Real-World Use and Adoption of Solana

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Real-World Use and Adoption of Solana

Driven by DeFi activity and NFT sales, Solana rose to prominence the fall of 2021. Constantly pushing the envelope, its team now wants to onboard “one billion users” in the following years. 

Named after a famous beach near San Diego, California, Solana is the brainchild of former Dropbox engineer Anatoly Yakovenko. Development started in 2017, and in April 2018, he and his co-founder, Greg Fitzgerald, secured their first backing from Abstract Ventures and 500 Startups. Solana had its big break in 2020 when Sam Bankman-Fried backed the project. He successfully deployed FTX’s decentralized exchange protocol, Serum, on Solana. In 2021, Polychain Capital and a16z injected $314 million into the blockchain venture with a private token sale. 

Solana’s beta mainnet saw the light of day in March 2020 and quickly attracted developer attention. According to recent research, it is on a path to overtake Ethereum when comparing developer activity in the form of GitHub commits, pull requests and forks.

Solana developer activity exhibits substantial growth

Source: Twitter

This chapter will focus on metrics that reflect the real-world usage of Solana. Looking at the meteoric price growth is a good indicator of investor confidence. To gain a deeper understanding, we’ll look at unique addresses, lending and staking rates, and protocol revenue plus the price-to-sales ratio.

As a marker of centralization risk, we’ll finally look into how many tokens are held by the team and VC backers.

Solana Summer: SOL price rose more than sixfold in autumn 2021

Source: Messari

Solana’s (SOL) price was on an absolute tear starting in August 2021, called “Solana Summer.” The token’s value rose from $35.15 to a high of $258.65 between Aug. 1 and Nov. 6, 2021. A boom in NFT sales, perpetual futures volume and a tight-knit community propelled Solana’s market capitalization to more than $73 billion and made the token No. 4 on the CoinMarketCap list of coins sorted by market cap at times.

Seen from a November 2021 perspective, Solana is up more than 130x from a year ago and outperformed all other top 100 tokens except Axie Infinity (AXS), Kadena (KDA) and Fantom (FTM). 

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

What is DeFi currently lacking and how can we overcome it?

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What is DeFi currently lacking and how can we overcome it?

Insider Insight with Bernhard Koch, Founder and CEO Cryptix

As a venture builder in the fintech sector, we build bridges between innovation and effective everyday usability. Thus, it is a given that we closely follow the developments in the DeFi space and the increased use of DAOs. What we recognize, however, is that DAOs intentionally lack substance when it comes to financial regulation:

DAOs are unregulated and legally unaccountable – not the right approach we deem suitable to serve the masses. The widely used “dot-org-constructions” based on non-profit-foundations are mainly used to avoid taxes.

At Cryptix, we have chosen to go the extra mile with a long-term regulated approach. While the main character of a DAO meets our requirements for decentralization and community engagement, it lacks the legal safety and conformity for the masses. Consequently, we have tried to think out of the box, and have successfully created a superior solution: We call it DGO – decentrally governed organization.

Unlike a DAO, a DGO makes use of a legal body: The Societas Cooperativa Europaea (SCE). While an SCE is not a new concept, we’ve discovered that very few are aware of this cooperative form, despite its great number of benefits: 

  1. Legal clarity and compliance by using a real legal entity.
  2. Responsibility and commitment as the SCE is legally liable.
  3. DGOs can have a for-profit motive, thereby creating more sustainable and engaging incentive structures for its members, which are ultimately more supportive and loyal to a project.
  4. An SCE can change residence within EU countries with low hurdles to operate from a jurisdiction where the environment favors innovative approaches of such DGO and its members.
  5. Voting on governance and strategic decisions can be made accessible and incentivized in a user-friendly mobile app, with absolute transparency and no manipulation due to real on-chain voting. While members, due to its simplicity, won’t even notice they’ve just voted on-chain.

