Ethereum, Solana, and ETH Killers | Predictions for the Future

My firsthand experiences using Layer 1 and Layer 2 protocols over the past few years.

I began using Ethereum in early 2018. I can still remember the network being clogged from the explosion of CryptoKitties. Promises of upgrading and adding layer two solutions on top of Ethereum to add more throughput (the ability to make faster transactions) was meant to solve this problem.

Yet here we are nearly four years later, and a basic DeFi transaction (such as swapping ETH for USDT on Uniswap) costs upwards of $50, while purchasing an NFT on OpenSea can cost more than $100.

ETH 2.0, commonly referred to at EIP-1559 is supposed to solve some of these issues. Although I’m not a technical expert by any means, my understanding is that gas prices could come down as much as 90%. But the question remains, is that enough?

---

If you’re new here, my name is Alec Torelli and I’ve spent thousands of hours in crypto, DeFi and NFTs. My mission at CrypTorelli is to simplify crypto so anyone can understand it. I’ll also share the latest, most exciting opportunities in the space before anyone else. Join the thousands of others to stay up to date.

---

There’s a lot of talk in the crypto community about ETH Killers, alternative blockchains that will overtake Ethereum because they can handle more transactions with have virtually no cost to the end user. The most popular contender is Solana.

While Ethereum can only handle roughly 25 transactions per second, Solana can theoretically handle 65,000. (To be fair, Vitalik Buterin, the founder of Ethereum, expects ETH to be able to handle 100,000 when ETH 2.0 is complete).

To better understand my own thoughts on the future of Ethereum and other blockchains, I wanted to experience what it was like to use a faster network. I created a Phantom wallet (the Solana equivalent of Metamask), loaded up some funds and participated in an NFT mint.

It was incredible. Everything about the experience was superior to using Ethereum. Transactions were near instant, costed nothing and best of all it created a more efficient market economy for NFTs.

On Ethereum, gas acts like a tax for everything one does on the network. If one purchases an NFT for $500, but pays $100 in gas, they must then wait for the NFT to appreciate 20% to merely breakeven.

The same problem exists in DeFi. If one is swapping tokens or harvesting rewards, one must either transact in large numbers so the percentage they pay in gas is insignificant, or avoid using the ecosystem because the tax isn’t worth the reward. Due to this limitation, ETH remains largely a platform for whales.

But crypto is meant to be equitable, fair and help the little guy. Blockchains like Solana do just that. Since there is no rake in the form of gas, NFTs can launch for a lot less. It also creates a highly efficient secondary market because people can buy and sell for small gains.

For example, I purchased an NFT for 1 SOL and sold it later for 2 SOL, for a profit of ~$150. This wouldn’t be possible on Ethereum, since the gas one pays to purchase an NFT will offset that gain.

This phenomenon has created many dead NFT project on Ethereum. Prices drop during a bear market and eventually the gas to purchase the NFT costs more than the NFT. Prices continue to drop as nobody buys, and then panic sellers undercut the floor desperate to get out until the project ultimate dies. This doesn’t happen on Solana, where an NFT market can still exist around a piece of art that costs a few dollars.

After using Solana, I tested out Binance and AVAX and had similar experiences. It became glaringly obvious to me that ETH in its current form cannot survive long term. I believe that  either ETH 2.0 will make Ethereum competitive with the efficiency of other blockchains, or capital will continue to flow elsewhere.

One of my first principles I came to understand when learning about the history of money (that I wrote about in The Future of Money) is, given a long enough time horizon, efficiency always wins. Right now, it’s simply too inefficient to use ETH for most transactions for most people.

This brought me to experiment with layer 2 solutions for Ethereum. A layer two is a network built on top of a blockchain which allows for faster and cheaper transactions. One can think of a layer two like going to a bar and opening a tab with their credit card. All the drinks that are ordered between the time the tab is opened and closed get added to the total, but payment is only settled when the bill is paid. This allows the blockchain to scale.

The most popular Layer 2 for Ethereum is the Matic Network. Getting funds from Ethereum to Matic is currently quite complicated, as one must ‘bridge’ them, a process that takes time and requires some technical knowledge. Although the user experience on Matic is equally impressive to other blockchains such as Solana, the friction of going from Ethereum to Matic is currently too big a bottleneck for mainstream adoption.

One upcoming yet largely undiscovered Layer 2 called Nahmii is meant to improve upon some of the limitations of Matic, including an increase in security and instant finality (meaning transactions are settled immediately which can pave the way for mainstream adoption and the use of ETH as a currency), but we’re not there yet.

I’m still not sure how this will play out, and the question remains as to whether Ethereum’s upgrade to ETH 2.0 or the seamless integration of a Layer 2 will allow it to remain the dominant blockchain. Perhaps an ETH Killer such as Solana or HBAR, which are built to scale will take over.

What I can say with confidence is that Ethereum in its current state is NGMI. Either ETH will improve to match the efficiency of its competitors, or it’s doomed to be the Myspace to someone else’s Facebook.

What are your thoughts?

Alec