DeFi Roundup Part 2: Can Ethereum’s Moat be Challenged?

Almost everything, if not everything, that happened with regard to on-chain permissionless finance was conceived and implemented on Ethereum. Synthetix’s co-founder, Kain Warwick, previously spoke of why the project, which started off on EOS as well, decided to shift entirely to Ethereum. But with development coming to competing for first layer blockchains like Tezos, Polkadot, Algorand, and Hashgraph (among others), does Ethereum stand to lose its spot as the crown prince of open finance?

Scalability, Network Effects, and Communities Put in Perspective

Without even discussing the ‘what, why, and how’, it should be noted that this space is incredibly young and anything could happen at any time to influence the course of things. So the rational, chain agnostic conclusion should be that “nobody knows”.

Ethereum competitors have a long, long way to go before they can come within a jabbing distance of the $14 billion giant. Nobody can deny that Ethereum’s head start gives it a significant advantage, especially because the protocol continues to be developed and upgraded with a vigour that is unmatched by any other blockchain project – even Bitcoin.

But then again, scalability does play a huge role in determining how sustainable a smart contract protocol is. Without enough throughput for people to have transactions confirmed in seconds or at least a minute, it is difficult to envisage a future where these protocols gain mainstream adoption. This is precisely why scalability is such a sensitive factor when it comes to these protocols. The race for dominance would have been cut for Tezos et al if Ethereum had rolled over and given up, but with ETH 2.0 on the horizon and Proof of Stake set to boost throughput to 5,000-500,000 transactions per second (based on the execution environment), Ethereum is not just in the race – it is currently the only one in the race.

One again, Ethereum already has a massive community, and it should be clear what impact a robust community has on protocol growth and adoption. While Polkadot and Tezos also having rapidly growing communities, only time will tell if people stay loyal to these protocols based on the premise of future adoption, or they leave to build on and use dApps on Ethereum that already exist.

Possible Course for the Future and Other Thoughts

It becomes pretty clear that Ethereum is leading the race and will continue to do so for the foreseeable future. But to count out competing protocols solely based on the network effect Ethereum has built and nurtured would be myopic based on industry trends. At the end of the day, the most secure, scalable, and easy to use the network will be the winner with the masses, and loyal minorities will stay with other chains, hoping to reverse the cause and effect that set that precedent in motion.

Interoperability enablers like Cosmos that take chain agnostic routes will be able to thrive even if a major economic movement occurs on one protocol while niche markets show up on other protocols. In another thought experiment, each protocol could be used for a specific purpose: Ethereum for finance, EOS and TRON for gaming and gambling, Polkadot for logistics, etc. Even in this event, interoperability enablers will do well. So a network like Cosmos may not get eaten by network effects while competing protocols almost certainly will.