfilling solution.The unoptimized state of such workaround smart-contracts is then shown in their cost. Remember, the shorter the smart-contract – the cheaper its execution is going to be.
Ethereum tokens, run on “foreign” EVM clones, also cannot use the benefits of completely foreign systems in a fulfilling way. These blockchains run different basic tokens and currency and any overlay software is going to utilize these basic tokens not in their native way. In other words, EVM is a great but intermediate stage of development of blockchain ecosystems.
Moreover, can the liquidity of the asset be withdrawn from Ethereum on other blockchains’ EVM clones while maintaining the price of the asset? No. The price of the asset is determined directly by the demand, whilst the demand is formed by the amount of users and their operations on the blockchain. So if we extract users or operations, the price goes down.
At this point it becomes a philosophical question – if your blockchain is used merely as an EVM clone – have you truly gained your user-base? And the more you think about it, the further you go from a positive answer.
Ethereum pioneered this new way of interaction on blockchain with smart-contracts and dApps and vigorously conquered the market. It has created an environment for rapid development of the crypto-economy within itself and shaped its own competition.
As of right now, the reign of Ethereum in the mainstream crypto-world is undoubtable. The dated, expensive behemoth is unskippable for the majority of the projects. Competition has learnt to exploit its mechanisms, but at the cost of their own influence and evolution.
But Ethereum has reached a glass ceiling of scalability, shifting possible use-cases towards high appreciation. And the undisputed leadership of Ethereum shapes the whole crypto-economy on a macro-scale.