Who will dominate in the next bull cycle, and how should one align their portfolio? Insights into the divided expert opinions. In recent days and weeks, the rivalry between Ethereum and Solana in the cryptocurrency space has intensified. Solana’s price performance has significantly outpaced that of Ethereum. Currently, Ethereum is struggling, especially in comparison to Bitcoin. This development contrasts with the narrative from last summer that Ethereum, with its Layer-2 solutions, would undermine the viability of other Layer-1 blockchain networks. Now, many influencers (e.g., Crypto Banter) seem to be jumping on the Solana bandwagon, while Ethereum faces increasing criticism. A detailed insight follows.In this article from the Lenous Protocol Academy, we will compare three crypto ecosystems: Ethereum vs. Solana vs. Cosmos.

The Cosmos ecosystem may emerge as the “silent third,” quietly gaining attention and traction, thus presenting a genuine alternative to established players. A key distinction is that the value of the Cosmos ecosystem is not tied to a single coin.

Four Fundamental Pillars for Evaluating an Ecosystem

1. Technology
2. User Experience
3. The Asset (ETH, SOL, ATOM)
4. Current Data Landscape

 (user numbers, Total Value Locked (TVL), number of addresses, developer activity, etc.), including growth rates.

In the subsequent sections, we will explore project movements—specifically, which ecosystems new projects are choosing or whether established projects are migrating. We will then discuss the risks and criticisms of the ecosystems—technical aspects, regulatory challenges, and competition—along with their current market analysis. Finally, we will conclude with insights regarding portfolio allocation focused on Layer-1 infrastructure.

Let’s dive in and examine these exciting developments in the world of blockchain technology and cryptocurrencies!

Technical Considerations

The blockchain trilemma posits that a single blockchain cannot optimally scale across all three pillars—security, scalability, and decentralization—simultaneously. One of these aspects will always lag behind.

Approaches to the Blockchain Trilemma in the Crypto World

In the realm of cryptocurrency, three distinct approaches to the blockchain trilemma are represented by the major smart contract platform ecosystems: Ethereum, Solana, and Cosmos.

Decentralization and Security

The question of how decentralized and secure a blockchain network must be is indeed complex and lacks a one-size-fits-all answer. There is no magic threshold, as the requirements for decentralization and security often grow with the value and significance of the network.

The debate over whether these issues are overstated and if they represent a form of security and decentralization theater is common in the blockchain space.

While centralized systems, such as traditional cloud servers (e.g., AWS), work effectively for applications like online games (e.g., World of Warcraft) with their closed economies, blockchain networks offer additional benefits that extend beyond mere redundancy and resilience. These advantages include features such as trustlessness (absence of ownership), the ability for cross-border transactions (interoperability), and general accessibility (permissionless).

Greater decentralization also aids in ensuring censorship resistance and independence from singular control entities. Thus, it is not only about technical security but also about creating an open, equitable, and resilient system. In this context, decentralization and security are viewed as fundamental building blocks that instill trust and stability in the network, often encapsulated under the term resilience.

Scalability

Horizontal Scaling (Cosmos)

Cosmos adopts a horizontal scaling approach. Its philosophy posits that each decentralized application (DApp) should have its own blockchain (Consensus PoS), which is securely interconnected through a protocol-level bridge. This means that transferring tokens and assets between different chains does not require third-party intermediaries. Instead, all chains utilize the same toolkit (the Cosmos SDK) and are thus securely connected via the Inter-Blockchain Protocol (IBC). The individual chains are moderately decentralized, with approximately 100 nodes per chain. The advantage of this system is the development of an ecosystem that can scale horizontally without limits, with each chain maintaining sufficient speed.

Communication and Scaling in the Cosmos Ecosystem

In the Cosmos ecosystem, communication between different DApps is limited; it primarily occurs through the transfer of tokens via the Inter-Blockchain Communication (IBC). Liquidity is fragmented across individual chains and must route through the IBC. Cosmos addresses this issue by designating a specific chain as a central hub for certain functions within the ecosystem. For example, the “Osmosis” chain hosts the entire decentralized exchange (DEX) of the ecosystem, thereby aggregating the necessary liquidity. Similarly, “Kava” is a chain that specializes in borrowing and lending services.

2. Vertical Scaling (Solana)

Solana challenges the traditional blockchain trilemma by adopting a vertical scaling model with a single blockchain. Its consensus algorithm is based on Proof of History (PoH), a variation of Proof of Stake (PoS). The consensus and execution clients are integrated into a shared protocol. There are validators that capture transactions and RPC servers that validate them. With approximately 2,400 nodes, the chain is moderately decentralized.

A significant advantage of Solana lies in its advanced technology, enabling an extremely fast network with a throughput of up to 40,000 transactions per second (TPS), resulting in very low transaction costs (between $0.0001 and $0.0003).

However, a drawback is the high hardware requirements for operating a node and the necessity of a significant stake in Solana coins to be a profitable validator. Critical here are the bandwidth requirements, which necessitate fiber optics and a minimum of 1 Gbps. In Solana, transaction validation through votes can even incur transaction fees, and many of these votes are included in the daily transaction counts, leading to distortions in overall figures.

These factors contribute to relatively moderate decentralization and pose a potential attack risk. In the past, Solana has experienced complete outages due to the lack of separation between consensus and execution clients. Nevertheless, the network has been stable for nearly a year (as of February 2023). Since there is only one chain, all assets can move freely without needing bridges within the ecosystem, allowing all DApps to communicate and preventing liquidity fragmentation.

3. Sharding (Ethereum)

As a pioneer in this field, Ethereum’s architecture is partly a reflection of its history. With each upgrade, such as the Merge—transitioning from Proof of Work (PoW) to Proof of Stake (PoS)—the network evolves and improves. Scalability is achieved through a sharding model. The Ethereum mainnet, the base layer, is characterized by a very high degree of decentralization and, crucially, security. With 7,500 nodes and 750,000 validator keys, the network is highly decentralized. This is also facilitated by relatively low hardware costs for operating a node. However, the number of transactions per second (TPS) is approximately 30, which is quite low and incurs high costs that can range from $3 to $100 depending on network congestion.