These benefits come with a more complex, time-intensive, pioneering and expensive path. Nevertheless, we are committed to going down this path and thereby creating a never-before-seen and promising concept, born from the connection between SCE and blockchain technology. In our opinion, this is the next logical step towards enabling a non-crypto community to experience the benefits of decentralized finance, and include them in a powerful, transparent and direct way of decision-making in important projects.

Cryptix is already employing the described DGO model and legal construction within one of its projects, a layer-1-blockchain with its own native cryptocurrency, products and complementary services in layer-2. These Layer 2 services will be run by a DGO and involve their users at the enterprise level in a very simple and highly transparent way as never before.

We are excited about this journey and are already receiving stunning feedback for this concept. We will keep a close eye on user participation and learnings to grow and adapt together for the benefit of the community, its members and our society.

Summary

Ethereum helped crypto to get to where it is today. Without NFTs, without DeFi, and without the ability to launch tokens in less than 30 minutes, many projects simply would not exist, and the world would be poorer for it.

Ethereum is here to stay. Massive network effects, a large pool of development talent, and a mature tech stack mean it is easier and more sensible to launch on Ethereum than any other blockchain. 

The onus is now on Ethereum’s developers to manage a timely upgrade to a more scalable and renewable future without compromising security and uptime — a genuinely colossal feat. The last upgrades to the mainnet have gone off without a hitch and have inspired well-earned confidence in the skills and thoroughness of the contributors.

2022 will be a make-or-break year for Ethereum. Its open, self-reflective culture and the surprisingly far-sighted thought leadership of Vitalik Buterin inspire confidence that it will be its best year yet.

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

DApps & NFTs on Ethereum

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DApps & NFTs on Ethereum

The No. 1 DApp on Ethereum is the NFT marketplace OpenSea. OpenSea outpaced its competition in 2020 and is now the go-to place to trade and collect NFTs.

With more than $10 billion in total sales, it is a true juggernaut, solely responsible for 135,000 ETH (~$450 million) in burned transaction fees since the London upgrade in August 2021.

No. 2 is the DEX poster child Uniswap, which brought Bancor’s Automated Market Maker model to the mainstream and is the go-to for coin swaps. Following these two monsters are SushiSwap, an erstwhile Uniswap clone that now lives on more blockchain platforms than any other DEX, and OlympusDAO and Curve Finance, two DeFi powerhouses.

NFT sales volume and transaction volume

Ethereum NFT sales amounted to $2.2 billion in September and $1.7 billion in October 2021, according to research by Messari, more than eight times the volume of the next competitor, Solana. Most of that volume comes from big-ticket sales such as CryptoPunks or BoredApes, where a single deal can be worth millions.

However, looking at just the dollar-denominated volume doesn’t paint a complete picture. Ethereum saw 132,879 unique buyers in October, compared to 68,235 on Solana. The average amount a collector spent on Ethereum was $12,878 in October 2021.

While Solana’s dollar-denominated value was only an eighth of Ethereum’s, its activity was half. Ethereum certainly faces strong competition in the NFT market, and sky-high fees hurt its position because they price out new entrants.

Figure: Daily NFT sales on Ethereum

Source: NonFungible.com

Top projects like CryptoPunks and BoredApes at record prices, and traditional companies like Adidas and Nike have launched NFT collections. So it is safe to assume that this technology is not yet exhausted, even if NFT transaction volume has dropped sharply, from 1.08 million sales in October to 360,000 in December 2021.

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

The Risks of DeFi

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The Risks of DeFi

What are the risks with DeFi and how can investors mitigate those risks? The biggest risk in DeFi is the so-called rug pull, which can be generalized to any action by the project team that is unexpected and harmful to investors, but often immensely profitable to the project team.

To some extent DeFi allows more opportunities for such actions, because the space is new, quick-moving, and investors are hungry for new opportunities and projects to invest in. This is why they often skip doing detailed due diligence.

Furthermore, due to the complex nature of smart contracts and DeFi composability, it’s often possible for a big risk to be hiding in plain sight, and unless you’re experienced in reading Solidity and actually put in the time to do due diligence, you won’t spot it.

