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Ethereum and its competitors

Posted by
Ilya Abugov

All you need to know about everything that matters | Week #47, 2020

This was another busy week for the blockchain industry. BTC has briefly crossed the $18,000, while ETH has touched $490. There is excitement in the space, but that is also firing up the competition.

As the prospects improve the outwardly cooperative nature may turn more towards open rivalry. For DeFi, hacks continue to be a problem and it remains to be seen how the sector intends to address its vulnerabilities as it continues to grow.

When the yield dries up

Liquidity mining has been a major catalyst for the DeFi sector in 2020 incentivizing user activity and resulting in increased TVL numbers. However, throughout this process, the question of sustainability has hovered over the space.

What will happen when the yield incentives go away? With Uniswap’s token liquidity program ending on November 17, the sector may have seen the first glimpse of what that might entail.

Source: info.uniswap.org/home

Uniswap has seen its TVL reduce in half in the span of a week, with TVL being reduced from over $3.3B to around $1.6B. However, capital didn’t just evaporate it migrated over to other protocols, primarily and old rival SushiSwap. The AMM alternative has seen its TVL skyrocket from around $300M to around $1B over the same period.

Source: sushiswap.vision/home

This may indicate the differentiation between organic and inorganic growth. Consider the first Uniswap encounter with SushiSwap. The latter first attracted and then ported over liquidated, but Uniswap came out with net growth in TVL relative to where it started.

Similarly now, the liquidity program helped to drive Uniswap’s TVL significantly higher. How even after the significant reduction, the TVL is higher now (~$1.6B) than when the token was launched on September 16 (~$916M).
The Uniswap community is currently voting on running another liquidity mining initiative.

The proposal wants to distribute UNI tokens to the same pools as before, but at half the rate. The proposal needs a minimum of 25M UNI in favor, before the end of voting on November 19. It is interesting that of the 16.86M currently in favor, 15.46M comes from a single address – Dharma: Deployer.

Ethereum and its competitors

As the industry is growing, the competition for market share may start to intensify. Despite its current scalability limitations, Ethereum continues to be the clear leader in the dapp space. Moreover, it is showing signs of accumulating network effects. This may help it defend its position against rival blockchains.
For instance, ETC will become the latest blockchain to plan to have its cryptocurrency appear on Ethereum in the form of wrapped tokens.

Tokenized BTC has proved to be popular on Ethereum and with Dash and Zcash also planning to appear on Ethereum in the form of wrapped tokens this looks to be forming into a trend.

Source: btconethereum.com

When it comes to dapps, users have shown a willingness to quickly migrate capital in search of better yields. It remains to be seen if that will also be the case when it comes to layer 1 ecosystems.

Ethereum competitors are working to provide alternatives. Nervos has launched a new token standard to help with the growth of its DeFi ecosystem. Tezos’ Delphi upgrade may reduce gas costs by as much as 75%. Given, that high transaction costs are one of the biggest challenges impeding growth in Ethereum, this may make Tezos a competitive alternative.

The Oasis Network launched its mainnet, and with a focus on privacy is also looking to compete in the DeFi sector, especially in the area of undercollateralized loans.

Traditional industry players are also looking to compete. For example, IBM has made news for its consensus for in-game transactions patent. Enterprise players are often discounted in blockchain conversations, but given their reach and resources, they may be able to significantly alter the competitive landscape. Furthermore, it is unclear how this sort of patenting may affect the dynamic of an industry that has focused on open source solutions.

At the same time staking on the Ethereum 2.0 Deposit Contract is progressing rather slowly. This may delay the anticipated launch of phase 0. As such, layer 2 solutions may become more important for Ethereum in order to maintain its dominance as a network for dapps.

The threat of exploits

November has seen a significant number of DeFi dapps being exploited. Most recently three projects suffered: Value DeFi ($6M), Origin Dollar ($7M), and Akropolis ($2M). The unfortunate events all happened in a relatively short window of time and have highlighted several trends.

Flashloans are not only a useful financial tool but also a potential attack instrument. This feature of the DeFi space is highly complex and it appears that projects are having a hard time identifying all of the possible attack vectors.

Audits are not covering enough to protect the projects. Even projects that have undergone audits have suffered from exploits. This has some in the community to question what audit firms should be responsible for. The industry may need to start supplementing its technological audits with economics audits. The recent exploits were not trying to crack protocol defenses, but rather manipulate economic conditions. As protocols become more and more interconnected there may be a greater need to evaluate cross-protocol dynamics.

Also, the recent situation has exposed the fact that projects have very limited options for recourse in a decentralized environment. Projects try to appeal to the attackers by offering rewards, but at the moment few have shown the ability to bring any legal action. This may only embolden malicious actors as the sector grows.

Centralization in a decentralized world

Axie Infinity has been one of the flagship gaming projects in the Ethereum ecosystem and the industry as a whole. From its implementation of the play-to-earn model to connect with the DeFi sector, fractional ownership, and governance it has been one of the leaders in experimentation in gaming.

However, news of 800 Axies being banned from the game by Sky Mavis creates a dangerous precedent. It is reminiscent of centralized DeFi projects blacklisting addresses in an attempt to counteract illicit activity. While the intentions may be good, the result underscores that a centralized entity can have a very major if not the deciding impact on the ecosystem. This may become an important development for both users and regulators.

NB: The information provided here is for reference and informational purposes only. This is not investment advice and should not be treated as such.

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All you need to know about everything that matters | Week #46, 2020
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