Protocol Movements (Alts to ETH)

I’ve recently been going down a rabbit hole on protocols. Many Layer 1’s were released and grew, beginning in January 2021. It has almost been 11 months since Ethereum held over 96% of TVL. That has changed (the market grew) and is now 64% (picture below). Other L1s are a mixed bag with differing utility, incentives, and ease of use: from Binance, Solana, Avalanche, Terra, all the way to Palm, with $159.83 of TVL and a similarly small market cap. This post will be about:

  1. What Ethereum is doing.
  2. An alternative to Ethereum.
  3. A few alternative chain projects I monitor.
https://defillama.com/chains

ETH2.0 be too late to maintain dominance come 2023 (better yet, does that even matter)? Or will the proliferation of these chains reinforce the collective demand for lower latency, higher throughput, and easier use to build on these networks? My opinion is the latter.

Although, I can’t forecast where and how alt L1s will evolve. I can evaluate the differences between the protocols, their traction, captured developer mindshare, and investigate all the telegram, discord, and back-channel Stack overflow rooms. Still, talking to developers always delivers the best results in understanding passions and frustrations.

As of today, Ethereum’s average block time is 13.71 seconds (unchanged essentially, but slowly decreasing), the hash rate is 877 (increasing since 2017), and TPS is 14.3 (constant).

https://www.etherchain.org/

All of that may be of little interest, or better yet, a concern in 2021. The ETH2.0 roadmap has been in motion, the beacon chain deployed, and other L1s already have (1) brand awareness, (2) developer mindshare, and (3) people building. Although, ETH2.0’s promises are not inconsequential in what it will bring: from a post-Vitalik did last year: 

  • “Today, Ethereum has ~15 TPS.
  • If everyone moves to rollups, we will soon have ~3,000 TPS.
  • Once phase 1 comes along and rollups move to eth2 sharded chains for their data storage, we go up to a theoretical max of ~100,000 TPS.
  • Eventually, phase 2 will come along, bringing eth2 sharded chains with native computations, which give us ~1000-5000 TPS.”

The ‘Summer of L1s’ evolution happened mainly because of Ethereum’s bottlenecks, and it has also shown that price sensitivity is a more significant concern than security. The cost reduction potential roll-ups (L2) promise can not be wholly realized until more users move from L1 to L2. 

Beyond architecture, bottlenecks are created because every node in Ethereum stores and executes every transaction submitted by users. Overlay this with the fact that more and more dapps are being built, and what you get is traffic, or congestion in the network creating rising gas fees, currently averaged at 122 gwei (below). In addition to a congested network, running nodes are more complex as the network grows, and the amount of energy used needs to decrease. But the Ethereum community is tackling this multi-year roadmap, i.e., with a phased approach to reconstruct its underlying properties. Those properties can be spoken in terms of resource requirements that will be changing.

https://ycharts.com/indicators/ethereum_average_gas_price

Resource requirements of Ethereum and alternative L1’s are relatively similar: (1) bandwidth, (2) compute, and (3) storage. Additionally, chains measure performance in two ways, (1) latency and (2) throughput. These are all measurements that help one understand the capability, capacity, and needs for any chain to function.

  • Bandwidth is when you download or ‘upload’ – i.e., data
  • Compute is when computations take place in (or to) smart contracts, i.e., scripts
  • Storage is what it sounds like – storing the transaction data for indexing, tracking, and continuing the state
  • Latency is the time it takes to process
  • Throughput is transactions per second/day, essentially how many the system can process

The ETH2.0 roadmap notes it will make the chain more scalable, secure, and sustainable. ETH2.0 will roll out in three phases, with the first phase already being completed: the release of the Beacon Chain (that allows staking). Later on, in 2022, Mainnet Ethereum will merge with the Beacon Chain, and then Shard chains will spread the network’s load across 64 new chains (the third phase). Some skeptics are expecting this to finalize in 2023.


Enter a new challenger chain, Avalanche, or AVAX. This L1 (almost considered an L0) doesn’t have block times, comprises three chains with distinct properties, and finalizes around .735ms. That’s fast and important from a security standpoint. It was created by Ava Labs, its main net launched in 2020. Both a16z and Polychain Capital invested. When the public launch took place, they raised $42M+ in 4.5 hours. Today it is one alternative that has seen strong public support from Zhu Su and others. 

As a base comparison to Ethereum, below is (1) AVAX’s current comparison compared to Ethereum, (2) its daily financial snapshot, and (3) the initial token outlay.