For example, when Sushiswap vampire-attacked Uniswap, they had a so-called migrator contract as part of the design. The contract owner could set this migrator contract to a malicious address and withdraw all LP tokens.

While this didn’t happen in Sushiswap, many of it’s forks exploited this to steal all the liquidity staked, even if a migration was never on their roadmap. One way to protect yourself from such risks is to check if a project has been audited by a reputable security firm, but a significantly better way is to be able to read the code and understand the contracts yourself.

This will allow you to understand “intended behavior” that would pass an audit but allows the project team to “rug pull”, such as the one given in the example. If you’re unable to, just trusting your intuition in terms of whether something seems shady or too good to be true goes a long way.

Over time, DeFi will actually become more resistant to this – because of its open nature, anyone being able to read code can actually feel safer putting their funds in a DeFi project rather than a centralized exchange or platform.

As the industry matures and more people learn how to analyze these projects, DeFi’s strength of being fully transparent and auditable will shine.

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

How can Cryptocurrency Investors avoid being Front-Run?

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How can Cryptocurrency Investors avoid being Front-Run?

When buying altcoins, it’s possible that there are early investors in that altcoin that you don’t know about. They bought at a much lower price before the coin was publicly traded so they are incentivized to sell and bag in a profit. To avoid this, cryptocurrency investors need to do deep due diligence and analyze the whole circulating supply of a specific coin/token before investing.

An Insider Insight with Ivo Georgiev, CEO of Ambire

But there is also a different definition of front-running when it comes to cryptocurrency investing. When you buy/sell tokens on a DEX, you may get front-run or sandwiched, allowing bots to benefit from your allowed slippage. Slippage in DEXes is the difference between estimated execution price before the trade and the execution price when the trade actually happens (when the transaction is mined), and sandwiching is inserting transactions right before/after your trade to manipulate the spot price, so that your trade is executed at the worst allowed price for you.

It’s still a form of front-running because the bot benefits from knowing your trade before it happens, and it’s the most widespread form. To prevent this, you can use a technology like Flashbots, which is a way of directly negotiating mining of your transactions with a miner, without broadcasting them publicly. The easiest way to do that is to use a wallet that has Flashbots built-in, like Ambire Wallet.

Is secure storage of Layer 1 cryptocurrencies like Ethereum different from secure storage of Layer 2 cryptocurrencies like Polygon (Matic)?

Secure storage of cryptocurrencies is the same regardless of whether it’s a L2 or L1 – it’s all about key management, and the industry standard for secure key management is to use a hardware wallet like Trezor/Ledger. 

There is one caveat to that – bridged assets that exist on Ethereum but not natively on Polygon, but are bridged to Polygon, carry the extra bridge risk – for example, if the bridge gets hacked, the Polygon wrappers of those assets may suffer. As such, it’s better to keep those on their native chain (Ethereum).

What are the best blockchains for earning yields in DeFi and what yields per annum can investors make potentially? 

This varies by the day but UST on Terra was pretty popular, allowing over 30% yields on their native stablecoin before the collapse. As a less proven chain, this was riskier than lending USDT/USDC on Ethereum for something like 3-5%. A middleground in terms of risk/reward is earning yield on stablecoins on Polygon, with a couple of solid options:

Aave and Tesseract (Yearn alternative on Polygon), both allowing yields between 5-10%. Whatever the case may be, all these yields are at least ten times better than what banks can offer you, especially in this low-interest economic climate.

One way to protect yourself from such risks is to check if a project has been audited by a reputable security firm, but a significantly better way is to be able to read the code and understand the contracts yourself!

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

Decentralized Finance on Ethereum

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Decentralized Finance on Ethereum

DeFi and Ethereum are almost synonymous and the DeFi directory Defiprime lists 214 Ethereum DeFi projects which indicates a significant growth over the last couple of years.

DappRadar even lists 2,990 decentralized applications (DApp). No other blockchain has inspired more developers, and Ethereum’s stack has become the de facto standard for many other blockchains. Even strong competitors such as Avalanche, Moonbeam or Fantom feature EVM compatibility to allow teams easy portability of projects from Ethereum.