Scaling Solutions in Ethereum and User Experience

Scaling within Ethereum is achieved through Layer-2 solutions such as rollups, which operate as separate chains utilizing the Ethereum Virtual Machine (EVM) and can be accessed by all DApps. These rollups have a transaction throughput of approximately 1,000 TPS, with costs around $0.10. Rollups aggregate all their transactions and periodically settle them on the Ethereum base layer. In the event of a rollup failure, transactions are secure, and funds can be restored on the base layer. This setup ensures the security of the base layer while providing the speed and cost-efficiency of Layer-2 solutions. However, decentralization within individual rollups is currently limited, as they rely on sequencers that may represent a single point of failure. Efforts are underway to enhance decentralization further.

Transaction costs on rollups are expected to decrease significantly, by a factor of one hundred, following an upgrade to the Ethereum base layer known as Proto-Danksharding (EIP-4844) in early 2024. This will make rollups competitive with other high-throughput blockchains like Solana, while still benefiting from the security of the Ethereum base layer. However, transferring funds between Layer-2 and the base layer via bridges can be costly and may lead to liquidity fragmentation. Each rollup typically operates its own decentralized exchange (DEX), often utilizing Uniswap with distinct liquidity pools, which presents a significant disadvantage.

In addition to rollups, other scaling solutions include Plasma, sidechains, and Validiums (similar to rollups).

Example

For example, Polygon originated as a sidechain of Ethereum but has since rebranded as a Layer-2 solution and is transitioning to a rollup model. The two types of rollups, Optimistic Rollups and ZK-Rollups, differ in their transaction validation methods and the duration of the bridging process. ZK-Rollups represent a more complex technology that requires additional development time, making Optimistic Rollups the more established choice for now. However, ZK technology is expected to gain prominence in the long term.

Rollups also serve as a model for value extraction, as operators can charge a small margin on transaction fees. This presents both advantages and disadvantages; there is a clear incentive to promote scaling and market rollups, but users may experience diminished value due to potentially excessive fees.

User Experience (UX)

Solana UX

Among the three ecosystems, Solana undoubtedly offers the best user experience. Transactions execute almost instantaneously and are so inexpensive that users rarely need to consider costs. Additionally, there is no need for bridging services as everything occurs on a single chain, providing two key benefits: all DApps can interact seamlessly (interoperability), and liquidity remains consolidated (non-fragmented liquidity). While liquidity may be distributed across various DApps, it does not face the fragmentation issues seen in Ethereum, where a DEX accesses different liquidity pools across various rollups. This simplification reduces the number of clicks required and enhances pricing on DEXs, particularly when liquidity is deeper (resulting in less slippage).

However, this relies on the liquidity being adequate; currently, liquidity on most Ethereum rollups is still lower than on Solana.

Notably, the most commonly used wallet on Solana, the Phantom Wallet, is designed for user-friendliness. The delegated staking process can be conducted directly within the wallet. Although liquid staking protocols (e.g., Marinade Finance) exist, they are only necessary when users desire a liquid staking token (LST). On Ethereum, liquid staking is utilized due to the absence of delegated staking, which means users cannot stake amounts under 32 ETH unless they operate their own node.

In summary, if Solana’s architecture continues to function effectively and maintain low transaction costs, it will likely provide the best user experience as it reaches user numbers and liquidity metrics comparable to Ethereum.

Cosmos UX

Navigating the Cosmos ecosystem can initially feel somewhat disorienting. Many users start with the ATOM token, only to discover that there are few DApps available. The experience becomes more engaging with the download of the KEPLR Wallet and its accompanying dashboard, where users can stake their ATOM tokens and earn consistent double-digit percentage yields largely due to inflation. Users soon find themselves utilizing the IBC Bridge to access the Cosmos DEX, Osmosis, for token swaps and liquidity provision. Swapping on Osmosis can now also be done directly through the KEPLR Wallet, including IBC transfers to and from Osmosis. Overall, the user experience has improved significantly due to the enhanced interface of the KEPLR Wallet.

However, using EVM-compatible Cosmos chains such as Injective Protocol, Evmos, or Canto can lead to mixed feelings, as users must revert to MetaMask for transaction signing. A solution that allows for both KEPLR and MetaMask to be used interchangeably is in development. Cosmos is also home to Thorchain and its unique cross-chain DEX, Thorswap. While Thorchain operates as a Cosmos chain, the user experience does not feel fully integrated due to the lack of IBC implementation; for example, users cannot stake RUNE through the KEPLR Wallet, which is also the case for some other Cosmos chains like Fetch.ai or Band Protocol.

The arrival of newcomers such as dYdX (from Ethereum Starknet), a perpetual DEX, and Celestial (TIA) is diversifying the user experience. It appears that new projects and their developers are increasingly using the Cosmos SDK as a framework to create their own DApp chains with unique tokens, which can then be staked for validation, providing inherent utility. Unfortunately, many DApps are still accessed through their own frontends with specific wallets, as seen with dYdX using MetaMask and Terra Luna 2.0 and Classic primarily managing their DApps through the Terra Wallet. Additionally, Cosmos lacks a robust NFT platform, with use cases predominantly focused on DeFi.

Transaction speeds across individual chains in the Cosmos ecosystem can reach several thousand TPS, though this varies by chain. Transaction costs typically range from $0.01 to $0.10, making the ecosystem financially accessible for DeFi and NFT users. However, these costs may encounter limitations in gaming, where higher transaction frequencies at lower costs are often required.

In summary, while the user experience may initially seem unfamiliar and fragmented, the trend is positive; many aspects have been simplified and are becoming increasingly user-friendly.

Ethereum User Experience

The user experience on Ethereum is well-known to many users. Interaction primarily occurs through the MetaMask wallet and Web3 websites, which serve as frontends to the DApps. While MetaMask is widely used, it has some shortcomings in terms of user experience, such as the need to import each token individually for display. Adding new networks can also require manual configuration.

