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Kyle Reidhead
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The competition among blockchain ecosystems is fierce.
Fast and cheap blockchains are all the rage.
Is Ethereum losing its edge? Are other blockchains soon going to dethrone the King? 👑 Or are Ethereum L2s succeeding and fulfilling the plan for Ethereum all along? 👀
Twitter would tell you that Ethereum is losing, but looking onchain suggests otherwise…
1 year ago today, we wrote a PRO report called “Is Ethereum Scaling?”
At the time, L2s were still very new and their numbers were limited. Here were the numbers across the entire L2 ecosystem in February 2023:
< 500k weekly active wallets
< 900,000 transactions daily
$5.6 billion in total value locked
~7 active and relevant L2s listed on L2Beat
Today, the numbers across the L2 ecosystem look very different.
We’ve since surpassed 3 million weekly active wallets (6x from last year)…
6 million Daily Transactions (6.67x from last year)…
$23.26 billion total value locked (4x from last year)…
And a highly competitive, innovative and thriving L2 ecosystem, with more than 39 active L2s, 36 recorded upcoming L2s (soon to be launched), 4 Layer 3s already live and plenty more that hasn’t been announced yet.
Also, on March 13th, 2024, we’ll have an important upgrade to Ethereum (EIP-4844) which will reduce the expenses of Ethereum L2s by approximately 10x.
This will surely ignite the innovation and competition amongst L2s even further.
The L2 landscape on Ethereum is one of the most exciting areas in crypto currently and it brings with it plenty of opportunity.
But of course, it comes with many challenges too, like broken UX and fragmented liquidity. However, these are all technical issues that are solvable and likely won’t be an issue in a couple of years from now.
What is a pressing issue for Ethereum and its L2 ecosystem is its competition with faster and cheaper L1s. – Solana, Avalanche, BNB, TRON, Cosmos and a long tail of many others have made a lot of noise over the last year, gaining a fair share of attention, users, developers and capital across the crypto ecosystem.
In today’s PRO report we are looking onchain to understand how well these alternative L1s stack up against Ethereum and its L2 ecosystem.
When we published the “Is Ethereum Scaling” report in early 2023, we were one of the first to combine the data of Ethereum + its Layer 2s.
When comparing blockchains, it no longer makes sense to compare something like Solana or Avalanche to only Ethereum.
Instead, you must compare Ethereum + all of its L2s to other chains.
While the data isn’t perfect, it’s come a long way since our last report, so we’ll be diving into:
Transactions
Active wallets
Transactions Per Second (TPS)
Total Value Locked (TVL)
Fees and Profitability
Active Developers
Monthly Commits
Number of Applications
One final note before we get into the numbers, for the purpose of this report, we’ve included Polygon POS as an L2 on Ethereum.
In its current state, Polygon is technically its own blockchain, however in the coming months it will be migrated into a proper L2 on Ethereum, so we feel including its numbers within the Ethereum ecosystem makes sense.
Also, reliable data is not yet readily available for many of the newer chains like Aptos, SUI and others, so we’re using the more established chains with the highest real numbers to date (Solana, BNB, Avalanche, TRON & Near).
Ok, let’s get into it!
In terms of scale, transactions per second (TPS) is a great metric to understand the scale of a blockchain.
While every chain has a “theoretical TPS”, like Solana’s potential 60,000 TPS, what we need to look at are the actual transactions per second it’s executing.
Amongst various blockchains, Solana is the clear winner here, achieving more than 700 TPS (excluding voting transactions)...
If we remove Solana to get a better look at the rest, we can see that Ethereum has been maxed out at 16 TPS for years.
In the last year, it has been surpassed by every other L1. However, when we combine Ethereum + Layer 2s, we can see exactly how well Ethereum is scaling.
With L2s, Ethereum is now processing more than 100 TPS, 2nd amongst any other blockchain.
In terms of overall monthly transactions, no blockchain compares to Solana right now. Solana is nearing 2 billion monthly transactions whereas no other chain has surpassed even 400 million monthly transactions to date.
If we once again remove Solana from the chart, we can get a better picture of the rest of the chains’ monthly transactions.
Ethereum, which has been maxed out on its number of transactions, is now second to Solana when you combine its L2 ecosystem.
One thing to note about transactions is that most chains saw a spike in November and December due to crypto prices increasing during those months (speculation/activity increases with price).