Names such as Uniswap, Curve, dYdX and Instadapp have all deployed on Ethereum first and moved on to become household names in the crypto community. Ethereum is where DeFi was invented, and it is the protocol with the most exciting innovations, such as dYdX or OlympusDAO, and the largest and wealthiest user base.

Source: The Defiant

Total Value Locked (TVL) on Ethereum DeFi

It is no surprise that the most value in decentralized finance is locked on Ethereum. DeFi applications on this blockchain control more than $150 billion.

Source: Defi Llama

The three most significant projects — Curve, Convex Finance and MakerDAO — account for 36% of all TVL on Ethereum. Counting locked value has some crucial challenges, however. Staked coins can be used in farms whose liquidity provider tokens can again be further deployed and so on. The double- and triple-counting of an uncertain percentage of all assets is unavoidable. TVL numbers should be viewed as a general indicator of growth and activity and not be taken at face value.

There are two other aspects to DeFi on Ethereum that are very important: DApps and NFTs. In next weeks article we will take a closer looks at those aspects to see where their importance lies in the general Ethereum ecosystem.

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

Ethereum Transactions and their Cost

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Ethereum Transactions and their Cost

Sending Ethereum costs around $5, and more complex transactions like swaps or adding liquidity mostly cost more than $100 in the last quarter of 2021.

Transaction fees are auction-based – users who pay the highest fees are processed first.  This sometimes leads to outright bidding wars. With the Ethereum network at 100% capacity, transaction fees were painfully high in 2021. In October, average transaction fees were $28. Ethereum earned the criticism of being a “rich boys club” because smaller investors simply could not participate.

Figure: Ethereum transaction fees were $28 on average in October 2021, and peaks were $70

Source: Blockchair

Average and theoretical TPS and time-to-finality

One Ethereum block is mined every 13.8 seconds on average, but this number fluctuates with mining capacity. Since only a limited number of transactions can be included in a given block until its storage capacity is filled, the theoretical maximum of Ethereum transactions is 35 per second, assuming that all transactions are small. Ethereum de facto processed 1.2 million transactions per day in October or 13.8 TPS. Transactions for staking, minting and swapping use more data and fill a block faster.

Since a consensus of other miners could still overwrite the most recent block, most applications demand three to six blocks to pass before they deem a transaction to be final. Time-to-finality is 42–90 seconds, accordingly. Users have to wait for finality until they can move on in their trades, and 90 seconds is a long time for the internet age.

Ethereum 2.0 will drastically change that and offer up to 100,000 TPS, and time-to-finality could be as low as six seconds, depending on the final implementation.

Current throughput and speed mark Ethereum as a member of the “old guard,” but strong network effects remain relevant. The big question is whether the upgrade to a sharded, performant Ethereum 2.0 will come soon, or whether other chains will take a piece of Ethereum’s pie.

In order to become a global DeFi system, Ethereum needs to actually implement this growth in potential TPS, otherwise competitors will gain ground that can already theoretically process more transactions.

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

Ethereum’s Solidity & Consensus Mechanism

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Ethereum’s Solidity & Consensus Mechanism

Ethereum’s move toward proof-of-stake (PoS) ETH2 was demonstrated on a testnet in October 2021 and is expected to be implemented on the mainnet this year.

Like Bitcoin, Ethereum also uses a proof-of-work consensus mechanism. Miners collect transactions for a block, aggregate them cryptographically, and then have to try quintillions of different numbers, called nonces, until the resulting hash has a certain number of leading zeroes. While Bitcoin uses the industry-standard SHA256 algorithm, Ether miners compute “Ethash,” a slightly altered version of the SHA3-256 and SHA3-512 algorithms.

It is much harder to build application-specific chips (ASIC) for Ethash, so the ASIC arms race never happened on Ethereum. Instead, miners use high-end graphics cards (GPU) like the Nvidia RTX 3090. Miners’ insatiable demand led to Nvidia implementing a throttling switch when cards detect mining workloads, so gamers could afford GPUs.

