What is a Smart Contract? (Simplified)
A smart contract is a self executing computer generated contract, the terms of which are stored in the blockchain. When terms of the contract are met, a transaction fulfils automatically. This eliminates the need for a third party, like a bank, because the ‘rules’ are already pre-determined. Every transaction resulting from a smart contract is recorded in an unchangeable database; a blockchain.
The advantages of using a smart contract is that you can pre-programme outcomes for diffferent scenarios. Let’s say you were raising money and the price target was £1000. If the price target is met, rule 1 would be triggered and the money would be given directly to charity. If the price target isn’t met, rule 2 would be triggered and the money raised would be redistributed back to the donors. This process saves both time and money. It also prevents any misuse of funds as they are locked in the smart contract until the terms are fulfilled.
What is a Smart Contract Platform? (Simplified)
A smart contract platform simply hosts applications on which smart contracts are supported. Let’s take a simple comparison. Ethereum is a smart contract platform and it hosts decentralised applications. This is rather like how an iphone hosts apps like instagram and facebook, except the big difference is that the data s not controlled by a centralised company and the Ethereum platform supports smart contracts.
The First Smart Contract Platform: Ethereum
Ethereum was in fact the first smart contract platform, holding the majority of the market share at a modest $560 billion market cap. However, Ethereum was not designed to scale the way that it has. The network has become overstrained, making the cost to interact with it very high.
High Fees in Practice
Like below, this can be as simple as exchanging one coin for another on an exchange (Uniswap in this case). Even if you want to swap $20 worth, there is still a sizeable fee. Here it amounts to $93.25!
The Emergence of Layer 1 Solutions
In response to this issue, we’ve seen a surge in interest in Ethereum alternatives (also known as layer 1’s). These platforms can provide faster and cheaper transactions regardless of high volume.
For example, we’ve seen platforms like Solana take on extraordinary growth this year, now amounting to an impressive £74 billion market cap. To provide a bit of context, Solana was at a mere $1.52 on January 1 2021! That’s over 100x in 9 months.
Other layer 1’s like Avalanche, Fantom, Terra have also seen impressive growth this year. These platforms give users the speed and low cost that Ethereum cannot offer at the moment.
High Potential for Layer 1’s
With this in mind, it is safe to say there is a lot of upside potential for these layer 1’s. . As such, we’ve compiled a collection of metrics that will help you research and identify the top layer 1 protocols.
Researching & Evaluating the Platforms
There are several metrics you can use to evaluate whether a blockchain has high potential. (list non-exhaustive).
- Blockchain Fundamentals
- Development Activity
- Total Value Locked
- News & Trends
1. Platform (Blockchain) Fundamentals
One of the first things to evaluate is how good the infrastructure of the platform is. One of the key differentiators for the new layer 1’s is the use of proof of stake consensus vs proof of work, which has a large impact for speed, energy efficiency and scalability. Yet’s see how Ethereum and Solana measure up against eachother.
Although Ethereum has had first mover advantage, it has become almost unusable at a low level. At a maximum capacity of 25 transactions per second and average fees of $100, it is has become unappealing to use.
Also, waiting nervously for minutes whilst a transaction goes through is not an optimal experience to say the least. It is interesting that despite these flaws, Ethereum is still the dominant player in the space.
Solana ranks higher on every metric, and by a considerable degree. The proof of stake consensus really does make a monumental difference to performance. This better infrastructure has certainly contributed to Solana’s success throughout this year.
2. Development Activity
Another metric to consider is development activity. To keep it simple, wherever the majority of the developers allocate their time is likely to be the dominant platform. A good metric to get an idea of growth is to look at the developer activity on github for each platform.
Interestingly, Solana ranks 2nd and Ethereum 36th in terms of activity for the previous 6 months. It is worth noting that Github commits only give an idea of overall sentiment, as a commit refers to a change/update of the code and can be any size – from a copy change to a new feature.
The Quality of the Applications
Inline with the developer activity, the quality of the products and the speed of development is fundamental to the success of the platform. Diving into the different protocols and apps will give you a good indication of whether the ecosystem as a whole has impressive projects.
The most valuable projects are likely to be those that provide a better alternative product to an already existing industry.
To see a list of applications built on the different platforms, coingecko has lists of projects under each platform. DeFi Llama also has top projects by platform, ranked by Tvl. Access all these links per platform/blockchain below
3. Backers – follow the money
If in doubt, follow the money. This strategy is certainly a good one and can actually refine your research for you. Funds are often very transparent as to what their investments are, and even though they are likely to get the pre-market allocations to platforms and projects, investing early will certainly give you a better chance of a higher return.
At InCrypto Hub, we’ve already accumulated link to the top funds portfolios and their websites to help you with the research.
A good tactic is also to follow certain individuals on twitter, the hub of crypto activity. Following team members of large funds, such as Multicoin Capital, can provide some valuable insights.
The Total Value locked in the platforms’ ecosystem is also a great indicator of growing popularity, although somewhat artificial. TVL signifies the amount of capital that is being staked in a protocol and gives a good indication as to the overall health of the smart contract platform.
Sometimes a surge in TVL will precede a price increase, and so this can be a good metric to catch trends early.
At an impressive $172 billion Total value locked, Ethereum sits comfortably as the smart contract platform leader.
Solana currently sits at $13.53 billion locked, which is more than a 4x increase since August!
5. News & Identifying Trends
On a certain level the cryptocurrency market runs on news, speculation and trends. Identifying whether the platform will fit into the newest trends / provide some infrastructure for upcoming trends will significantly contribute to its success. Identifying a narrative with a core fundamental thesis helps to identify these trends before they happen.
For example, with the rising fees on Ethereum, it is likely that low level NFT buyers will look to platforms with lower fees so they can participate. These could be Ethereum based, like Immutable X (zk rollup), or marketplaces like Magic Eden or Solanart on Solana.
Another Example: The play to earn narrative is strong at the moment, especially with the rise of Axie Infinity. The smart contract platform that becomes the ‘go to’ development platform for games is likely to do extraordinarily well.
Summary & Final Thoughts
In summary, alternative smart contract platforms to Ethereum could well see substantial growth as mainstream adoption continues. We’ve already seen a huge surge in interest over the past year and this is likely to continue.
However, it is certainly worth considering the impact that zk rollups may have in aiding Ethereum to scale. Unlike layer 1 platforms, zk rollups actually become less expensive as users increase. This could certainly have an interesting effect on the market, potentially catalysing a shift back to Ethereum.
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