This also explains why TRON saw no increase in activity as its transactions are predominantly for stablecoins.
Solana saw sustained activity through January, which can likely be attributed to airdrop farmers transacting to farm the various Solana applications soon to be launching tokens.
It’s difficult to determine what is organic activity and what is not at the moment, but this will be something to continue to watch over the years to come. 👀
To wrap up the activity section, Solana is the clear leader. However as we’ll see in the coming sections, it lacks in many other areas.
Outside of Solana, it appears that Ethereum + L2s are beginning to break away from the rest of the pack.
Let’s move on to users and liquidity. ⏬
To be clear, understanding where the users are onchain is very difficult. Most researchers confuse the term wallets with users. These are very different things as any user (or bot) can have unlimited wallets.
All we can track currently is unique active wallets (not unique people) onchain, which we are showing in the chart below.
Ethereum + L2s have seen steady growth for the last 2 years, now leading the pack.
TRON also had a steady lead for the last 2 years but appears to be declining, likely as more stablecoins move to other cheap and more decentralized chains like Solana and L2s.
Solana’s active wallets are rather small compared to the top chains, however it is having significant growth over the last few months with the launch of many new applications and tokens.
Below is the breakdown of unique monthly active wallets across Ethereum and some of its L2s. One thing to note is that similar to Solana, ZkSync’s wallet numbers are likely inflated due to airdrop farmers.
In terms of liquidity and value locked onchain, Ethereum has always been the dominant chain here, even more so when you include L2s.
Interestingly, L2s are beginning to gain traction here and alone are already dominating every other chain outside of Etherum.
The closest to L2s currently is TRON at $8 billion and then BNB < $4 Billion.
L2s are gaining liquidity so fast that combined, they are approaching the levels of Ethereum itself, with Ethereum sitting at $38.8 billion and L2s at $23 billion.
When it comes to active wallets and liquidity, the Ethereum ecosystem remains king. 👑
Before we look at the chains’ profits and sustainability, let’s first take a look at the developer activity across each ecosystem.
One of the most important metrics for the long term health of a blockchain ecosystem is developer activity.
The success of a blockchain hinges on its developers and applications, as they are key indicators of its future users and transactions.
Below we can see the monthly active developers in December across the 6 ecosystems we have been covering in today's report.
Ethereum and L2s have a massive lead here with monthly active developers at an order of magnitude bigger than any other ecosystem.
Interestingly, Ethereum L2s have also surpassed Ethereum itself in active developers, an important signal for the future success of the L2 ecosystem.
We can also look at the monthly commits from the above developers, to get a better understanding of the amount of work these developers are doing.
The Ethereum ecosystem of course dominates here too, however, Solana developers are showing how much work they are putting in right now.
Despite having only a quarter of the developers compared to Avalanche and BNB, their output in commits surpasses Avalanche and nearly matches BNB. Impressive!
Finally, the number of live applications in a particular blockchain ecosystem is key. This shows where teams are spending their time building and also where investment capital is forming.
The greater the number of applications on a chain, the stronger its network effects, enhancing its likelihood of success.
The Ethereum ecosystem is once again well ahead of the rest of the chains, with TRON coming in second.
Solana and Near have some work to do in this regard, though important to note that Ethereum and TRON have had a multi-year head start from the others.
The final section will cover the revenue and profitability of these ecosystems.
Blockchains make money by charging fees on every transaction that occurs on its chain – this fee is known as gas.
On one hand, gas fees are a benefit to the blockchain ecosystem as it provides revenue. On the other hand, it’s an expense for the users (or application if they decide to cover the fees on behalf of the users).
Like any business, finding a balance between earning enough revenue to remain profitable while not outpricing your customer is extremely important and also takes time to determine, especially in new markets.
Below, we can see the monthly average cost to transact across various chains.
Ethereum charges significantly more than any other blockchain due to its scalability restraints and strong demand.
While profits are strong as a result, these fees are way too extractive to scale its user base. This is exactly why L2s exist, to scale the Ethereum blockspace.
If we remove Ethereum, we can see that every other chain is somewhere under $1 per transaction.
Solana and Near are significantly cheaper than the rest at fractions of a $0.01 and most L2s ranging between $0.05 and $0.40.
I mentioned at the top of this report that on March 13th, 2024 the EIP 4844 upgrade will go live and fees on L2s should decrease significantly.