Figure: MSI Nvidia RTX3090 graphics card, typically used for Ethereum mining

Source: msi.com

Solidity — Ethereum’s programming language

Vitalik Buterin wanted to allow developers the freedom to run everything they could dream of on top of the blockchain and create a massively distributed system. He called Ethereum the “world computer” because miners worldwide would execute programs.

Bitcoin has a programming language called Script that has limited functionality. Ethereum’s language needed a complete instruction set to give developers more freedom.

Gavin Wood, who later founded Polkadot, was the first to implement a working version of Ethereum and developed Solidity as Ethereum’s language. Later, another language called Vyper was introduced. (Smart contracts can be written in both.)

Since miners run different hardware, Solidity compiles to so-called bytecode, executed by the Ethereum Virtual Machine (EVM), abstracting the hardware layer. This way, a developer doesn’t have to worry about what machine a miner will run. The EVM takes care of that.

Solidity is easy to read and is quite similar to JavaScript in the way the code looks, although it has several fundamental differences — e.g., more stringent variable data types.

With a TVL of more than $160 billion and thousands of projects, the need for improved performance has become critical. We will look at the full extent of the performance currently required in another article next week.

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

Enter Ethereum 2.0

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Enter Ethereum 2.0

Ethereum was finally launched in 2015 and proved that programmability was incredibly powerful and equally dangerous. Performance was not the top priority at the time. More emphasis was placed on robustness and the ability to easily run a large network of nodes.

With more than $160 billion in locked value and thousands of projects running, the need for radically improved performance has become pressing.

The next generation of the Ethereum protocol will introduce three significant changes:

  • A move from PoW to PoS.
  • Introduce a sharded blockchain, basically multiple synchronized chains in parallel.
  • Replacing the Ethereum Virtual Machine with eWASM.

The move to proof-of-stake will be a quantum leap toward making Ethereum more energy efficient and carbon neutral. PoS means that validating nodes vote on transactions and get rewards for successfully submitting blocks to the blockchain. The network’s energy use will come from the computers running nodes, mostly standard desktop machines. Miners consumed 45 terawatt-hours of energy in 2021 as millions of high-end graphics cards churn away to compute the necessary calculations securing the network.

Sharding is a widely used process in database management where tables with high demand are spread out among multiple servers to make access more performant. Ethereum sharding will split its blockchain into multiple chains running in parallel and synchronizing to the so-called Beacon Chain. Sharding will improve Ethereum’s performance from a maximum of 35 transactions per second (TPS) to a theoretical maximum of 100,000.

Last but not least, the switch from the Ethereum Virtual Machine (EVM) to eWASM, which stands for Ethereum Web Assembly, will mean that smart contracts can be written in most general programming languages, such as Rust, C++, Python and others — a big boost for developer access and productivity.

Ethereum 2.0 — The timeline to launch

Upgrading Ethereum is like open-heart surgery. There are thousands of projects and millions of active users, and hundreds of billions of value operate on the network, but any significant mishap would spell an irreparable loss of trust in the blockchain. Accordingly, Ethereum developers are cautious and test and retest every upgrade before rolling it out to the mainnet.

No fixed date for the launch of the next steps toward Ethereum’s future is set, much to the community’s chagrin, however. Nevertheless, the Eth2 Beacon Chain was successfully deployed in December 2020, and a successful merge of Ethereum to PoS Eth2 was demonstrated on a testnet in October 2021, representing an important milestone. 

The merge of Ethereum’s v1 mainnet to v2 is expected for May–June 2022. Miners will no longer be able to produce blocks after that. The shift from a single-threaded blockchain to sharding is expected a year after the merge, sometime in 2023. Eth2 stakers are in for a long ride: Unstaking requires a minor update after the sharding upgrade.

Ethereum 2.0 will be able to process up to 100,000 tps, and time-to-finality could be as little as six seconds, depending on the final implementation!

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

Ethereum Staking and Lending Rates

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Ethereum Staking and Lending Rates

Ethereum 2.0 can’t come soon enough, as blocks were always full in 2021. The next iteration of Ethereum will be a proof-of-stake (PoS) network where validators need to have at least 32 ETH to vote on transactions.