Users first encounter Ethereum’s extremely high transaction fees. A simple ETH transaction can cost several dollars in ETH (GWEI), depending on network congestion. Sending ERC20 tokens is even more expensive. Staking, deposits, or swapping assets can be particularly costly. During bull markets, fees for certain actions reached hundreds of dollars, leading to situations where funds were stuck due to high costs associated with moving or swapping assets. NFT mints, such as the Otherdeed mint, clogged the network for hours (known as gas wars), resulting in gas fees of up to 2 ETH. These significant drawbacks in user experience coincided with a surge in popularity for alternative Layer-1 solutions (e.g., BNB Chain, Fantom, Avalanche, etc.). Use cases outside of high-stakes DeFi and expensive NFT collections struggle to find a foothold on Ethereum. However, this also highlights the desirability of the Ethereum base layer and the associated security.

Layer-2 solutions like Arbitrum, Optimism, Polygon, zkSync, and Base can be added to MetaMask relatively easily, providing a user experience similar to that of the Ethereum base layer. Most major Ethereum DApps, such as Uniswap, Aave, and 1Inch, can be utilized identically on Layer-2 platforms. However, there are two main issues from a user experience perspective:

1. Transfer of Funds Between Base Layer and Layer-2: Bridging funds from the mainnet to Layer-2 requires an expensive Ethereum transaction and can take a long time for both deposits and withdrawals. Particularly with older rollup technology, such as Optimistic Rollups, this process can take several days. While third-party services can expedite the process, they incur additional costs and risks. Alternatively, centralized exchanges (CEXes) can be used to withdraw most tokens and Ethereum on either the base layer or rollups.
2. Fragmented Liquidity: DApps can only utilize the liquidity available on their respective rollups. This leads to a poorer user experience, as slippage fees may increase or assets may not be available across all rollups.

Currently, rollups are also limited in speed and cost. Transactions can sometimes take several seconds to process, and costs typically range from $0.10 to $1, but can be higher during periods of high congestion. This is only acceptable for certain use cases.

In the future, the trend may shift towards completely bypassing the base layer by purchasing funds on a CEX in fiat, directly transferring them to the rollup, and using DApps there. This process would be nearly identical in user experience to using other EVM-compatible chains like BNB, Avalanche, or Fantom.

Ethereum Upgrades

The upcoming upgrade, Proto-Danksharding, could improve transaction fees and speeds by up to 100 times. This would be a crucial step for the Ethereum ecosystem, enabling Layer-2 solutions to compete with technologies like Solana and newer developments such as Aptos and SUI in terms of transactions per second (TPS). It would also expand the possibilities for use cases such as gaming.

This upgrade could largely close the door for any new market participants who do not plan to develop a blockchain that is faster and better than Solana while also overcoming network effects. Any actor needing a specific use case chain—such as a game, an exchange wanting a DEX chain, or an NFT platform preferring its own chain—will likely choose either a Layer-2 solution or a Cosmos DApp chain. The decision will revolve around the security of the Ethereum base layer or the integration with the Cosmos ecosystem. In both cases, there is potential for value extraction, which will be crucial for such actors. Here, Layer-2 solutions with Ethereum’s security and connectivity to the Ethereum ecosystem appear more attractive. Nonetheless, projects like dYdX or Celestial have chosen Cosmos for specific reasons.

dYdX’s transition from Ethereum Layer-2 StarkNet to its own DApp chain in the Cosmos network was primarily motivated by the desire to tackle the Miner Extractable Value (MEV) problem more effectively. On its own chain, dYdX can achieve closer integration between the consensus mechanism and the specific needs of the application. This allows for better control and optimization opportunities that are harder to achieve on Ethereum due to the separation of consensus and application layers, as well as a broader validator set. Such a focused and tailored environment enables dYdX to address specific challenges related to fair and efficient trading more effectively.

Unified Liquidity

The solution to the problem of fragmented liquidity may come from the Layer-2 project Polygon with its announced development of “Polygon 2.0” and the zkEVM (Zero-Knowledge Ethereum Virtual Machine). This development speaks of “Unified Liquidity,” meaning consolidated liquidity. The exact details and functionality of this concept are still unknown, but if Polygon were to create a system where rollups can share liquidity, it would be a significant innovation.

Such a development could represent a breakthrough not only for Polygon itself but also for the entire Ethereum ecosystem. The ability to pool liquidity across different rollups would address many current challenges related to slippage, trading depth, and user experience. This could significantly enhance the attractiveness of Ethereum and its Layer-2 solutions, particularly for applications requiring high liquidity, such as DeFi platforms.

Solana Upgrades

Firedancer, developed by Jump Crypto (a venture capital firm), is a new validator client designed to further enhance the performance and scalability of the Solana network. It supports a higher number of concurrent transactions through optimized programming languages, offers sharding support for improved scalability, utilizes optimized network and P2P communication protocols, and implements a more efficient version of the Solana consensus protocol. In a demonstration, Firedancer processed 1.2 million transactions per second (TPS), potentially making the operation of Solana nodes more cost-effective. The Firedancer upgrade addresses significant criticisms, such as the low level of decentralization caused by the resource-intensive operation of nodes, as well as concerns regarding the scalability limits of Solana’s monolithic blockchain approach. It enables the Solana ecosystem to scale horizontally in the future, similar to Cosmos and Ethereum, when necessary.

Conclusion from the User Perspective

This section highlights a critical issue from the user experience perspective: for the average user, security and decentralization often become important only after an incident occurs. The focus here is not on the relevant issue of smart contract risk, which is high across all chains, but rather on the general risk that the blockchain itself may be insecure or susceptible to attacks. From the user’s viewpoint, this is an extremely unlikely event, perceived as a hypothetical risk that is difficult to quantify. There have been no significant attacks on blockchains that have jeopardized user funds. The few incidents that have occurred are either historical or involve insignificant chains, such as Ethereum Classic (PoW). Risks such as inflation bugs are also not a central concern, as they cannot be mitigated through decentralization or security.

For individual users, it is often more of an ideological decision to choose a more decentralized and secure network, especially when it comes at the cost of higher expenses and a poorer user experience. However, larger entities, such as the traditional financial system entering the ecosystem through the tokenization of various assets (real world assets), may have a different perspective.

Another reason individual users may prefer the Ethereum ecosystem, despite its poor user experience, is its current status. Ethereum has by far the largest user base, total value locked (TVL), liquidity, developers, and consequently, the most DApps. A network is subject to the network effect, where its current status and growth rates are critical. These aspects will be explored in more detail in a later chapter.