While the exact impact on fees for L2s is unknown, we’ve used our rough estimates to extrapolate what the average cost for L2s would have been for the last year if EIP 4844 was live.
You can see below that with EIP 4844, L2s on Ethereum would have ranged between 1-5 cents per transaction.
With more improvements coming soon, it’s likely that L2s will reach <$0.01 in the next 1 to 2 years.
While cheaper fees are important for users, blockchains have expenses too – they must pay their validators to secure the chain and facilitate the transactions.
If the blockchain is not earning enough fees to pay the validators, they must subsidize that by inflating their currency.
Most startups in tech work this way. They raise capital to subsidize their growth and expenses in hopes that one day they will become profitable. Amazon, Facebook and almost every tech company we know today have done this. Many of them took decades to become profitable.
At some point, blockchain ecosystems will need to become profitable too. If not, they will inflate away their currencies similar to how most indebted countries are inflating away their currencies today.
Below is the monthly profit from each blockchain. Ethereum took about 7 years to become profitable, occurring post the merge from PoW to PoS in Q3 2022.
If we remove Ethereum from the list, we can see that most blockchains are not profitable, excluding L2s, TRON and BNB.
In fact, Solana is subsidizing $100’s of millions every month to function currently.
Polygon is also currently not profitable, however once it merges into an L2, its expenses will decrease significantly and will immediately become profitable.
Ethereum and its L2s have built a system that allows them to remain profitable while working on scaling, whereas Solana is going the typical tech startup route by subsidizing to maximize growth and scale and then figure out profitability later.
Which strategy will work the best in the end? Who knows. Blockchains and tokens are a brand new technology and it’s still unclear how this will all play out.
It’s clear that Ethereum and Solana are the 2 leading blockchain ecosystems currently.
In terms of scale, no one can compete with what Solana has accomplished with their technology. Although of course, Solana has its fair share of problems too, considering its recent 5 hour outage on February 6th.
On the other hand, it’s hard for anyone to compete with Ethereum's first mover advantage, which brought massive liquidity, users, developers and applications before most other blockchains even launched.
While that may be true, it’s important to remember that this is still very early days for blockchain ecosystems.
Less than 1% of the global population and an even smaller fraction of the world's capital are onchain.
In the coming years, the blockchains which host the killer apps that onboard millions and billions of users will win.
Ethereum's dominance in liquidity and user base is not safe – without resolving its UX problems and reducing fees to under 1 cent, it risks failing to attract mainstream adoption.
Blockchains generate revenue from transactions, not from value being locked onchain.
Having a slow and expensive blockchain with a bunch of value on it isn’t going to be the long-term winner here.
The blockchain ecosystem that can process billions of transactions for billions of people, in a secure manner, that never has outages, is the ecosystem that will win.
Right now, no blockchain has solved this. Solana and Ethereum are both far from reaching this goal, which means there’s still plenty of opportunity for either ecosystem (or even another) to win.
That said, I don’t see a world where there is only one winner. There is plenty of room to grow the pie here and result in multiple winners.
There’s a very good chance that both Ethereum and Solana succeed well beyond what they have done today, and both become extremely important decentralized infrastructure for the internet in the future.
It’s likely a few other chains will join this group as well.
The one thing I would add as I wrap up here is don’t underestimate the network effects that Ethereum has created over the last 8 years.
Some are beginning to fade the Ethereum L2 ecosystem, because of the newer and faster L1 blockchains.
But what people are missing is that Ethereum has significantly more developers and investment capital working within its ecosystem to solve its problems – no other ecosystem is even remotely close.
This can not be understated, as ultimately it is the monetary and human capital that will push these ecosystems forward.
I think the next few years will be very interesting to watch and give us a lot of answers as to where this industry is headed.
My guess is that the Ethereum L2 ecosystem will be at the forefront of the onchain world, with Solana and a few other blockchains taking a decent sized market share as well.
For this reason, it’s important to not get religious about any one chain. Don’t let the tribalism on X blind you from the truth.
Instead, look at the data onchain and invest accordingly!
Thanks for reading. And remember, you're strong, you’re powerful, you’re alpha! ❤️
Kyle Reidhead
Founder of Web3 Academy and Impact3
Find him on Twitter
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Disclaimer: This article is for informational purposes only and not financial advice. Conduct your own research and consult a financial advisor before making investment decisions or taking any action based on the content.