Smart contracts are the key to the potential of blockchain, enabling it to become so much more than just a distributed ledger that stores financial data. Ethereum, since launching back in 2015, has rightly been considered the “King” of smart contract platforms. However, it is now under serious threat of losing that crown as new blockchain projects emerge and smart contract technology matures.
Ethereum was the first blockchain platform to introduce smart contract support, enabling self-executing agreements that rely on the distributed ledger to record the terms of a transaction. With smart contracts, when predetermined criteria are met, the transaction is facilitated automatically and instantaneously, with immutable finality.
Smart contract platforms such as Ethereum are widely seen as the second evolution of blockchain technology. They enable systems, processes and entire industries to live on-chain, where they can be automated and become far more streamlined than before, with no more reliance on a centralized authority to process transactions. Smart contracts remove intermediaries and make systems more efficient, with transactions processed faster and at lower cost. It’s for this reason that smart contracts and blockchain have the potential to disrupt entire industries.
Thanks to its first-mover advantage Ethereum is by far and away the most popular smart contract platform in use today. It has the biggest user base, the largest developer community and is home to more decentralized applications than any other blockchain platform.
However there is reason to believe Ethereum’s first-mover advantage may not be enough for it to hold onto its crown as the king of smart contract platforms. Ethereum’s network is severely hampered by its lack of scalability, and as more dApps are built atop of it, users have suffered due to increased transaction processing times and higher fees. To complete transactions on Ethereum, users are required to pay “gas fees” in ETH, its native cryptocurrency. During peak times when traffic is higher than usual, these fees can cost well over a hundred dollars. As a result, more developers are moving their dApps to alternative networks that don’t suffer scalability problems.
Of course Ethereum’s developers aren’t standing still. The network is in the midst of a major migration, planning to move to Ethereum 2.0. This upgrade is designed to make Ethereum more scalable by moving to an alternative Proof-of-Stake consensus mechanism and introducing “Zk-Rollups”, which will enable a greater number of transactions to be processed. But will it be enough for Ethereum to retain its crown?
Ethereum Losing Ground
A growing number of influential names in the crypto industry believe that Ethereum’s upcoming “merge” will be too little and too late to save the day.
Muneeb Ali, a self-professed Bitcoin maximalist and the founder of Stacks, a project that’s looking to create smart contract functionality on the world’s original cryptocurrency, recently told Twitter why he hasn’t held any ETH since 2018 and has no intention of changing that.
He argued that Ethereum is currently fighting a war on two fronts, aiming to become both an alternative form of money, and retain its position as the number one smart contract platform. Ali says Ethereum is losing both battles, because Bitcoin is a superior money platform, and it is rapidly losing smart contract market share to a number of alternative Layer 1 blockchains.
My reason for not holding any ETH for the 2018-2021 cycle:— muneeb.btc (@muneeb) May 27, 2022
(a) Bitcoin will win as money
(b) Newer L1s will gain market share against Ethereum for smart contracts.
I think the reasoning remains true for coming years as well. Not downplaying developer traction etc of Ethereum.
In particular, Ali identified blockchains such as Algorand, Avalanche, Solana, NEAR and Stacks as having highly competent engineering teams that are shipping faster and gaining market share.
These claims have some factual basis, with recent price changes regarding ETH/BTC. Notably, on May 27, ETH broke the 0.065 support level it had been holding for more than seven months. The value of ETH has plummeted like a stone since the crypto market collapsed in early May following the Terra Luna debacle, while Bitcoin has largely held its ground. Ethereum’s market dominance is now at its lowest point since March, while Bitcoin’s dominance has gained 10% in the last month.
One of the reasons for Ethereum’s recent decline is hesitancy about the upcoming Ethereum 2.0 merge, as many investors are wary about what will happen. Those fears were stoked recently when Ethereum’s most famous co-developer Vitalik Buterin said on Twitter he’s still not happy with its protocol design, and that he’d like to see the network transform to become a more “Bitcoin-like” system.
Contradiction between my desire to see Ethereum become a more Bitcoin-like system emphasizing long-term stability and stability, including culturally, and my realization that getting there requires quite a lot of active coordinated short-term change.— vitalik.eth (@VitalikButerin) May 17, 2022
Not everyone feels the same way. Ethereum still has many, many proponents including researchers at Coinbase Institutional, who believe the Ethereum 2.0 upgrade will be enough to stave off pretenders to its throne.
The Ethereum Killers
There is however good reason to believe that what critics like Ali are saying is true, as Ethereum faces some extremely promising blockchain projects that have already solved the scalability issues it continues to struggle against.
These so-called “Ethereum killers” are building momentum, occupying a growing share of markets such as decentralized finance and NFTs, and doing so with faster and more energy-efficient technology that not only delivers faster and cheaper transactions but is also more environmentally-friendly.
Ethereum’s rivals include Solana, whose native SOL token is currently ranked as the 9th most popular cryptocurrency in terms of market capitalization. Solana relies on a Proof-of-History consensus mechanism to validate transactions and has won the backing of institutions such as JPMorgan and Bank of America, as well as the top venture capital firm Andreesen Horowitz. They like Solana because it offers blazing-fast transaction speeds and fees that equate to just a fraction of a cent.
Another possible rival is Tezos, which was one of the first blockchains to implement the PoS consensus mechanism that Ethereum will adopt after its merge. Tezos is especially popular with fashion, music, gaming and art projects and has community governance, where anyone who stakes at least 8,000 XTZ tokens enjoys network voting rights.
DeFi enthusiasts have been particularly taken with the Avalanche blockchain project, which is home to not one, but three independent blockchains that work in tandem to ensure scalability. Avalanche’s X, P and C chains handle different tasks, namely token creation and transactions, smart contract and proof-of-stake validation, separately, to ensure they can be processed at lightning fast speeds.
What’s crucial to remember is that all three of the above projects have already solved the problem of scalability. Meanwhile, there’s a lot of debate over whether Ethereum 2.0 will actually work as intended. Some observers have argued that a single upgrade alone won’t be able to deliver the true scale the platform requires. There’s also the problem that some users are expecting too much from the merge, which may make transactions proceed faster but likely won’t do anything to fix Ethereum’s exorbitant gas fees. Add to that, the merge may not even happen, as it has faced multiple delays already. And even if it does go ahead this year, there could well be unforeseen technical challenges that arise from the upgrade.
If the merge fails to solve Ethereum’s problems, it could well lead to an opening for what is perhaps the most interesting of all the so-called Ethereum killers – Ali’s very own Stacks blockchain, which is aiming to bring smart contract functionality to Bitcoin itself.
Stacks is a layer-1 blockchain with a unique Proof-of-Transfer algorithm that ensures that the history of all blocks ever produced is settled on Bitcoin’s blockchain. In this way, Stacks can be thought of as a programmable layer for Bitcoin that’s able to leverage its unique security and capital for decentralized apps and smart contracts.
Stacks, like the platforms listed above, has already gotten a handle on the problem of scale. But its biggest advantage, according to Ali, is that Bitcoin is the most decentralized of all cryptocurrencies. He argues that Bitcoin is the cryptocurrency that provides true decentralization of trust, and says this makes it the most desirable settlement layer for transactions. By building smart contract capabilities into Bitcoin through the Stacks layer, Ali says he will enable the creation of DeFi, NFTs and other dApps that can tap into its unique user base.
In this way, Ali believes he can unleash the potential of Bitcoin as a highly scalable and final settlement layer that’s capable of stealing Ethereum’s crown.