Ethereum may be the second most popular cryptocurrency by market capitalization, but scaling challenges have opened the door to competition in the smart contract space. While it enjoys a critical mass of developers, users and projects, high gas fees and transaction times have led several projects to expand onto other smart contract platforms in recent months.
Let’s take a look at so-called Ethereum killers and if their recent performance is indicative of longer-term changes to the smart contract ecosystem.
Ethereum’s Achilles Heel
Ethereum has become a tremendously popular smart contract blockchain platform, but the growth hasn’t come without its fair share of growing pains. As decentralized finance (DeFi) and other applications grow in popularity, the platform has seen a tremendous increase in transactions over the past couple of years that has led to widespread scalability issues.
These challenges fall into a few different buckets:
- Clogged Networks: Ethereum has a limit to the number of transactions that it can process per second, which has created an obvious bottleneck.
- Disk Space: Running a node is becoming harder because the required disk space needed to run a client is growing at a very fast pace.
- Energy Waste: Ethereum’s underlying proof-of-work consensus algorithm has a significant and well-known environmental impact.
Ethereum launched the Ethereum 2.0 Beacon Chain on December 1, 2020 with updated consensus nodes, validation methods and governance structures known as proof-of-stake. While it still needs to break the blockchain into shards and adopt Rollups, Ethereum 2.0 promises to eliminate many of the growing pains experienced by the original version.
While Ethereum 2.0 is expected to boost network speeds from around 15 transactions per second to 100,000 transactions per second, some experts are still concerned that communication between shards could pose an even greater challenge to scalability than the transaction bottleneck that the new paradigm was designed to solve.
Top 5 Ethereum Killers
There has been no shortage of smart contract platforms that have sprung up to fill the void while Ethereum works toward launching Ethereum 2.0. In many cases, these platforms have sidestepped scalability concerns by leveraging more modern architecture concepts or targeted niche subsets of the market where they could offer an advantage.
Some of the most popular Ethereum killers include:
- Polkadot was co-founded by Gavin Wood, a co-founder of Ethereum. At its core, the platform uses so-called parachains that run at a higher throughput than Ethereum’s blockchains using sophisticated parallel processing features.
- Cardano uses a proof of stake consensus algorithm, called Oroboros, which makes the network a lot more scalable than Ethereum. As a commercial project, the company’s programmers and researchers are also paid and work as a unified single team.
- Solana was founded by a team of engineers from big tech companies and is capable of processing 50,000 transactions per second. With architectural advantages, it can also process 10,000 times as much as Ethereum and at a much lower cost.
- Avalanche launched in September 2020 with the claim that it could process 4,500 transactions per second, but unlike other Ethereum-killers, it’s been pitched as a way to complement and connect with Ethereum rather than replace it.
- Stellar is an open network designed specifically for storing and moving money. While Ethereum works best for programming smart contracts, Stellar is ideal for facilitating the transfer of funds within a blockchain ecosystem.
Many of these platforms have already seen tremendous growth since their launch. For instance, Polkadot has a market capitalization of $34.5 billion with more than 50 projects in its ecosystem, including Kusama and Ontology. Cardano has similarly grown to a $37.8 billion market capitalization with a significant jump in recent interest.
Investing in Ethereum Killers
The Ethereum killers gained a lot of popularity over the past few months, surpassing Tether, XRP, Litecoin and other top cryptocurrencies in market capitalization. When Bitcoin and Ethereum prices dove in February, many Ethereum killers saw a significant rise in value as investors turned to them as an alternative in the crypto space.
Investors can purchase many of these cryptocurrencies through conventional trading platforms, such as Coinbase, Binance or Kraken. Of course, it’s important to keep in mind that these cryptocurrencies have many of the same risk factors as others, including the potential for significant volatility and the uncertainty of future adoption.
Crypto traders and investors should also keep in mind that the IRS continues to crack down on those that aren’t claiming crypto gains on their taxes. With a new question on Form 1040 and the hiring of blockchain audit specialists, it has never been more important to ensure that you’re properly recording transactions and paying the right amount of taxes.
ZenLedger makes it easy to automatically import crypto transactions across wallets and exchanges, compute capital gains or losses and pre-fill popular IRS forms. You don’t have to worry about miscalculations or paying an accountant to comb through records by hand—and you can identify ways to save with tax loss harvesting and other features.
The Bottom Line
The so-called Ethereum killers have become increasingly popular over the past few months. As Ethereum struggles with scalability issues ahead of its migration to Ethereum 2.0, these projects aim to provide better performance to fit themselves into pockets of the market where they may offer an advantage over Ethereum smart contracts.
Investors may want to consider these Ethereum killers as potential ways to diversify their portfolio away from simple Bitcoin and Ethereum, although it’s important to keep in mind that many of the same risks apply to these cryptocurrencies and any others. You should ensure that you’re taking the right steps to diversify risk, as well as plan to pay taxes.