SOL, ETH, and ATOM as Assets

When investing in a blockchain ecosystem, the simplest approach is to purchase the Layer-1 coin (ETH, SOL, ATOM) of the respective network. However, it is essential to remember that the value of the coin does not necessarily reflect the value of the network itself. Some networks do not have their own coin or value-capturing vehicle, such as certain Layer-2 solutions like BASE, the internet itself, or a non-public social media network. Therefore, the key question is how well the value creation of a network is linked to its coin.

A more complex approach involves not only investing in the Layer-1 network coin but also in the coins of Layer-2 networks (in the case of Ethereum) or DApp chains (in the case of Cosmos). In Solana’s case, this question is less relevant due to its architecture. The most complex strategy from an investor’s perspective involves additionally investing in the coins associated with the applications (DApps) located within the ecosystem. However, our analysis will focus solely on the first approach.

The price of a crypto asset is indeed determined by supply and demand. While the supply of cryptocurrencies can be relatively accurately assessed through known issuance schedules or circulating amounts, identifying and weighting the demand drivers is more complex. Key demand drivers include usage for transaction fees (gas), validation (staking), use in DeFi (liquidity provision and collateral), governance, use as currency, and, of course, speculation (price increase). The latter is a significant and often unpredictable demand driver in the crypto world, heavily influenced by belief, hype, and community engagement. Ideally, speculation should only reflect the future of the five preceding demand drivers.

These psychological and market psychological aspects can lead to rapid and significant price movements that are not always based on fundamental or technical analyses. Therefore, even with knowledge of supply and specific demand drivers, accurately predicting the price of a crypto asset can be challenging.

Dynamics of Supply and Demand in Blockchain

In the dynamics of supply and demand within the blockchain ecosystem, token emission (supply inflation) and token burning (supply deflation) are particularly noteworthy, especially in conjunction with transaction fees and validation costs. Simply put, blockchains operate through a set of validators who maintain and finance the infrastructure. These validators sell block space and generate revenue through two primary channels: transaction fees and transaction ordering, which results in value extraction (MEV). Users (buyers of block space) incur these costs via transaction fees and slippage when engaging with DeFi applications.

Additional demand drivers, such as DeFi, staking, governance, currency utilization, and speculation, dynamically influence the coin price but do not directly contribute to the infrastructure. Instead, they manifest through network activity, which then translates into transaction fees and MEV for the infrastructure providers (validators).

A sustainable blockchain would exist if the product of transactions and transaction fees, combined with MEV, exceeds the operational costs of maintaining the infrastructure. When this is not the case, new coins must be minted (token emission) and distributed as additional rewards to validators (block rewards), leading to token inflation. Consequently, all token holders experience dilution and bear the costs of the infrastructure. However, as long as overall demand remains high, this dilution does not manifest as a negative price trend. Long-term and in the event of declining demand, this situation may change.

Both Solana and Ethereum have integrated token emission and burning mechanisms that result in more tokens being burned than emitted at certain usage levels (transaction volume). The advantage of such a system is that validators can always be compensated: during low utilization through inflation (taxing all stakeholders) and during high utilization entirely through the sale of block space. This can even lead to a reverse tax due to deflation, resulting in value redistribution rather than extraction.

Theoretically, it is also possible for validators to be compensated solely through MEV. However, since MEV generally correlates with a poor user experience (high slippage), developments tend to focus on reducing MEV rather than promoting it.

The Bitcoin blockchain does not incorporate such a system; it only features inflation, which is halved every four years (halving). The Bitcoin blockchain is not yet sustainable, as miners must be incentivized through block rewards, particularly because the Proof of Work (PoW) system consumes external resources (electricity and hardware) on a much larger scale than the Proof of Stake (PoS) system. A significant increase in transaction volume is necessary for Bitcoin to become sustainable. Ethereum is the first blockchain to achieve this (and seemingly Tron as well). Solana, due to its low transaction fees and high infrastructure costs, is still far from this goal.

SOL Token Economics

In the Solana ecosystem, the SOL coin is primarily used as a gas token for transaction fees and as a staking coin. Currently, approximately 70% of all SOL in circulation is staked. Additionally, SOL is used as collateral across various lending and borrowing platforms. It is crucial to highlight the coin’s use as currency, as this also generates demand for liquid SOL. Notably, while many NFTs on Solana’s trading platforms are priced in SOL, there is a growing trend to price them in Ethereum (ETH) instead. This shift underscores Ethereum’s ongoing significance and acceptance as a price reference in the NFT market, even within an ecosystem built on a different blockchain.

As of November 2023, due to low transaction costs in the network, users are paying an average of around $100,000 per day in fees, equating to approximately 2,000 SOL. This results in an annual revenue of only about $36.5 million, or 730,000 SOL. Half of these revenues are burned, while the other half is distributed to stakers, leading to an annual burn of approximately 335,000 SOL. In contrast, there is currently an inflation rate of 5.56%, which, with a circulating supply of 423 million SOL, corresponds to an issuance of about 23 million SOL coins. Thus, 23 million new SOL are created annually, while only 335,000 SOL are burned (1.4%). This dynamic between token burning and inflation is crucial for understanding SOL’s tokenomics and directly impacts the token’s value and scarcity, which is currently extremely weak.

The annual inflation rate of SOL in the Solana ecosystem is gradually reduced by 15% until it stabilizes at a permanent rate of 1.5%. At that point, with a circulating supply of 560 million SOL, this would result in an annual issuance of approximately 8.4 million SOL. Given the current burn rate of 335,000 SOL per year, transaction volume—and thus the amount of SOL consumed for transaction fees—would need to increase twenty-five-fold from its current level to achieve a constant supply of SOL and trend towards a deflationary coin. This indicates that a significant increase in network activity is necessary to offset the new SOL created through inflation via the burning process, thereby achieving a deflationary dynamic similar to that already present in Ethereum. If the new Firedancer client further reduces transaction fees (by a factor of 30), it could imply that this goal may never be reached. Consequently, Solana validators would either need to be compensated through MEV or all SOL stakeholders would have to fund the network through the dilution of their own coins.

