Ethereum Killers are almost just as old as Ethereum itself. Hundreds of projects have been launched with the promise to build a better version of Ethereum. In particular, Ethereum Killers have focused on delivering higher scalability than Ethereum itself.
While Ethereum is working on improving scalability, it will still take several years for the Ethereum Roadmap to be implemented. In the meantime, there will be a number of projects claiming that they have solved the blockchain trilemma consisting of scalability, speed, and security. So far, no blockchain has solved this trilemma in a credible way. In the following, we take a look at the history of Ethereum Killers and the network effects undermining Ethereum’s leadership position.
A Short History of Ethereum Killers
One of the very first Ethereum Killers that rose to great popularity was $NEO. $NEO was labeled as the Ethereum of China and praised for its scalability. While decentralization was on the road map in 2017, it was never successfully implemented – even five years later, the Neo Blockchain is not decentralized, which is the essential feature of any blockchain.
During 2017 $NEO experienced exponential growth and was massively outperforming $ETH. Investors that saw the narrative coming early benefited tremendously from the performance of $NEO. However, as the market sentiment turned bearish, the $NEO to $ETH ratio peaked in February 2018 at 0.14. More than 4 years later, the ratio is down to below 0.007. The investors that jumped on the Neo hype train in February 2018 would have lost 95% of their capital in comparison to investing in Ethereum. $NEO was one of the first examples of a so-called Ethereum killer that first massively outperformed $ETH and eventually ended up becoming a meaningless altcoin.
The next Ethereum Killer that caught fire was Eos. Dan Larimer, the founder of Eos, claimed that with his at the time novel delegated Proof of Stake consensus mechanism, Eos had solved blockchain scalability. The project was backed by many famous crypto venture capitalists such as Multicoin Capital and Mike Novogratz. The native token $EOS saw a lot of traction during 2018 and even 2019. However, thereafter it started to massively lose value in relation to Ethereum and ended up losing more than 97% on the Ethereum ratio. Both retail and institutional investors gave up on Eos just as they had on Neo.
As the Ethereum blockchain became congested and expensive to use in late 2021, Binance Smart Chain (BSC) started to appear. Binance Smart Chain was essentially a centralized fork of the Ethereum blockchain, which enabled an easy migration of wallets and decentralized applications to the new network. However, Binance Smart Chain was never really decentralized and remained in control by Binance exchange, which ran the majority of its nodes. For these reasons, BSC was more perceived as a centralized Ethereum test net than a real competitor to the decentralized vision Ethereum was on to. Nevertheless, the end user seemed to prefer low fees over centralization. For these reasons, BSC ended up with significant traction during the peak times of Ethereum gas fees. However, as the market sentiment started to turn more bearish, BSC experienced the fate of previous Ethereum Killers, and the growth of the network started to vanish.
The latest Ethereum Killers of the 2021 market cycle were Cardano and Solana. Solana managed to rise to astronomic levels during 2021. 2021 also represented a glorious comeback year for $ADA (Cardano’s native token) after a sharp decline started by the 2018 bear market. Both of them managed to significantly outperform Ethereum during the most bullish phases of the market during the first and third quarters of 2021. However, whenever the overall cryptocurrency market sentiment turned bearish, their relative market capitalization to Ethereum started to decline, and the Ethereum Killers began to underperform.
Despite their traction, both Solana and Cardano have their shortcomings. Solana is struggling with repeated network issues and outages, questioning the reliability of the blockchain for settling important DeFi transactions. Cardano, on the other hand, is not yet seeing any substantial adoption by decentralized applications questioning whether the theory-heavy blockchain is providing any use in practice.
It is yet too early to judge the success of Solana and Cardano in relation to Ethereum since retail investors have not yet capitulated on these coins such as they have on $NEO or $EOS, for example. However, if history provides any guidance, it will be extremely difficult for them to establish themselves as a serious contender of Ethereum in the long term.
Besides the mentioned Ethereum Killers, there are many more projects who are aiming to build a better version of Ethereum. However, when studying the history of Ethereum Killers, a few patterns crystallize:
● Ethereum has been criticized by its competitors for the high gas fees, which are pricing out low budget users. Nevertheless, none of the contenders managed to credibly solve the blockchain trilemma by delivering speed, security, and stability at the same time
● During periods of less euphoria in the cryptocurrency markets, the demand for block space starts to decline. This causes Ethereum gas fees to come down and takes out the wind of the sails of the so-called Ethereum Killers. Furthermore, as market conditions get worse, investors tend to consolidate their money into the blue-chip cryptocurrency assets Bitcoin and Ethereum. This causes the $ETH ratio of Ethereum Killers and other altcoins to come down.
● The names of Ethereum Killer have changed over the years. However, Ethereum itself has remained the leading and undisputed smart contract platform. In 2022 Ethereum has a very big upgrade coming, which further can solidify its leadership position. The network will change its consensus mechanism from Proof of Work to Proof of Stake, which will come along with a sharp decline in the issuance of new coins. The implementation of the merge in 2022 and the release of layer 2 scaling solutions in the following years will help cement the leadership position that Ethereum holds.
Network Effects
Besides the recent history of Ethereum Killer, there are other arguments for the sustained dominance of Ethereum as the leading smart contract platform. Those arguments can be mostly summarized as network effects. The following five variables are useful to look at when it comes to determining Ethereum’s advantage in relation to its competitors:
● Market Capitalization: The market capitalization of a blockchain is an indicator of how much trust investors have in a network. The market capitalization of Ethereum as of April 2022 is around 10 times as high as the market capitalization of Solana, which is currently the largest Ethereum contender. This provides for a very significant lead of Ethereum on that metric.
● Users: While leading on most other metrics, Ethereum is not constantly leading on the number of active users. This is due to the fact that transactions on Ethereum are relatively expansive, which is pricing out several users who would like to use the blockchain. The number of daily active users is occasionally higher on Solana than on Ethereum. However, it needs to be noted that a lot of the activity on Ethereum is already taking place on layer 2 scaling solutions, which essentially act as an extension for Ethereum.
● Developers: As more developers become familiar with Ethereum, they will continue to build applications on the blockchain that they have learned to use. Ethereum is leading clearly as the blockchain platform with the highest number of active developers despite other ecosystems growing faster. Once the number of active developers of an alternative smart contract platform outgrows Ethereum, this would be an indicator that investors should pay close attention to.
● Applications: The number of dApps or so-called decentralized applications built on a blockchain and their number of users are indicators for the adoption of a blockchain. While the number of dApps and their users are important, it is even more important how much value is locked in these dApps. Ethereum is not necessarily leading in the number of daily active users of dApps. However, it is leading in terms of Total Value Locked by dApps.
● Total Value Locked: The variable Total Value Locked measures the value that is locked inside the decentralized applications deployed on a blockchain. More than half of the total value locked on all blockchains is locked inside Ethereum, with the rest divided among several others.
The network effects in play make it unlikely that in the near future one Ethereum Killer will be able to replace Ethereum as the leading decentralized blockchain for settling transactions, recording state, and executing simple programming language.
The sustained growth of all these variables leads towards demand for the Ethereum blockchain. As demand grows, the fees collected by the Ethereum blockchain increase. Ethereum is massively leading all competitors in terms of total fees generated.
Since parts of the fees collected get burned, the issuance of the Ethereum blockchain gets reduced, ensuring the long-term viability and profitability of the blockchain. Eventually, the demand for block space on Ethereum is what generates value for the blockchain and ensures its leadership status in both adoption and financial metrics. As long as this demand is growing strongly, it is unlikely for an Ethereum contender to replace Ethereum as the leading blockchain.