Ethereum Loses TVL Market Share
Ethereum Loses TVL Market Share
Why other L1 chains are catching up to Ethereum’s dominance in Total Value Locked
Hey DEFI TIMES community,
Ethereum’s congestion is probably the biggest problem in crypto right now.
The Ethereum community sticks to its vision to keep the chain as decentralized as possible. Therefore Ethereum does not make short-term trade-offs in favor of scalability. That’s good for ETH in the long term but short term… Ethereum is losing LOTS of market share!
This is a trend that is likely to continue as Ethereum’s sharding is still years away.
According to DeFi Llama, Ethereum currently has $160 billion in TVL and still dominates the niche of DeFi.
But other chains are catching up fast… you see where this is going.
In my opinion, it’s only a matter of time until Terra, Cosmos, Solana, Avalanche, and co are developing their own flourishing ecosystem that could eventually become bigger than Ethereum itself.
But when could other chains flip Ethereum in terms of Total Value Locked?
And could this mean that there might be another chain replacing ETH in the market cap?
Let’s find out!
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What Makes ETH So Valuable?
Let’s start with why Ethereum is still the KING when it comes to DeFi and TVL. Ethereum was the first general-purpose smart-contract blockchain. Ethereum launched in 2015 and it had plenty of time to dominate the niche of smart contract blockchains.
Even in 2020 when DeFi became a thing, there were literally no viable alternative blockchains. Most other blockchains weren’t even launched. Avalanche wasn’t there, Solana was just an idea, and Cardano - well… let’s not talk about Cardano…
People literally didn’t have an option other than choosing Ethereum. Developers built stuff on Ethereum and users got used to their Metamask wallet. A massive network effect that lasts until today.
The most significant reason why ETH is so valuable is that Ethereum still has the largest developer community and user base. But to be honest, that might be due to its first-mover advantage. There are more and more alternative blockchains evolving that have to potential to take away a significant share of Ethereum’s network effect. But why? Well, Ethereum only has one problem but it’s so huge that it seems almost impossible to solve in the next 1-2 years.
Ethereum’s Biggest Problem
Ethereum is very careful when it comes to making short-term scalability trade-offs. The Ethereum community values decentralization over everything else. That’s why their whole roadmap is focused on creating a decentralized and scalable blockchain.
Ethereum will have two main updates in the future:
The Merger (6-8 months away)
Sharding (2 years away)
When both the Merger and Shrading have been implemented, Ethereum will both be decentralized and scalable for the masses - no doubt! But this will take time…
I expect Sharding to take at least 2 more years to go fully live. And until Ethereum’s roadmap is finished, other base chains will have time to catch up…
And the question is: Do users really value decentralization so much that they are willing to use a slow and expensive blockchain?
Ethereum is Losing TVL Market Share
As we discussed earlier, Ethereum is losing a good share of DeFi activity. One of the best metrics to track here is the Total Value Locked on different chains. While Ethereum had almost 100% of all DeFi TVL back in the day, it currently only has 65% (according to DeFi Llama).
A trend that is likely to continue. How do I know that? Well, just take a look at Ethereum’s TVL dominance over time.
Where Are Things Going?
So, that’s the trend we are seeing. But where are things going in 2022? What can we expect?
What we are clearly seeing is that users are moving away from Ethereum’s base chain. That’s actually not bad at all for Ethereum’s ecosystem because it’s exactly what Ethereum developers want.
To understand why… let’s recap Ethereum’s roadmap for a second.
Ethereum’s roadmap is very rollup-focused, which means that Ethereum depends on second-layer scaling solutions like Optimistic rollups and Zk-rollups. The community wants users to move away from the expensive base chain to a more scalable rollup ecosystem that is renting Ethereum’s security.
That’s also the reason why Solana, Avalanche, and co are not competing against Ethereum. They are competing with rollups and sidechains.
But we are in crypto, so there is no competition, right?
The One Thing That Is Certain
Anyway, there is one thing that is almost certain at this point: Ethereum’s base chain will lose market share throughout 2022. Both in terms of on-chain volume and TVL. The reason doesn’t have to be that liquidity is moving away from Ethereum. Liquidity can even stay inside the Ethereum ecosystem (rollups, sidechains, etc.). This wouldn’t be bearish at all for Ethereum as it’s exactly what ETH people want. And if you are worried about ETH “competitors” I highly recommend you read my latest piece about the ETH debate.
There really is no competition in crypto - we are all growing together.
The fact that Ethereum is losing TVL market share is a feature, not a bug. The only question is: Will L1s or rollups capture more liquidity?
For me, it doesn’t really matter because I know that the future is multi-chain.
Of course, if Solana, Cosmos, Avalanche, and co overtake Ethereum in TVL, this could mean that they can overtake Ethereum in market capitalization - no one knows…
So if I had to take one bet right now, it would be that Ethereum’s on-chain activity is going to decrease over the course of 2022. Whether you are betting on L2s or other L1s is completely up to you. But as so often in crypto, it’s best to stay open-minded and not maximalist.
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DISCLAIMER: All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.
Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value. Holding cryptocurrencies is risky.
Well written article. Thank you for the analysis and your bravery to expose explicitly your bet about Ethereum's trend during the next 2-3 years. Really appreciated. Kind regards from Helsinki.