From a staker’s perspective in Solana, current returns of around 8% per year (APY) can be achieved. This yield results from the combination of an inflation rate of nearly 6% and a high staking rate in the network, which currently hovers around 70%.

The high staking rate of 70% of circulating SOL in the Solana ecosystem can be attributed to the straightforward system of delegated staking. This elevated rate suggests that little additional demand for SOL through further staking is expected, leading to a relatively weak impact on price due to supply reduction. For stakers, this means they need not worry significantly about sharing their staking rewards with many other participants.

In contrast, Ethereum’s staking rate is around 23%. This presents the potential for significant amounts of ETH to migrate into the staking contract in the future, which could reduce the freely circulating supply of Ethereum and potentially have a positive effect on its price. However, increased participation in staking could lower the annual yield (APY) for existing stakers, making staking less attractive.

In both ecosystems, Solana and Ethereum, liquid staking protocols play a crucial role. These protocols create a counterpart token for staked ETH or SOL (LST), which can then be used as collateral in DeFi projects. This dynamic adds another layer of complexity, as it provides additional utility for staked assets and can influence circulating supply and price formation.

ETH Tokenomics

The tokenomics of Ethereum is characterized by a unique interplay of inflation and deflation. Currently, 0.35 ETH is generated per block (with approximately 7,000 blocks per day), resulting in an annual inflation rate of about 0.7%. However, this inflation is offset by the simultaneous burning of base fees in Ethereum. The actual balance between inflation and deflation is heavily dependent on network utilization, as higher utilization raises the base fee, leading to more ETH being burned.

Under moderate to high network utilization, the Ethereum network can even become deflationary, as more ETH is burned than created through block rewards. For 2023, which appears to be a relatively weak bullish year for Ethereum, deflation is expected to persist. This implies that Ethereum may have surpassed its “peak supply,” and the total circulating supply of ETH could continue to decline as long as network utilization and the associated ETH burn exceed the inflation generated by block rewards.

Ethereum Network Staking and Tokenomics

In the Ethereum network, stakers receive rewards not only from network inflation and Miner Extracted Value (MEV) but also from a portion of transaction fees known as the “Priority Fee.” This fee is charged in addition to the base fee and is directly allocated to the stakers. The combination of these income sources results in variable returns for stakers. A validator with a 32 ETH stake can typically produce around three blocks per year, making the yield highly dependent on chance, fluctuating between 3% and 6%, based on the variable values of MEV and Priority Fees (network utilization).

Liquid staking protocols (such as Lido Finance and Rocketpool) provide a means to smooth this variability. By pooling returns in what are known as Smoothing Pools, they can offer more consistent yields. However, stakers utilizing liquid staking must share a portion of their returns with node operators and the liquid staking protocol. Consequently, yields from liquid staking are around 3.5%. This arrangement allows users to stake any amount of ETH rather than the fixed 32 ETH bundle.

Currently, Ethereum, as a base layer, processes approximately 1 million transactions per day, with average transaction fees varying significantly but averaging around $10. This results in an annual revenue range of about $2 to $4 billion. Given the current network utilization, which is slightly deflationary in 2023, the resulting interest rates for stakers are sustainable and do not arise from coin dilution. Users willingly pay transaction fees because they perceive value in executing transactions, indicating that these are real revenues, not artificially maintained.

Thus, Ethereum can be viewed as a sustainable network that would be cash flow positive if compared to a traditional business. Cash flow is directed to stakers, with a little extra going to those who also operate nodes, thereby providing the network infrastructure. While Ethereum holders and stakers receive nominally lower returns compared to Solana and Cosmos, these returns stem from real revenues (Real Yield) in a non-inflationary, even deflationary environment. This generates value for participants in the ecosystem sustainably.

With a current staking rate of about 23% of all circulating ETH, relatively low compared to other networks, there remains significant potential to reduce yields. Inflows into the Ethereum staking contract have been less robust in recent months, tending towards equilibrium with outflows. Interestingly, inflows of ETH into the staking contract surged following the Shapella upgrade in the first quarter of 2023, which allowed ETH to be withdrawn from the staking contract for the first time.

An increase in staked ETH can positively impact the price of ETH by reducing circulating supply. However, this also means lower yields for stakers, as the generated revenues must now be shared among more participants. This situation reflects the dynamics and balance between the incentive structure for stakers and the overall health of the Ethereum network. It is a balancing act between attracting new stakers and maintaining an attractive yield level for existing participants.

Layer-2 solutions are another demand driver for ETH within the Ethereum ecosystem. With few exceptions, such as Polygon and Celo, most Layer-2 platforms use ETH as their native gas token. Consequently, the ETH flowing into these Layer-2 networks remains liquid. As Layer-2 networks grow in terms of transaction volume, Total Value Locked (TVL), and user numbers, the demand for Ethereum will also increase. Additionally, Layer-2 networks generate substantial transaction fees at the base layer, as their transactions are bundled and processed on Ethereum’s base layer through their own smart contracts, consuming gas. The cost of individual transactions on Layer-2 is significantly lower than on the base layer, which is one of Layer-2’s primary purposes.

However, this creates a double-edged sword regarding ETH’s value capture by Layer-2. On one hand, Layer-2 platforms siphon transaction volume away from Ethereum, relieving network congestion, which can lead to lower transaction fees at the base layer and potentially impact stakers’ yields. On the other hand, Layer-2 networks make the ecosystem more attractive to new users and DApps, thus promoting overall system growth. This leads to a significantly higher number of transactions being bundled on Layer-2 and partially redirected back to the base layer in the form of fees. In the distant future, the Ethereum base layer may primarily process bundled transactions from numerous Layer-2 networks, while individual transactions are better suited for the Layer-2 platforms due to cost and efficiency.

The upcoming Ethereum upgrade, Proto-Danksharding, will introduce additional dynamics to the interplay between Layer-1 and Layer-2 by reducing transaction fees on Layer-2 by fifty to one hundred times.

