Ethereum, Solana, Polygon & Co Form A New Hot Market Of Blockchains
Most chains are vying with Ethereum for a share of the smart contract/dapp space. We’re now also witnessing a greater number of supplementary/ancillary chains. An increasing number of them are being privately funded by venture capital.
Blockchains are proliferating almost at the rate of cryptoassets. There are now blockchains for decentralized finance (DeFi), decentralized exchanges, smart contracts, non-fungible tokens (NFTs), video content, for cloud computing, gaming, marketplaces, and who knows for whatever else.
The market for competing blockchains is now becoming crowded and complex, with many platforms offering variations on the same thing, and many others offering something a little different. It’s therefore hard to discern just which are the dominant or up-and-coming chains, and what the sector will look like in several years’ time in terms of market share.
However, figures within the industry expect the market to crystallize and consolidate in the not-too distant future, with crypto’s versions of Google and Amazon likely to emerge in the form of platforms for dapps (decentralized applications). At the same time, venture capital (VC) is funding numerous smaller platforms and helping them to grow beyond the startup phase, something which promises to maintain diversity and competition in spite of concentration.
The blockchain market landscape
For the most part, the blockchain market/sector is defined by Ethereum (ETH)-style platforms offering support for smart contracts and dapps.
“From our observation, the existing chains are similar in models; however, we can still expect lots of variety in terms of nature. While most of them are targeting to solve the ETH scalability problem, some focus on interoperability and security,” said Lennix Lai, director of financial markets at OKEx.
Other industry observers agree that most chains are vying with Ethereum for a share of the smart contract/dapp space, which arguably is the heart of the non-money-focused crypto ecosystem.
“Smart contracts and dapps are core features for a number of notable blockchains and, while there is certainly some overlap, we’re not short of different use cases,” said eToro crypto market analyst Simon Peters.
And yes, Ethereum is unsurprisingly the dominant platform when it comes to this core area of the blockchain market. According to data compiled by DeBank, it accounts for around 73% of the total value locked in on all DeFi platforms, with Binance Smart Chain (its nearest rival) currently accounting for 17%.
“Ethereum is currently the main platform for dapps, smart contracts and NFTs. Over time, given planned upgrades (such as ETH 2.0) it will hopefully overcome the scalability and high transaction fee issues it currently has,” said Peters.
Despite Ethereum’s dominance of the core blockchain market, Peters suspects that other rivals could begin eating into its market share.
“However, Cardano (ADA) and Tezos (XTZ) — both platforms for token creation, smart contracts and dapps — could well rival Ethereum for market share in the future,” he added. (However, Cardano still does not support smart contracts.)
Aside from Cardano, Tezos and Binance Smart Chain, other Ethereum-rivalling smart contract/dapp platforms include EOS, Tron (TRX), Solana (SOL), Algorand (ALGO), NEO and Avalanche (AVAX), among others.
And beyond platforms aiming to be smart contract/dapp blockchain, we’re now also witnessing a greater number of supplementary/ancillary chains, which aim to provide the wider ecosystem with additional functionality and capabilities.
“On the more unique side of the scale, we have examples like Chainlink (LINK), which is the main decentralised oracle network to provide real world data to smart contracts and blockchain as a whole. And Polkadot (DOT), which delivers focused blockchain interoperability so independent blockchains can exchange information and transactions in a trustless way,” said Peters.
Other chains which operate as an accompaniment to ‘core’ blockchains include Polygon (MATIC) (a layer-two scaling solution for Ethereum), Cosmos (ATOM) (a platform for linking other blockchains), and Kusama (KSM) (a test blockchain for Polkadot).
Then there are the projects which boast their own specific, sometimes niche uses, such Iota (MIOTA) (which is not blockchain), Filecoin (FIL), Theta Network (THETA), and VeChain (VET). This highlights the fact that, even if a few blockchains will eventually emerge as the dominant smart contract/dapp platforms, there will always be a peripheral ecosystem of other chains offering targeted use cases.
Funding and revenues
What’s interesting about the blockchain market is that it’s being increasingly operated much like a traditional sector of the economy. This means an increasing number of them are being privately funded by venture capital, with the expectation of bankable profits somewhere down the line.
“Venture capital is still a significant source of funding to blockchain platforms. It helps the platforms or projects to grow quickly; however, it is not a guaranteed success,” said Lennix Lai.
He added that OKEx has helped with consultation on many new blockchains projects, although the planning for a significant portion of these is often in the “very initial” stage.
“This is dangerous since the money comes with strings attached; every decision should be strategic, or scaling up too fast might end up failing,” he said.
Wilson Withiam, a senior research analyst at Messari, said that funding is usually a mix these days, with traditional VC funding being complemented by some variation of a token sale.
“Almost every new Layer-1 project has raised a private VC round. Several (not all) have also held a public token sale at launch or leading up to its mainnet launch as a way to raise more funds and improve the initial token distribution,” he told Cryptonews.com.
Withiam also noted that most blockchain projects these days launch a foundation tasked with overseeing the distribution of raised funds in order to support development initiatives.
“These foundations also often receive an allocation of tokens, which they'll periodically sell in private sales to fund development and adoption initiatives long-term. Examples include the Celo Foundation, the Solana Foundation, and Ava Labs,” he said.
As for revenues, there’s little if any data on whether venture capital-backed blockchain projects are earning anything describable as a ‘profit.’ Meanwhile, the picture is complicated further by the fact that some blockchain networks are more decentralized, with transaction fees (for instance) usually going to a dispersed pool of miners or validators, rather than a centralized corporation or organization that banks a profit.
This may potentially undermine attempts by new and existing projects to attract significant venture capital. However, with successful blockchains likely to see their native tokens rise vastly in value, this may be enough to compensate for the fact that blockchains lack a traditional revenue stream.
The future blockchain market
It’s likely to be a while before the blockchain market consolidates in the way the dot-com bubble consolidated after 2001 into a few key corporations.
“In the near-to-mid-term, we're going to see an explosion of app-specific chains and apps popping up on new platforms,” said Withiam.
While he acknowledged that most new platforms aren't feature-complete and haven't reached a state of maturity that makes Ethereum-level adoption viable, he also suggested that there are too many upgrades and catalysts on the horizon to think they won’t grow in the future.
“Cosmos and Polkadot have two of the largest developer communities outside of Ethereum, and they each have network-defining upgrades coming up that will encourage developers and users to explore opportunities within their respective ecosystems. Solana has a burgeoning application ecosystem that might be short on tooling for now but may have enough momentum for it to overcome short-term hurdles,” he said, while also noting that Terra (LUNA) and THORChain (RUNE) have proven app-specific chains can add and generate significant value.
However, industry observers suspect that, sooner or later, a few dominant blockchains will emerge.
“In terms of evolution of the 'blockchain sector' going forward, I feel there will be dominant blockchains that will be used for the building of dapps. Some, such as Ethereum and Tezos are currently centred around enterprise and how existing companies can use their blockchains for new initiatives, for example, Red Bull Racing and McLaren Racing using Tezos for NFT listings,” said Simon Peters.
For Lennix Lai, this evolution is “inevitable” at some point. “We would love to see our version of successful cases like Google and Amazon in the blockchain/crypto field in the coming years,” he said.
Despite this, there will remain a number of other blockchains which offer unique features and functionality, as well as chains that target specific applications and use cases (such as Cardano working with the Ethiopian government).
“I see a growing importance for a number of interoperability projects such as Polkadot and Cosmos, which allow different blockchains to communicate with each other. Projects like Chainlink are also worth watching, there are clear applications for bringing real-world data onto blockchain for use in dapps and smart contracts,” Peters concluded.