Parts of this network are already parallel to the main PoW blockchain, and investors can stake their Ether on the new network. This stake is locked until the migration is complete, and until now, it’s unclear whether this will happen next year or even later.

Staking Eth2 is a strong indicator of trust. So far, 7% of all ETH is staked on Eth2. Compared to Solana, which has 76% of its SOL staked, this might seem low, but some perspective is needed. If the transition never succeeds, which is a possibility, these funds are lost.

Users with less than 32 ETH need to delegate their coins to other validators to collect rewards. Centralized exchanges such as Kraken have made that very comfortable and offer 5%–7% APY on staked Ether. Decentralized protocol Rocket Pool allows users to stake and unstake Eth2 at will with 4.3% APY. Plus, there’s a token.

Figure 1: Amount of ETH staked

Source: Beaconcha.in

Lending platform YouHodler pays 5.5% APY, with CoinLoan and BlockFi offering more than 4.5% each. Juicier gains are realized when providing liquidity to decentralized exchanges (DEX) such as SushiSwap, where pairing ETH with stablecoin TerraUSD (UST) yields 46% APY this December.

Initial coin distribution of Ether

Buterin and his early team often get a lot of flak for Ethereum’s alleged centralization. The truth is that the core team did get around 10% of all ETH in circulation. Even then, the exact distribution was a contested issue and led to some bad blood. After this initial distribution, the team had a crowd sale — arguably the first ICO ever — where investors could purchase Ether for Bitcoin. Thousands of individuals bought 60 million ETH, about half of the supply in 2021. This share represents Ethereum’s early community, which got well rewarded for their faith in a project headed by a scrawny 20-year-old.

Figure 2: Breakdown of Ethereum’s Initial Coin Distribution

Source: Etherscan.io

Compared to Solana and many other blockchains, Ethereum has little centralization. Conversely, the setup is not as squeaky clean as Bitcoin’s, where nothing was pre-mined.

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

Real-World Use and Adoption for Ethereum

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Real-World Use and Adoption for Ethereum

Ether, or ETH, are the native tokens of Ethereum. It has no cap, and there are currently 118.9 million Ether in circulation. Ether is added when miners are paid for finding blocks (block rewards), and decreases as base transaction fees are burned. In 2021, Ethereum has a net annual inflation of 1.8%.

Ether’s price has been above $3,000 since August 2021, and its average market capitalization was $440 billion in October 2021. Starting in July 2020, its market cap rose in tandem with the TVL. In December 2021 the ratio of market cap to TVL was around 2.9x which places Ethereum between Fantom with just 0.76x and Solana with 4.4x. This is a good measure for how valuable a chain is in relation to the assets locked.

Figure 1: Ethereum’s price near all-time-highs in December 2021

This image has an empty alt attribute; its file name is image-2-1024x537.png
Source: Messari

Ethereum daily active addresses

The number of active addresses represents the number of accounts with at least one transaction on a given day, which is a good measure for the overall liveness of a blockchain. Ethereum surpassed 500,000 daily active addresses in the second half of 2021 and peaked at 800,000 in November 2021. Growth has been hampered by high transaction fees and longer wait times lately, as can be seen by the plateau on the graph above, which started in May 2020. The amount of active addresses is likely to stay at current levels until major technical upgrades become available.

Figure 2: Ethereum active addresses surpass 500,000 in the second half of 2021

Source: Messari

Ethereum protocol revenue and price-to-sales ratio

The Ethereum network currently employs a PoW consensus mechanism. More on this later. Miners secure the blockchain in return for block rewards and transaction fees. Block rewards

were 5 ETH per block until October 2017, when the Byzantium upgrade reduced the rewards to 3 ETH per block. The Constantinople upgrade in February 2019 went a step further, and now miners receive only 2 ETH per block or around 13,000 ETH per day for their services.