Ethereum is also used as collateral in various DeFi protocols; for instance, ETH worth $4.3 billion is now deposited in the MakerDAO protocol to back the stablecoin DAI. ETH is present in numerous liquidity pools within DeFi protocols as available liquidity. As a currency, Ethereum has established itself not only as a benchmark for gas costs but also in the NFT sector, where prices are often quoted directly in ETH, regardless of their dollar value. Recently, even influencer shares in the temporarily hyped DApp Friend.tech were valued in ETH.

ETH thus has clear functionality and can be considered as money rather than merely a utility token. The staking yield of ETH could also be viewed as a type of baseline yield for all returns in the crypto space, similar to the “risk-free yield” of U.S. Treasury bonds. This underscores Ethereum’s central role in the crypto ecosystem and its significance as a stable unit of value and reliable investment.

ATOM and the Cosmos Ecosystem

The horizontal architecture of Cosmos, consisting of many individual chains and a core bridge between them, results in the absence of a clear leading asset for the ecosystem. The ATOM chain does not serve as a central base layer for settlement, as Ethereum or the DOT chain in Polkadot does; it was originally just the first of many connected chains. Additionally, it is not home to significant, frequently used DApps. ATOM is merely the gas token for the ATOM chain and not for the parallel DApp chains. Instead, the Osmosis chain with the OSMO token could be regarded as the linchpin among all Cosmos chains, as it hosts the central DEX through which all coins and tokens are traded.

ATOM is primarily used as an onboarding chain for funds from centralized exchanges, given its widespread listing. However, ATOM has suffered from double-digit inflation for years, leading to weak tokenomics and poor price performance. Non-stakers, in particular, are severely penalized in this environment. The community is aware of this issue, and concepts are being developed to provide the ATOM chain with additional utility, thereby creating value for the token.

Cosmos Hub 2.0 Overview

Cosmos Hub 2.0 aims to address the challenges associated with the ATOM token by introducing new features that integrate ATOM more closely into the Cosmos ecosystem. Key innovations include Interchain Security, Liquid Staking, Interchain Scheduler, and Interchain Allocator, all designed to enhance the role and utility of ATOM within the network. Additionally, the tokenomics of ATOM will be revised to tackle high inflation and manage supply more effectively. A new governance model will also be implemented to strengthen decision-making processes and better consider the interests of various stakeholders. While the long-term effectiveness of these measures remains to be seen, they represent significant steps toward solidifying and improving ATOM’s position within the Cosmos ecosystem. Currently, ATOM is rarely used for direct valuation, and the planned upgrades aim to improve this situation, though considerable progress is needed compared to Solana and especially Ethereum.

In the future, ATOM staking may play a more prominent role, particularly if the concept of restaking becomes established within the Cosmos ecosystem. This would enable ATOM staking to support not only the security of its own relatively underutilized chain but also that of other chains or projects within the Cosmos ecosystem, potentially increasing the demand and value of ATOM.

Within the Cosmos ecosystem, the numerous individual coins of DApp chains are particularly interesting. Their functionality and value can be evaluated similarly to DApp tokens in Ethereum or Solana. A significant difference, however, is that these tokens can almost always be used for staking to validate and secure their respective chains. This makes them natively stakable, generating a baseline yield. This stands in contrast to other protocol tokens, which sometimes struggle to find additional justification beyond their role as governance tokens. The ability to serve as security and validation instruments for their respective blockchains while also generating returns adds an extra dimension of utility and value to these tokens in the Cosmos ecosystem.

Data Snapshot and Growth Trends

Snapshot

To assess the current state of a blockchain ecosystem, on-chain data provides a valuable entry point. Evaluating the three major blockchain ecosystems—Ethereum, Cosmos, and Solana—requires different approaches due to their distinct architectures.

• Solana: The analysis is relatively straightforward due to its singular blockchain architecture. On-chain metrics such as Total Value Locked (TVL), stablecoin market capitalization, and daily transactions can be directly derived from the Solana blockchain.
• Ethereum: The analysis is more complex, as it necessitates considering both the base layer and all connected Layer-2 networks. On-chain metrics must be aggregated across multiple layers to obtain a comprehensive picture.
• Cosmos: The Cosmos ecosystem consists of many independent chains, necessitating the aggregation of data from each individual Cosmos chain. This can be challenging, as not all data is consistently clear or accessible.

TVL and the market capitalization of stablecoins are two crucial metrics, as they are difficult to manipulate and provide insights into network utilization in the DeFi and stablecoin sectors. While the number of transactions is easier to influence—especially in networks with very low transaction costs—it still serves as a good indicator of overall network activity.

Defillama.com serves as a primary source for these data metrics, providing insights into current usage and engagement within the respective ecosystems, which are valuable for evaluating the current status of these blockchain ecosystems.

A comparison of the TVL across various blockchain ecosystems clearly shows Ethereum’s dominance. With a total TVL of $31 billion (as of November 2023), the Ethereum ecosystem far surpasses both Solana and Cosmos, with Ethereum holding approximately 44 times the TVL of Solana and 26 times that of Cosmos. Even individual Ethereum Layer-2 platforms exhibit significantly higher TVL than Solana. This trend is similarly reflected in the market capitalization of stablecoins, indicating that a substantial amount of capital resides within the Ethereum ecosystem.

Regarding stablecoin usage, it is noteworthy that the Tron blockchain has withdrawn significant amounts of Ethereum, with $8.1 billion in stablecoins, primarily due to its low transaction costs, which are critical for transferring stablecoins. Tron has established itself as a low-cost transfer network for stablecoins. However, with Ethereum’s Layer-2 solutions and the upcoming upgrade, there may be a reversal of stablecoin capital back to Ethereum, as transaction costs become comparably low while maintaining higher security than Tron’s base layer.

In terms of daily transaction volume, Solana leads significantly. However, a pertinent question arises regarding how many of these transactions are actually from real users versus those generated through the consensus protocol or automated processes. The low transaction costs on Solana could lead to inefficiencies and potential manipulations, which would not be economically feasible at Ethereum’s higher transaction costs. Conversely, Cosmos displays notably low transaction numbers overall, which likely reflect realistic user activity driven by genuine demand.