NetworkConsensusLaunchM/CapTVLTPSProcessorMemoryStorageMin. StakeLanguageGit Stars
EthereumPoW 2015$503bn$170bn~15CPU > 2.8GHz16gb>100gb32Solidity33k
AvalanchePoS2020$25bn$13bn4,500CPU > 2GHz>6gb>200gb2,000Solidity 1.2k
https://www.coingecko.com/en/coins/avalanche
https://www.fxstreet.com/cryptocurrencies/news/avax-price-to-see-triple-digits-as-avalanche-sits-on-strong-fundamentals-202110280932

All the buzz around AVAX is because of two key differences to ETH: latency and throughput. Using Proof of Stake, Ava Labs created a new method that incorporates the Nakamoto consensus (decentralization + scale + robustness) and classical consensus (low latency + high throughput + lightweight + and sustainable). This combination creates a system that strengthens the chain from a security and usability standpoint.

https://www.avalabs.org/whitepapers


This is accomplished by the three chains separate instances of a virtual machine. Each is deployed on a subnet, and each subnet has its incentive mechanisms to ensure validators are honest. 

  • It works by having each validator randomly select X nodes from the entire validator list to query for the result,
  • Each validator responds with their decision,
  • And if the majority of responses differ from the node performing the query, then it will update its preferred decision to reflect that and respond to the other nodes with that answer.

By randomly selecting other validators to query, participants build confidence in the correct decision shared by the other nodes in the network. The key here is that one node doesn’t query every other node as you’d have in classical consensus. Each node does its sample of randomly selected nodes. Avalanche can scale to hundreds of thousands (millions) of nodes without adding massive overhead. And that architecture can be translated comparably to other networks in practice.

Below is a snapshot showcasing a comparison of Avalanche to Bitcoin, Ethereum, and Polkadot (the closest in comparison). As you can see, Avalanche is quicker than all three and has finality in under a second (.7ms as of today).

https://www.avax.network/


Lastly, developers have already built many projects on Avalanche. Those projects are (1) continuing to grow, (2) unique, and (3) are primarily engineered to be a multi-chain. Two of my favorites so far are Trader Joe and Benqi

Trader Joe: 

  • Trader Joe is an AMM (automated market maker) based DEX where users can trade, pool, farm, stake, lend, and soon vote. The white paper is here.
  • Their token, ‘JOE,’ is a governance token.
  • The network now has over $2bn in TVL. And in the past 24 hours, the network had over $1bn of trading volume.
  • Competitors (or comparisons) on other blockchains are Pancakeswap, Uniswap, and sushiswap. A competitor on the Avalanche network is Pangolin (a Uniswap clone).
  • JOE didn’t do any pre-sales, seed investors, or VC allocations initially. However, Trader Joe is aware that the ambitious plan will require expenditure; therefore, they allocated 10% for potential strategic investors and have since taken in private capital.
  • JOE’s reward model works similarly to Sushi, where .05% of all trading fees are diverted into rewards for JOE holders. Those holders can stake their JOE for xJOE to earn their share.
https://coin98insights.com/what-is-trader-joe

Benqi: 

  • Benqi is a non-custodial liquidity market protocol that enables users to effortlessly lend, borrow, and earn interest with their digital assets. Me (a depositor) providing liquidity to the protocol earn passive income, while borrowers can borrow in an over-collateralized manner.
  • Their token, ‘QI,’ is required to vote and decide on the outcomes of proposals through BENQI Improvement Proposals (BIPs).
  • The total supply of QI will be 7,200,000,000 tokens.
  • Depositors and lenders are given tokenized yield-bearing tokens (QI Tokens) that are used to withdraw funds from the pool on-demand when required. Those tokens can also be transferred and traded like any other crypto asset on Avalanche.
  • BENQI uses a time-based approach to calculate the rates on the platform to give users the most accurate prices.
  • I like that smart contracts manage the funds stored in BENQI. Currently, the governance of BENQI is led by the founding team but will eventually be delegated to a Decentralized Autonomous Organization (DAO) by using QI tokens.
https://cryptorank.io/ico/benqi

What does all this mean? There are alternatives, and private capital is targeted at ideas powered by intelligent individuals. It also means that the ecosystem as a whole is growing cumulatively. Founders have options, and those options are expanding exponentially. In my next post, I’ll go into valuing one of these networks and considerations that should be kept top of mind.

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