Will Ethereum Ever Be Replaced As The Leading Smart Contract Blockchain?

However, the days of blockchain maturation are still early—and Ethereum is facing significant scalability issues, including network congestion resulting in slow and expensive transactions.

One of the main causes that lead to congestion on Ethereum is decentralised applications, also known as DApps. These applications could vary from games to crypto exchanges to social platforms. Ethereum boasts over 67,000 daily active users on its blockchain, with more than 269,000 transactions in a typical 24-hour period in early 2022.

Moreover, the Ethereum blockchain is home to some of the largest non-fungible token (NFT) marketplaces. The most popular NFT marketplace, OpenSea, has more than 1.4 million users with nearly $23 billion in transactions.

It’s important to note that the Ethereum Foundation has been working on some technical upgrades to the blockchain, also known as forks. These updates are expected to help Ethereum’s scalability issues such as high transaction fees and network congestion, which result in the very slow and expensive process of transferring Ethereum’s native asset, ETH.

Ethereum’s Biggest Problem

In the context of Ethereum’s scalability hurdles, a major problem is Ethereum’s operating mechanism, known as Proof-of-Work (PoW). The model allows miners to solve complex math puzzles to verify a transaction on the distributed ledger and get a fixed amount of ETH as a reward (users need an Ethereum wallet to collect this reward). PoW is also used by the most popular blockchain, Bitcoin.

However, the PoW working mechanism consumes a significant amount of energy. The reason is that miners need to utilise powerful hardware to solve the blockchain’s puzzles, leading to unhealthy competition. According to Digiconomist’s analysis, Ethereum consumes an estimated 112 Terrawatts of electricity per hour.

As an alternative to PoW, the Proof-of-Stake (PoS) model allows a network of validators to stake the blockchain’s native asset in exchange for updating the blockchain with new transactions while earning rewards. PoS requires much less energy than the PoW mechanism, which helps to reduce the carbon footprint of the emerging technology.

Ethereum is planning to transition to PoS, through its upcoming Ethereum 2.0 upgrade. The upgraded version of the blockchain is expected to use approximately 99.95% less energy than the PoW working mechanism. It’s also easier to facilitate much faster transactions with the PoS consensus mechanism, which is expected to alleviate Ethereum’s scalability burden.

Chief Investment Officer of Bitwise Asset Management, Matt Hougan, believes that Ethereum’s transition to PoS is “a really big deal.” Hougan says, “I think non-crypto natives are becoming aware of the merge for the first time. There really wasn't much discussion of the merge outside of crypto channels until a few weeks ago,” Hougan told Fortune. “Now that the mainstream media is picking up on it, and institutional investors are hearing about it, people are realising what a big deal it is.”

Hougan says there are, however, some risks with Ethereum’s “very high stakes technological upgrade”.

The PoS model is less secure than PoW since there is no physical computational base to confirm transactions. In simple terms, PoS presents higher scalability while removing an extra layer of security.  With the rise of crypto, many investors have jumped into the industry. An estimated 55% of all active Bitcoin investors started to invest in 2021, for example.

Last year, the number of crypto users in the world, according to Crypto.com’s report, surpassed 295 million—and is predicted to reach the 1 billion mark by December 2022. 

Part of the reason for such a boost was crypto’s 2021 bull market. Both digital assets and traditional securities such as stocks noted significant gains. TSLA stock rose 55% in 2021, for example.

Yet digital assets have also become increasingly accessible. There are many approved cryptocurrency exchanges in the United States, but many stock trading apps have also added support for digital assets. Still, most stock apps don’t support a wide range of crypto assets or transfers outside of those stock trading platforms, which limits the use of those cryptocurrencies.

The Rise Of Ethereum Competition

While Ethereum users await the long-anticipated transition to 2.0, competitors have swooped in. These blockchains were built with PoS or other mechanisms from the start, able to provide cheap, fast transactions immediately upon product launch.

Yet this doesn’t mean they’re perfect. Here are Ethereum’s biggest rivals:

Solana (SOL)

Launched in March 2020, Solana was created to support DApps and smart contracts. The blockchain uses a combination of PoS and Proof-of-History (PoH) mechanisms for a faster and more reliable functionality with lower fees, according to its whitepaper.

Solana’s combination of PoS and PoH allows it to process tens of thousands of transactions per second while Ethereum typically processes only 15 per second. Further, more than 5,000 projects are underway for Solana with around 1,000 developers. Solana is also the network with the highest staked value at the time of writing. Solana’s total staked value is over $44.5 billion.

Terra (LUNA)

One of the biggest rivals to Ethereum is Terra with its native utility token, LUNA and its USD-pegged stablecoin, TerraUSD (UST). Terra was founded in 2018 with the aim to offer price stability with Bitcoin’s censorship resistance. Terra mainly focuses on algorithmic stablecoins with a fast-growing financial applications network.
Terra is the third-largest network in terms of staked value. Earlier this month, Terra flipped Ethereum to become the second-largest blockchain for a few days. Terra’s total staked value is over $33.3 billion at the time of writing.

Avalanche (AVAX)

Ava Labs created the Avalanche, a smart contract-based blockchain in 2020. It’s one of the most popular PoS operators with over $10 billion in total value locked (TVL). Moreover, its native utility token, AVAX, is the 10th largest crypto with a market cap of more than $24 billion. Furthermore, two of the most important issues that Avalanche is trying to fix are congestion and low fees. The blockchain can process around 6,500 transactions per second, much higher than Ethereum.

So Who Wins The Layer-1 Blockchain Race?

It’s clear that Ethereum is the most popular on the list and there are some notable mainstream names such as billionaire investor Mark Cuban publicly supporting it. However, Ethereum is poised to make a huge move toward PoS since its utility is much higher than what PoW can offer.

“We’re seeing a rush where there’s a lot of different blockchains that are competing,” Mark Cuban told CNBC Make it. “When they start to put smart contracts to work, that’s when we’ll start to see things really level out. It’s going to come down to applications and integrations.”

Although these so-called “Ethereum Killers” have been created with Ethereum’s scalability issues in mind, they still lack Ethereum’s decentralisation. Many of them offer much more centralised networks with lower transaction fees and higher transaction speeds. Another downfall is that the centralised design of these networks results in various outages.

It’s too early to say whether Ethereum could be replaced with all the support it gets from the community. If Ethereum can successfully pull off its upgrade to 2.0 and improve scalability, it will be difficult to see its user base go elsewhere.

About the author: Shane Neagle is Editor In Chief at The Tokenist.