Nov 17, 2021
What happened to projects called the ‘Next Ethereum’?
Author: Kevin Hao (Analyst) from Cipholio Ventures
Since this year, emerging blockchains such as Solana, Avalanche, Fantom, and Terra have ushered in a collective soar. In just a few months, prices of these tokens have risen by as high as 100x. The rise of the emerging blockchain has triggered the speculation and prediction of the “Next Ethereum”. Yet, this is not the first time in the blockchain industry.
In the early wild west stage (between 2017 and 2018), many projects were also self-claimed as the “Next Ethereum”. Now, most of the former “Next Ethereums” have disappeared, and only a few projects still exist. Taking a deep dive into EOS, Cardano, and Polkadot, this paper intends to find out implications for the currently emerging blockchains by learning from the rise and fall of the former so-called “Next Ethereums”.
1、 DEVELOPMENT
The development stages of EOS, Cardano, and Polkadot projects do not completely coincide. Before analyzing their current conditions, we shall take a look at the state of these three projects before this round of bull market, that is, at the beginning of 2020.
Table 1 above shows that at the beginning of 2020, EOS was ahead of both Cardano and Polkadot in terms of capital reserves, technological development, and ecosystem development. It’s not hard to say that EOS did have an obvious first-mover advantage and would have a better performance in this round of bull market. But that’s not the case.
（1） EOS
EOS was once labeled as the “Next Ethereum”. In 2018, EOS became the focus of the whole crypto world. Funds from major exchanges, mining pools, communities and even traditional institutions were participating in the election of EOS supernodes. Under the fanatical market sentiment, EOS ecosystem developed rapidly, and a large number of DApps emerged.
However, EOS once took the lead, but it fail to make good use of the first-mover advantage. In this round of bull market, EOS attracted little attention, and its market value rank fell sharply. Meanwhile, the ecosystem did not make much progress. Instead, most developers and users left the EOS ecosystem, and the chain regressed significantly. With the rise of other blockchains, the market competition pattern has completely changed. EOS has missed the best development period and is difficult to become a competitor of Ethereum again.
（2） Cardano
Cardano was once considered a strong competitor of Ethereum. Previously, Cardano’s development was rather slow due to lacking a smart contract. However, over the past year, Cardano has made important technological progress, and its market rank is stable among the top players.
In September 2021, Alonzo’s hard fork was a success and Cardano launched Plutus-powered smart contracts. Projects in the ecosystem now enjoy more development opportunities. Projects in Cardano ecosystem mainly focus on the fields of DeFi and NFT. Based on the history of other blockchains, when the DeFi projects break out, the whole ecosystem will grow significantly.
It should be noted that Cardano has another advantage in the field of DeFi, that is, the amount of capital deposited in the staking market is tremendous. ADA in staking accounts for more than 70% of the total circulation, and the value of staking is about $47 billion.
These funds in staking can be reinvested into DeFi protocols through liquidity conversion to earn benefits, which is very attractive to staking participants. At the same time, the activity of Cardano developer community has also increased significantly this year. There are various signs that indicate Cardano will be a key player in the blockchain war in the near future.
（3） Polkadot
Polkadot is a heterogeneous multichain with shared security and interoperability, which is very different from Ethereum in architecture. The Relay Chain is the central chain of Polkadot. All validators of Polkadot are staked on the Relay Chain in DOT and validated for the Relay Chain. Parachains can achieve cross-chain and interoperability through XCMP (Cross-Consensus Message Format Protocol).
Polkadot ecosystem has flourished in the past year. At present, there are 510 projects on Polkaproject and 174 projects are based on Substrate. There are numerous projects in the Polkadot ecosystem that will compete for parachain slots. However, the parachain slots are a scarce resource, and the ownership needs to be determined by auction. Based on the slot auction of Kusama, the competition in the upcoming slot auction of Polkadot will be very fierce. When the parachains actually start to operate, Polkadot ecosystem will usher in further development.
2. CAUSE ANALYSIS
（1） Project Competitive Advantage
The competitive advantage of the blockchain can be divided into two categories. Firstly, it’s the performance and characteristics of the blockchain, including the consensus mechanism, security, TPS, and transaction cost. For example, high TPS and low transaction costs will be more attractive to developers and users. Secondly, it’s the ecosystem, including the number of developers and users, on-chain project quality, synergy between projects, etc. For instance, the higher the interoperability and composability between projects in the ecosystem, the lower the possibility of a single project moving away.
From these two points of view, the advantages of EOS back in the early days were not stable. The performance advantages of EOS relative to Ethereum have been quickly overtaken by the emerging blockchains. From the perspective of an ecosystem, EOS projects are mainly games and gambling-related. Different from the DeFi projects, the interoperability and composability between game and gambling projects are not high, and the migration cost of those projects is very low. As a result, a large number of developers and users left the EOS ecosystem.
（2） Core Members
Daniel Larimer (a.k.a BM) is the core member and leader of EOS. However, in January 2021, BM announced that he would leave the team. This move of BM dealt a heavy blow to the confidence and morale of participants in EOS ecosystem. Cardano and Polkadot do a lot better on this aspect. The core members of Cardano may have some personal issues, but as far as the project is concerned, Cardano has made steady progress thanks to the cooperation of the foundation (responsible for fund management), IOHK (responsible for technology research and development), and Emurgo (responsible for ecosystem development). As a core member of Polkadot, Gavin wood promotes Polkadot ferociously and influences the community in a positive way.
