Multi-chain future likely as Ethereum’s DeFi dominance declines
This analysis is by Bloomberg Intelligence Senior Market Structure Analyst Jamie Douglas Coutts. It appeared first on the Bloomberg Terminal.
Competition and diversification among layer 1 blockchains is forming the foundation for a more-resilient decentralized (DeFi) finance ecosystem. While only the fittest cryptocurrencies will survive over the bear cycle, a broadening base of chains lowers concentration risk and marks an important progression in the evolution of DeFi.
Future of DeFi is a multi-chain world
If the current bear market stretches beyond 2H22, attrition may become a theme among the long tail of DeFi protocols and chains as aggressive vesting schedules and capital incentives meet lower price expectations. Nevertheless, the 10x growth in the number of layer 1 chains over the course of 2020-21 has gone a long way to validating different blockchain use cases, each with their own set of trade-offs. While the top 5 Ethereum rivals have yet to break above single-digit percentages in terms of TVL market share, collectively they now account for 25% of the total.
The emergence of a highly competitive ecosystem of layer 1 blockchains has enabled the pie for DeFi applications to grow beyond Ethereum’s capability, while also gnawing at the total market share controlled by the incumbent.
Current layer 1 blockchain landscape
Explosive 1-year TVL growth across top chains
Total value locked (TVL) growth for the past 12 months was explosive, despite the current bear market, rising 357% to $255.39 billion among all layer 1 and 2 blockchains in aggregate. Ethereum, hamstrung by congestion issues and high fees, lagged the market, expanding TVL by 241% to $157.95 billion.
The growth for several of the top alternative chains over 2021 was magnitudes higher. Terra TVL led the way with a rise of 7,729% to $14.73 billion, followed by Avalanche up 6,687% to $13.65 billion. The accelerating bear market in 2022 has withdrawn liquidity from the market with TVL falling 18% in January. Despite this, Fantom’s TVL jumped 85% in the same period as it used aggressive capital incentives to attract developers to its chain and boost liquidity.
Top 6 blockchain TVL performance
Ethereum DeFi dominance wanes
As DeFi exploded on the Ethereum network in mid-2020, gas fees steadily became prohibitive for certain applications, opening the door to upstart developers wagering on different design pay-offs and employing aggressive incentives to boost strap adoption. Ethereum’s market share fell 30% over 2021 as a result. EIP1559, a protocol upgrade in August designed to address the high fees and the success of layer 2 solutions such as Polygon and Arbitrum improved Ethereum’s overall position, attracting an additional 5% of market TVL. Layer 2 solutions optimize for speed and cost by batching transactions before settlement on the base chain.
A highly competitive ecosystem of chains and layer 2 solutions, all with different trades offs and market-product-fit is ultimately healthy for the future of DeFi.
Ethereum DeFi TVL dominance
