Is Ethereum dominance in web3 fading?

Is Ethereum dominance in web3 fading?

Analysis of the second blockchain’s current position in NFT, DeFi, and overall crypto space.

Few things are stable in the crypto space, and as Bitcoin continues to reign supreme as the leading cryptocurrency, Ethereum’s dominance in web3 is increasingly contested. Its issues with high transaction fees and limited throughput have spurred the emergence of various other layer-1 blockchains like Solana and NEAR, as well as Ethereum’s own sidechains and layer-2s, such as Polygon and Arbitrum. These networks are beginning to pose a real challenge to Ethereum. Moreover, with Bitcoin stepping into the arena and developing NFT and DeFi functionalities, the competition intensifies.

Ethereum seems to be losing its market grip, which might explain its relatively sluggish price recovery. Since the beginning of the growth cycle in October, Ethereum price saw a relatively modest increase of +55%, a performance that pales in comparison to Solana’s +270% (going as high as 420% at one point), NEAR’s +175%, or Avalanche’s +235% gains.

Is this an indicator that Ethereum’s era of web3 dominance is drawing to a close? Maybe not just yet. Higher gains on newer blockchains with smaller market caps are normal.

However,  the increasing share of the DApps, NFT, and DeFi activity now happening outside of Ethereum is more preoccupying for the blockchain that once ambitioned to become a “world computer”. Unless, of course, the whole of web3 space is growing too 😉

NFT volume

NFTs play an important role in web3, as independent collections, parts of crypto games, or fulfilling other roles their developers assign to them. Ethereum has maintained its leadership in web3 from the outset, with iconic NFT collections such as CryptoPunks, Bored Apes Yacht Club, and Azuki. Yet, despite the fame of these pioneers and their developers’ efforts (like Pudgy Penguins’ recent game launch), a growing number of new collections are emerging on other blockchains.

Bitcoin Ordinals‘ meteoric rise has nudged Ethereum NFT sales to second place, with Solana’s growth posing a potential further threat. As shown by cryptoslam, Solana’s 30-day trading volume is now over two-thirds of Ethereum’s ($251 million versus $351 million), with Solana already outpacing Ethereum in 24-hour trading volume on multiple occasions. Interestingly, a month ago Solana’s share represented “only” a half of Ethereum’s.

When it comes to crypto gaming, Ethereum’s Achilles’ heel has always been its high fees, leaving its sidechains such as Polygon, Ronin, and Immutable X, or specialized blockchains like WAX to excel in this arena.

DeFi activity

Decentralized Finance has always been Ethereum’s stronghold, with a robust 67% of the entire Total Value Locked (TVL). Yet, it is growing on other chains as well.

While Ethereum DEX’s volume is still leading with $7.7 billion traded weekly, its share is at an all-time lowest, capturing less than 30% of total trades. Solana is breathing down its neck with $4.7 billion weekly trades, and Arbitrum and BNB generate $3.6 billion and $3 billion, respectively (source: DeFiLlama).

Solana isn’t just inching forward in the DeFi domain; it’s making leaps. The recent debut of Jito, a decentralized liquid staking protocol akin to Ethereum’s Lido, has been a hit. Jito DAO now commands over $500 million, and the $JTO token is listed on major exchanges.

User activity

Does the increasing activity on other chains mean that there are fewer users on Ethereum?

To some extent yes, but not proportionally. In a year, the number of unique active wallets (UAW) on Ethereum-based DApps has been reduced by a half (a kind of halving for Ethereum 😅), while some of its competitors saw a remarkable increase: 2,100% for NEAR (the current leader with 7.65 million weekly UAW) or 3.1 million for the newly launched zkSync.

However, wallets connecting to a DApp do not necessarily trigger transactions, which is another interesting metric to follow. Here, the incontestable leader is Solana, with 23.5 million daily transactions, followed by BNB Chain (3.2 million) and Polygon (3 million).

Ethereum staked

Do these trends mean that there’s less interest in Ethereum? Not according to the numbers.

Currently, 29.1 million ETH (over $70 billion) are staked, effectively locking up 24.3% of all ETH in circulation. This is twice as much as Solana’s total staked amount of $33.6 billion.

Even if the outflows have increased since October, the inflows are steadily high, making for a net flow since the Shanghai update (which enabled withdrawals) of 10.9 million ETH, the equivalent of $26 billion.

We believe that it is a multi-blockchain world, and every new DApp, NFT, or DeFi project chooses the chain that suits its objectives the most. While Ethereum is clearly not suitable (yet?) for projects with high throughput, it still can aim for the “value layer of the Internet” objective and develop its role in global finance. Ethereum’s layer-2 solutions, such as Arbitrum, Optimism, or the newly launched Base, are in a way competing with the mainnet, but also contribute to its activity, using more secure Ethereum as a settlement layer.

Ethereum still has the strongest developer network, with numerous well-made libraries and tools, making the developer experience smooth and cost-effective.

However, web3 is democratizing, and with the emergence of gaming, social DApps, and other use cases, cheaper and scalable blockchains will continue gaining ground.