Current Data Landscape

The current data, based on information from platforms like DeFiLama, clearly indicates that the Ethereum ecosystem is not only leading but is truly dominant (see Fig. 15). It concentrates the majority of capital, users, developers, and DApps. In comparison, Solana holds only a small fraction, while Cosmos, due to its fragmented structure, is even more difficult to assess and lags significantly behind.

From the perspective of network effects, it appears challenging for Ethereum to be toppled from its position. Users attract more users, capital draws in additional capital, and developers and DApps benefit similarly. However, the question arises whether the network effect perspective is appropriate at this stage. It is possible that we are still in such an early phase of crypto adoption that a superior user experience—such as that offered by Solana—could be the decisive factor prompting capital and users to shift.

While $31 billion in the Ethereum ecosystem may sound substantial, it pales in comparison to the market capitalization of companies like Apple, which stands at $2.7 trillion, whereas the entire crypto market capitalization is only about $1.5 trillion. Moreover, cryptocurrency is still far from full mainstream adoption. These factors put the seemingly large differences between blockchain ecosystems into perspective and suggest that current market dynamics could change significantly in the future. To better understand this, let’s take a closer look at growth dynamics.

Growth Trends

A main argument from some Ethereum critics or bears concerns the alleged decline in Total Value Locked (TVL) in Ethereum compared to a rising TVL in Solana. However, this often stems from a misunderstanding of data analysis. It is crucial to consider the price movements of the underlying assets, as an increase in the price of these assets naturally affects the TVL value (excluding stablecoins) (see Fig. 16). Even if the TVL measured in ETH (see Fig. 17) tends to decline, another factor must be considered: since the Shapella upgrade in April 2023, staking on Ethereum has gained momentum, seeing strong inflows. This offers a form of “risk-free” interest generation that competes with DeFi interest-generating tools. Consequently, Ethereum capital is flowing out of DeFi applications, reducing the TVL.

When including staking (including liquid staking) in the analysis, it becomes evident that the TVL is not declining but is even slightly increasing (see Fig. 18). This is specific to Ethereum itself and does not encompass the entire ecosystem. According to Ethereum’s architecture with Layer-2 solutions, the TVL is expected to shift from the base layer to the Layer-2s, which is indeed happening. Therefore, to evaluate the entire ecosystem, the TVL of Ethereum should be considered in conjunction with all Layer-2 platforms. This broader perspective provides a more accurate picture of the overall situation and capital distribution within the Ethereum ecosystem.

Although the TVL on the older Layer-2 platforms of Ethereum also suffered during the 2022 bear market, analysis shows that the trends of Layer-1 and Layer-2 platforms are increasingly diverging. In Fig. 19, it is noticeable how the two charts slowly separate, ultimately creating a slight upward trend.

When comparing the TVL chart of Solana with that of Ethereum, it appears that Solana’s TVL has recently shown an upward trend (see Fig. 20). Following the FTX drama at the end of 2022, which led to speculation about Solana’s potential demise, the TVL initially dropped sharply, but seems to have found a bottom and is now showing an upward trend. However, this positive trend is primarily attributed to Solana’s own price. When looking at the TVL denominated in SOL, a downward trend is even more apparent (see Fig. 21).

Staking must also be taken into account. However, the situation does not improve significantly, as a large portion of Solana—about 70%—has been staked for some time (see Fig. 22).

Due to the numerous independent chains in the Cosmos ecosystem, creating a unified TVL trend line is indeed challenging. Each chain operates independently with its own tokenomics and use cases, complicating the aggregation of data into a total TVL.

In conclusion, Solana does not demonstrate a clear upward trend in most price-independent on-chain metrics. For instance, the stablecoin market cap remains stagnant, with the exception of a slight increase in transaction numbers and new addresses. The number of core developers and developer commits also shows no upward trend. Ethereum, while also lacking overwhelming figures regarding TVL and stablecoin growth trends, at least shows slight increases in developer data (core and commits), while transactions and addresses for the Ethereum base layer remain relatively stagnant.

Interestingly, the often-criticized blockchain network Cardano has shown increasing figures in TVL, stablecoins, and developer commits in 2023.

The recent surge in the cryptocurrency market, particularly among altcoins since September 2023, does not appear to be based on fundamental network data. This could indicate that the price is either ahead of the trend or has decoupled from the network fundamentals and is instead based on expectations regarding upcoming Bitcoin and Ethereum ETFs, the Bitcoin halving, or general cryptocurrency economic four-year cycles, which may constitute a self-fulfilling prophecy. Macroeconomic factors could also play a significant role or even be the sole reason. A more pessimistic view would be that the price increases are manipulated and excessive liquidity is being generated to facilitate the exit of large capital. Hopefully, the latter is not the case, but the actual reasons for the recent price increase in the cryptocurrency market remain speculative.

Project Movements
The decision of various projects to choose a specific blockchain ecosystem is indeed an important indicator of its future prospects. This choice primarily depends on whether the ecosystem meets the technical requirements of the project. A good example is the Solana conference Breakpoint in Amsterdam, where the slogan “Only Possible on Solana” highlighted the unique technical capabilities of Solana. Solana is often chosen for applications where high transaction speeds and low costs are critical, such as games with an in-game economy.

Another important aspect in the decision to choose an ecosystem is the availability of capital and developers. Although Solana’s perceived safer programming languages, Move and Rust, are closer to widely known languages like Java than Ethereum’s specifically developed Solidity, many DApps still opt for Ethereum, primarily due to the large capital and user base, as well as the network effect. Security is another critical factor, especially for financial applications and the tokenization of real-world assets (RWA), which tend to take place more on Ethereum. Games and NFTs, on the other hand, may be more likely to be built on Solana, where scalability takes precedence over security and decentralization.

Regarding actual project movements, the picture is mixed. While some projects choose Solana due to specific advantages like scalability and low costs, many others, particularly those with a higher need for security and decentralization, remain on Ethereum. This suggests a diversification within the blockchain landscape, with different ecosystems serving different niches and applications.

