AVAX and SOL TVL outperform Ethereum by 2,800% as layers heat up

Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please review our website policy before making any financial decisions.

For a very long time, Bitcoin and Ethereum have gained reputations for making millionaires. However, as they have reached high market caps, lesser-known smart contract platforms increase competition by increasing the yield game.

Blockchain layers explained

When Vitalik Buterin, the co-founder of Ethereum, proposed the concept of the blockchain trilemma, it was taken for granted that there is a certain trade-off between scalability, security and decentralization. This means that if there is a focus on one feature, the other two will be downgraded.

Image credit: Logos Network on Medium.com

While there are a few caveats about the blockchain trilemma, it serves as an illustration of the issues we’ve already seen in action. For example, as Ethereum became more popular, it attracted more traffic. In turn, the increased traffic resulted in greater network congestion, resulting in higher ETH gas charges. To address this issue, Ethereum has started offloading off-chain transactions, also known as a layer 2 solution or rollups.

Layer 1 is the blockchain as we know it – immutable and decentralized – while Layer 2 is a network added on top of Layer 1 to handle transactions. When executed on Layer 2, transaction data is fed back into Layer 1. In other words, Layer 2 is the scalability that relies on the core security feature of Layer 1.

Likewise, Bitcoin solves its scalability issue with the Lightning Network as a Layer 2 solution, which allowed Twitter to integrate Bitcoin for the tip.

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The impact of scaling the token value

Bitcoin and Ethereum both use Layer 2 solutions to onboard more users. However, other blockchains have been developed independently, without the need for additional layers. When Ethereum suffered its worst network congestion in May 2021, Binance Smart Chain (BSC) was the biggest beneficiary, topping Ethereum by nearly 600% in transaction volume.

BSC is more centralized than Ethereum. This makes it faster, as fewer nodes are needed to verify transactions. Additionally, BSC uses Proof of Stake Authority (PoSA), while Ethereum is still moving towards Proof of Stake (PoS) for the upgrade to ETH 2.0. Solana (SOL) is also a beneficiary of Ethereum’s exorbitant gas fees, having outperformed ETH by over 500%.

Like BSC, Solana does not use Layer 2 solutions. In the words of Anatoly Yakovenko, CEO of Solana, the issue of scaling doesn’t just revolve around Transactions Per Second (TPS).

“Layer 2, sharding, etc. do not increase censorship resistance, only the TPS application. The heart of what we do with every performance optimization is to scale the minimum set of nodes that can censor the network. This set had to be super connected. And the only way to scale it is with hardware, because you need more signatures, more messages, more packets. “

In a separate response to the / r / Solana questions, he said:

“Our goal is to be the global price discovery engine for everything. There is no way this will happen without resistance to censorship. “

Layer 2 can solve the scalability problem but also introduces a new problem – L2 interoperability. This means that a dApp using one L2 solution may not work with another. This creates a fragmented ecosystem that could be fertile for code exploits and attacks on the network.

However, not relying on stacks is just one of the reasons Layer 1 tokens have outperformed Bitcoin and Ethereum over the past six months.

L1 tokens – Avalanche, Cosmos and Solana vs Bitcoin and Ethereum, image credit: TradingView

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The success of L1 tokens explained

Although Ethereum has rushed to hold the dominant market share among smart contract platforms, it is still early in the game. After all, it’s been just over a year since the Total Locked-In Value (TVL) in DeFi hovered around $ 1 billion, compared to a current value of over $ 100 billion. Additionally, Bitcoin and Ethereum have both hit certain price thresholds that will be difficult to overcome.

Locked-in Gross Value (GVL) on Major Smart Contract Platforms, Image Credit: The Block

For example, if Ethereum were to have a 2x gain, the price would double to around $ 6,000. It may be possible in the long term, but it is not feasible in the short term. In contrast, L1 Solana (SOL) made 6x gains over the past semester simply because its potential had yet to be tapped. Likewise, if you had purchased $ 5,000 worth of Cosmos (ATOM) at the start of the year, you would now have approximately $ 24,750 worth of ATOM to sell.

While much of this territory is still unexplored, Ethereum’s rival blockchains – Solana (SOL), Avalanche (AVAX) and Cosmos (ATOM) – represent a return to high returns in a short period of time.

Market capitalization of the top 10 smart contract blockchains, image credit: DefiLlama

While market capitalization and TVL metrics have their problems, the mcap / TVL ratio is a good indicator of an asset’s value. Thanks to the data from DefiLlama, if we take the late March token prices and TVL at press time, we come to the following comparison:

  • Ethereum – $ 67.89 billion to TVL 120.93 billion, market capitalization of $ 337.5 billion – mcap / TVL ratio 2.8. (78% TVL increase, 56% ETH price increase)
  • Solana – $ 209.79 million to $ 8.66 billion TVL, market capitalization $ 39.1 billion – mcap / TVL ratio – 4.6. (increase in TVL by 4,043%, increase in the price of SOL by 596%)
  • avalanche – $ 194.07 million to $ 3.59 billion TVL, market capitalization $ 14 billion – mcap / TVL ratio 3.94. (TVL increase of 1.749%, AVAX price increase of 122%)
  • On average SOL and AVAX, this gives us a TVL performance of 2.818% compared to ETH.

If the token’s mcap / TVL ratio is less than 1, it is almost always undervalued. On the other hand, the higher the ratio, the more likely the token is to be overvalued. With SOL, the ratio is 64% higher than Ethereum, and with AVAX, the ratio is 40% higher than Ethereum.

Nonetheless, even though we view TVL as a metric that indicates money is flowing between protocols instead of representing new user growth, it’s clear that Ethereum continues to pay for its high fees and a protracted transition to ETH. 2.0.

Do you think Ethereum’s network effect will maintain its momentum as the king of dApps? Let us know in the comments below.

About the Author

Tim Fries is the co-founder of The Tokenist. He has a BSc in Mechanical Engineering from the University of Michigan and an MBA from the Booth School of Business at the University of Chicago. Tim was a Senior Associate in the investment team of RW Baird’s US Private Equity division and is also a co-founder of Protective Technologies Capital, an investment firm specializing in detection, protection and protection solutions. control.

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