（3） Foundation Support
Block.one, the parent company of EOS, holds a large number of funds, but it hardly supports projects in the ecosystem. Instead, it used these funds to buy BTC and real estate. In contrast, Emurgo announced an investment of US $100 million to promote the development of projects such as DeFi and NFT in Cardano ecosystem. Web3 foundation has given grants and support to hundreds of projects, which plays an important role in the growth of the ecosystem of Polkadot. In October 2021, Gavin Wood announced that Polkadot would use nearly 19 million officially held DOT for ecosystem growth.
（4） Staking Scale
The proportion of staking participation can directly reflect the long-term willingness of token holders, especially holders of a large number of tokens, to participate in the project. If the participation rate of staking is very low, it means that a large number of token holders in the ecosystem are unwilling to bind long-term interests with the project.
Table 4 above indicates the staking status of the three projects. Although the staking APY of EOS is the highest, the proportion of staking participation is far lower than that of Cardano and Polkadot, which indicates that most EOS token holders are not optimistic about the long-term value of the project.
Meanwhile, higher participation in staking means that the number of circulating tokens is lower, which will boost the token price. On the contrary, the reduction of staking participation is harmful to the token price. If the token price continues to fall, willingness to participate staking will further reduce, forming a downward spiral.
（5） Positions of Well-known Crypto Fund
According to the data reported by CoinShares Research, the total AUM of the crypto fund is worth USD $78.72 billion. In the portfolio of these well-known institutions, Cardano and Polkadot rank among the Top 10 in the portfolio valuation, with a net inflow of more than 80 million US dollars this year. Yet, EOS isn’t among them. Tokens held by well-known funds indicate institutions’ willingness to provide value-add to the project.
3. SUMMARY
（1） Ethereum status is hard to challenge
From the beginning of 2020 to now, the proportion of the market value of Ethereum in all crypto has been on the rise, from 7.5% to 19.3%, while the proportion of bitcoin in terms of market value has decreased significantly in the same period. In other words, although emerging blockchains continue to challenge Ethereum, the rise of DeFi and NFT has further consolidated Ethereum’s leading position.
No matter from which dimension, Ethereum’s market position is difficult to shake. Ethereum ecosystem has the most projects, the highest TVL, sufficient investment funds, and the most developers. All these advantages are powerful enough to offset its disadvantages, such as low TPS and expensive cost of use. Meanwhile, Ethereum has been working to overcome its problems in various ways.
In the short term, the launch of Layer 2 project and the implementation of EIP1559 proposal have alleviated the problems of Ethereum to a certain extent. has been recognized by the market. For example, the TVL of Arbitrum has ranked among the top 10. In the long run, the launch of Ethereum 2.0 will further encroach on the space of other blockchains.
（2） Connection between blockchains
For the emerging blockchains, being EVM Compatible is easier to succeed. Being EVM Compatible means that it can connect with Ethereum ecosystem to facilitate the migration of mature projects and their user from Ethereum ecosystem. By undertaking the spillover value of Ethereum, ecosystems such as Avalanche and Polygon can achieve significant development in a short time.
It’s worth mentioning that EOS Foundation plans to support EVM in the first half of 2022. In addition to Ethereum, blockchains should also be opened through cross-chain bridges and other ways to allow more interactions between ecosystems.
（3） Importance of sustainable development
The blockchain industry is going through rapid development, and new technologies and projects continue to emerge. For the existing blockchains, if they cannot continuously innovate and develop to maintain the leading edge, they may be replaced by other projects soon. Additionally, they should keep strengthening their existing advantages.
At this point, Solana gives full play to its own characteristics. Compared to other blockchains, Solana has the advantages of high performance and low transaction cost, which is suitable for the development of DeFi project. Hence, Solana continues to make efforts in the field of DeFi to undertake the spillover value of Ethereum. At present, Solana’s TVL is second only to Ethereum and BSC, and the TVL of star projects such as Saber, Serum and Raydium in the ecosystem have exceeded US $1 billion.
（4） Financial support
In the early stage, there are few users in the ecosystem, and capital is very important for attracting developers to grow the early ecosystem. For successful blockchain projects, early incentive and support plans will greatly boost the development of the whole ecosystem. Currently, emerging blockchains provide generous financial support for their projects. Such as, Solana cooperates with many institutions to launch an ecosystem fund; Dfinity Foundation launched a $220 million developer incentive program to encourage development in the fields of infrastructure, toolkit and application projects. Foundations such as Avalanche, Fantom, and Near have also launched ecosystem incentive plans.
（5） Core members have great influence
Although most blockchains emphasize the decentralized and distributed architecture characteristics, the role of governance is very limited. Average users generally don’t want to participate in governance. Their thoughts and emotions often turn in the same direction and are usually easily influenced by the core members. Therefore, the core members are vital to the project, and their actions will directly impact the future of the project.
To sum up, the performance of the former “Next Ethereums” in this round of bull market is completely different, but their development course provides valuable lessons and insights for the emerging blockchains. Newcomers should learn from them and find their own market position and development route in order to stand out in the competition of blockchains.
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