Updated February 2023
For the first time in three years, in 2021, Bitcoin’s supremacy over all other cryptocurrencies is heading below 50%. The biggest beneficiary is Ethereum, with a thriving ecosystem of non-fungible tokens (NFT) and decentralised finance (DEFI). Vitalik Buterin's brainchild isn’t, however, without its issues - namely spirally transaction fees - but there are plenty of challengers to Ethereum queuing up to capitalise.
Ethereum currently handles only 17.5 transactions per second (TPS), which is too low to become a global payment system. To give context, Visa manages about 65,000 transactions per second.
The main reason for ETH's low TPS is its proof-of-work (PoW) consensus mechanism, which is how it validates transactions. PoW is not only slow, but has drawn criticism for wasteful use of computation resources and electricity (read our separate blog post on whether Bitcoin is bad for the environment).
As transactions require computational resource, and are increasingly exponentially - thanks to the success of NFTs and DEFI - the cost of using the Ethereum network - as measured in GAS - is growing to unmanageable levels. The current average transaction fee for the Ethereum network is around $15.
Ethereum’s problems can be summarised in one word - scalability. The same criticism that has been levelled at Bitcoin. But given crypto innovates at lightning speed, there are a host projects lining up as challengers to Ethereum, with their own clever solutions to the tricky challenge of scaling.
Polkadot’s credentials couldn’t be stronger, developed by the co-founder of Ethereum - Gavin Wood. If focuses on a solution to the scalability issue with the help of something called sharding.
Sharding is the process of breaking the blockchain into smaller chunks (shards) which are easier to process. These shards connect to a central chain - the Relay Chain - which is responsible for processing parallel transactions, achieving high TPS with much lower transaction fees than Ethereum network.
The process is clearly more complex than the few lines we have dedicated to the summary, but what is important is that Polkadot’s approach to the problem is being taken seriously.
There are multiple use cases of Polkadot. For example, Kusama, the canary network of Polkadot plays a crucial role in reviewing a project and its features before deploying it on Polkadot. Centrifuge, another Polkadot-powered project, facilitates borrowing and lending of digital assets.
With a Twitter community of 323k and 3,503 developers sitting in the Substrate Technical channel, the platform is arguably the most organised and well-supported ETH alternative in the market. A truly decentralised network, Polkadot has 297 validators, backed by 6,978 individual nominating accounts and run by around 200 independent operators.
The current ranking of Polkadot's native toke DOT on CoinMarketCap is #8, with a market cap of approximately $31 billion. Polkadot doesn't have a maximum supply - a potential Achilles Heel - with around 933 million DOTs in circulation. Its price has increased 400% in 2021, but in comparison to the dramatic rise of other cryptos, that appreciation is relatively modest.
In late 2021, after auctioning slots on its chain, Polkadot launched something called parachains. Initially, just 38 parachains joined on the main network, with a further 43 parachains coming on board on Kusuma.
The term parachain comes from "parallelised chains", which Polkadot defines as a data structure that is specific to an application, can be globally understood, and validated by the Relay Chain validators on Polkadot. Parachains allow an application's transactions to be spread out and processed in parallel over a network of Layer 1 blockchains, benefiting from Polkadot's transactional capacities and scalability. Instead of creating their own native token, the way most Dapps might do when building on a smart contract Layer 1 like Ethereum, these apps would simply use DOT, the native currency of Polkadot.
One of the main reasons to choose the parachain model is governance. Parachains on Polkadot can adopt their own governance model, including pre-built modules that can run on-chain governance systems. They do this do efficiently bootstrap governance, while mitigating the risks of splits in the community, and thus splits in their chain.
Parachains today are used in DeFi, smart contracts, even social media and gaming.
Second on our list of Ethereum challengers is Cardano - an open-source blockchain founded by Charles Hoskinson, another Ethereum co-founder. Do you see a pattern here?
Cardano describes itself as a third-generation platform, which improves upon the shortcomings of first-generation Bitcoin (decentralised money) and second-generation Ethereum (smart contracts).