Figure 3: The total mining reward per day in ETH is the block rewards plus the transaction fees

Source: Etherchain.org

Transaction fees are now split into base and priority fees ever since Ethereum Improvement Proposal 1559 was implemented, part of the famed August 2021 London upgrade. Apart from different naming geography, it introduced a mechanism to burn the base transaction fees and only award miners the priority fee. The priority fee is like a tip that users add to their transactions to be processed quicker. Sometimes, substantial amounts are tipped during high transaction demand, like NFT launches. Burning the base fee will make Ether net deflationary when the network merges to its next iteration, Eth2, scheduled in 2022.

With Ether prices around $4,000, block rewards are close to $19 billion per year. Priority fees per day can peak up to 32,000 ETH. In the second half of 2021, they have evened out at an average of 1,500 ETH per day or $2.19 billion per year.

The price-to-sales ratio divides the market capitalization by the protocol revenue to make blockchains more comparable in the same way a price-to-earnings ratio does for stocks.

Ethereum has a 22.2x price-to-sales ratio, and a 214.9x ratio of price to transaction-fees. Both reflect a solid fundamental value of Ethereum when other blockchains such as Solana have a P/S of more than 30,000x.

 1 More information about Ethereum’s inflation here

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

Ethereum at full capacity since May 2021

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Ethereum at full capacity since May 2021

For many, Ethereum 2 can’t come soon enough, as Ethereum blocks have been consistently full for many months.

DeFi and Ethereum are almost synonymous. Ethereum smart contracts enable the trustless transactions that make up decentralized finance, and most projects developed on top of the “world computer.”

This research focuses on the fundamentals of real-world use and gives an overview of Ethereum’s scalability — or lack thereof. Finally, we will explore Ethereum’s astounding dominance in both NFT sales and value locked in DeFi.

Vitalik Buterin co-founded Ethereum in 2013. Due to legal challenges with Ethereum’s initial crowd sale, it took almost two years to launch the network on July 30, 2015. Buterin wanted to expand Bitcoin’s programmability radically. He saw blockchain-native programs as a powerful catalyst for usage and adoption.

His ideas were met with intense pushback by the Bitcoin developer community, so he started to pour his efforts into a project of his own, which he called Ethereum. After receiving a $100,000 grant from the Peter Thiel Foundation in 2014, he began assembling a core team of contributors.

Some of today’s most prominent figures in crypto were among early Ethereum developers, such as Charles Hoskinson, founder of Cardano; Gavin Wood, founder of Polkadot; Joseph Lubin, founder of ConsenSys; and Anthony Di Iorio from TMX. These heavy hitters embarked on a rocky journey, which saw them facing intense infighting among the team, massive delays caused by regulatory uncertainty and near bankruptcy. 

Ethereum finally launched and proved that programmability was incredibly powerful and equally dangerous. The initial coin offering (ICO) hype of 2017, DeFi summer and the NFT boom in 2020 did more for crypto adoption than anything else, while the DAO heist(1) nearly ended Ethereum’s existence in 2017.

Figure: The Ethereum network has been at full capacity since May 2021

Ethereum hit the ceiling of its transaction capability this year. Most of the time, blocks are at capacity, but transaction fees have skyrocketed to peaks of $10,000 during coveted NFT launches.

The situation has become untenable and frequently priced out participants with lower net worth. Other blockchains picked up the slack, and Ethereum now faces innovative competition from Solana, Avalanche and Fantom. 

Will Ethereum remain the predominant ecosystem and continue to be at the forefront of innovation and adoption? Or will it fall behind and get overtaken by blockchains with better performance and faster development?

1 See “The DAO: Chronology of a daring heist and its resolution”, Deloitte Blockchain Institute, September, 2016

This article is an extract from the 80+ page Scaling Report: Does the Future of Decentralized Finance Still Belong to Ethereum? co-published by the Crypto Research Report and Cointelegraph Consulting, written by ten authors and supported by Arcana, Brave, ANote Music, Radix, Fuse, Cryptix, Casper Labs, Coinfinity, Ambire, BitPanda and CakeDEFI.

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