Unsurprisingly, Cardano’s differentiator is its focus on scalability. It uses a unique, proof-of-stake (Pos) consensus algorithm called Ouroboros - a name borrowed from the ancient traditions of alchemy - with huge claims around efficiency. It may not be able to turn worthless metal into gold, but the Ouroboros approach to validation promises much greater transaction speed.
The biggest difference with Ouroboros is that there is an open competition for mining new blocks. The network uses a random process to elect qualifying nodes, which are called the slot leaders. To make this work, Cardano divides time into epochs, which are further divided into slots— a short period in which exactly one block can be created.
Cardano's much anticipated consensus mechanism is called Ouroboros, a name borrowed from the ancient traditions of alchemy
Cardano then elects (chooses) slot leaders from each slot, and the elected leaders become solely responsible for mining a block for that specific slot, thereby making the network highly scalable.
Since Cardano promises to process millions of transactions per second, the future use cases are limited only by our imagination. Goguen is a huge development milestone for Cardano, expected around June of 2021, it will introduce a Smart Contract capability to rival Ethereum. We can expect to see an influx of projects building on top of Cardano as soon as Goguen is launched.
Though Goguen mainnet - for creating dApps - is yet to be released, the Cardano community is still one of the biggest in the crypto space with over 438k Twitter followers and 356k Redditors. Around 597 kLOC is in the Cardano Github repository, which itself has now been forked by over 100 users and has collected 3,560 stars from developers across the world.
ADA, the native token of Cardano, currently ranks at #6 on Coinmarketcap, with a market cap of around $40 billion. The token has a maximum supply of 45 billion ADA and a circulating supply of 31,948,309,441 tokens.
Cardano broke the psychologically important $1 price level in February, but since then, its price has been relatively static, most likely in anticipation of the release of Goguen mainnet, which was originally slated for the end of March.
The final contender among our challengers to Ethereum is Tezos, a self-amending cryptographic ledger that can expand as demand increases, without having to fork.
The platform allows developers to create smart contacts and dApps while also facilitating peer-to-peer transactions.
Tezos produced the biggest ICO in the history of the crypto market, raising $232 million in just 13 days, but was mired in legal battle against its founders, Arthur and Kathleen Breitman, which was only settled in September 2020.
The amount the Tezos ICO raised in just 13 days
Once again Tezos differentiates itself with an unique consensus mechanism called liquid proof-of-stake (LPoS) aimed at improving the validation of transactions.
It allocates block publishing rights to a random stakeholder as per their stake on the network. Like Bitcoin, Tezos uses transaction fees and inflationary block rewards to reward validators for securing the network.
Since Tezos implements on-chain governance and there are enough incentives for validators, the transactions are validated at a much faster rate than Ethereum. This also ensures that those running the network have a say in how it develops.
Tezos is a popular choice in areas like DeFi, NFTs, Web3.0 Wallets. The list of projects building on top of Tezos include Yield Baker - an automated liquidity protocol, QuipuSwap - a DEX, Kalamint - an NFT-based marketplace, and many other dApps.
Tezos is supported by a global community of researchers, validators, and builders. Progress has notably speeded up following the settlement of the protracted legal battle, and the project has seen rapid adoption as new individuals, organizations, and industries look to enter the system.
In February, Tezos recorded over 100,000 contract calls and observed the funding of around 1 million wallets. A key milestone.
Though the current ranking of Tezos native currency XTZ is #36, it has a huge market cap of around $4 billion, with a circulating supply of 767,843,249 XTZ tokens.
The number of Tezos wallets reached in early 2021
All three contenders make a strong case against Ethereum. They are decentralised, backed by prominent crypto figures, have a huge community, and importantly offer unique solutions to the most pressing problems within crypto right now - scalability.
The issue they all face is that they are untested and unproven, and though each has elegant consensus methods on paper, there is a nagging doubt that a true solution to scalability and decentralisation may need something more fundamental than variations on existing consensus mechanisms.
Time will tell. The field is wide open as Ethereum's transition from PoW to PoS is still a distant dream. If Polkadot, Cardano or Tezos can prove that their blockchains can scale, and ensure cheap and fast transactions, there is a huge opportunity for them to capture market share and move from Ethereum challengers, to Ethereum killers.
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