Pro-Ethereum:

• Coinbase: Decision to develop their own blockchain as an Ethereum Layer-2.
• Celo: A former standalone Layer-1 that has decided to continue as an Ethereum Layer-2.
• Canto: A Cosmos chain that is EVM-compatible, is now also becoming an Ethereum Layer-2.
• Worldcoin: An ambitious project by Sam Altman, aiming to create a “Proof of Human,” plans to build its coins as an Ethereum Layer-2 blockchain.
• Shibarium: The Shiba Inu’s own blockchain will be an Ethereum Layer-2.
• PayPal: Decision to launch their stablecoin (PYUSD) on Ethereum.
• Polygon 2.0: Polygon, originally an Ethereum sidechain, is evolving into an Ethereum Layer-2 ZK-Rollup.
• Near Protocol: A standalone Layer-1 blockchain that is moving closer to Ethereum as a data availability platform.
• OKX: The cryptocurrency exchange plans to launch its chain as a Polygon ZK-EVM Layer-2 on Ethereum.
• Kraken: Rumors suggest that Kraken also plans to launch its own chain as an Ethereum Layer-2.
• Eclipse: An Ethereum Layer-2 that operates the Solana Virtual Machine (SVM), enabling Solana DApps to directly integrate into the Ethereum ecosystem.

Pro-Solana:

Visa is integrating the Solana blockchain to facilitate cross-border payments, reflecting the increasing stability and performance of Solana and underscoring Visa’s positioning at the forefront of blockchain innovation.
The Ethereum OG project Maker DAO, with its stablecoin DAI, plans to develop its own blockchain, primarily for its own governance, for which it will utilize Solana’s technology. This decision has caused a stir in the Ethereum community, but it also underscores the technological strength and attractiveness of Solana.
A consortium led by Circle and the USDC stablecoin had announced last year that Solana would become the native blockchain for USDC. However, this statement was later removed from their website.
NEON EVM is working on a protocol for the Ethereum Virtual Machine on Solana. This enables the simple migration of Ethereum DApps to Solana and promotes blockchain interoperability.
Helium (HNT), a decentralized internet concept, has abandoned its own blockchain in favor of Solana to benefit from increased performance and scalability, especially for IoT networks.

Pro-Cosmos:

dYdX, the largest decentralized perpetual exchange, had been running on an Ethereum Layer-2 powered by StarkWare (version 3) until now. However, the protocol hit its limits, according to its own statements, and has now decided to launch its version 4 on a dedicated Cosmos chain. Here, the necessary throughput speed is available, and dYdX can charge fees for the required trades and directly pass them on to the dYdX stakers. This migration is one of the strongest arguments in favor of the Cosmos ecosystem, as a real application with many users has decided to choose Cosmos over Ethereum Layer-2 for purely technical reasons.It’s worth noting that the decision occurred about two years ago, when Layer-2 technology was not as advanced as today. A recent upgrade might have sufficiently met dYdX’s requirements. We will find out in the coming years whether version 5 will be a Layer-2 again.

The data availability layer Celestia (TIA), which describes itself as a modular blockchain network, intends to act as a data availability layer for Ethereum, but has decided not to build its own chain as an Ethereum Layer-2, but rather as a Cosmos chain.

In summary, the project migration speaks relatively clearly in favor of the Ethereum ecosystem. However, it is interesting, especially in the case of dYdX and Visa, that they have decided against Layer-2, and with meaningful arguments. The further blockchain selection of projects will be exciting here. Other blockchain ecosystems can only show isolated successes against the three described here, such as the Polkadot ecosystem, which could be classified as a mixture of Ethereum’s scaling solution and Cosmos. The currently much-discussed project Bittensor (TAO), a promising AI project, has entered the race as a Polkadot parachain that was once considered dead.

Risks

Technical Risks and Criticisms

Solana attempts to process a large number of transactions with a minimum support of 33% of the nodes. This makes the network insecure and centralized, as mathematical proofs indicate that at least 66% of the nodes are required for security. Some experts have criticized Solana’s Proof-of-History system as “pseudoscience.” If 33% of the validators support one version of the blockchain and the other 67% support another, this could lead to a regressive consensus finding, undermining the reliability and security of the network.

The concentration of Solana validators in large data centers of well-known providers due to the high bandwidth requirements is indeed a potential attack vector. This could become particularly relevant if regulators were to prohibit or restrict the operation of Solana nodes. An example of the impact of such concentration occurred in 2022 when about 20% of Solana nodes went offline after measures taken by the cloud provider Hetzner, which prohibited the hosting of Solana nodes. This event underscores the risk associated with a high degree of infrastructure centralization.

Solana uses the SPL token standard, which supports both non-fungible (NFTs) and fungible tokens, in contrast to Ethereum’s ERC-20 and ERC-721/ERC-1155 standards. While Ethereum NFT collections are typically defined by a single smart contract with a fixed, non-expandable number of NFTs, NFTs on Solana are not necessarily bundled in a single smart contract, which technically enables the expandability of NFT collections and therefore poses a risk of dilution for NFT holders.

In the Ethereum ecosystem, Infura is widely used. Infura is a centralized service that facilitates access to the Ethereum blockchain for developers and businesses, but it poses a centralization risk within the Ethereum ecosystem, as many Ethereum services rely on it. This creates a single point of failure and contradicts the decentralized approach of the blockchain. Infura controls the provided data, raising concerns about data integrity, censorship, and privacy. Additionally, the dependence on Infura could reduce the decentralization of the network, as it discourages users from running their own nodes.

The liquid staking protocol Lido Finance now controls approximately 32% of the assets staked on Ethereum, which is close to the critical threshold of 33%, above which a single staker could theoretically cause problems for the entire network. Particularly concerning is a stake share of 51%, as this would enable the possibility of a network takeover, while a complete control would be reached at 66% of the stake. Critics see this as a significant threat to network security and decentralization. However, the counterargument is that Lido Finance distributes its Ethereum stakes across currently 32 different node operators. Therefore, Lido itself would not be able to take unilateral actions without involving the node operators. Nevertheless, it would be easier for governments or other external actors to exert influence on the network if they only had to intervene at a few points to gain access to the base protocol.

Hier ist eine Zusammenfassung des Inhalts in formalem Englisch:

MEV (Miner Extractable Value) is not an issue exclusive to Ethereum, but rather a challenge common across blockchain networks. However, Ethereum’s thriving DeFi ecosystem has made MEV particularly prominent on this network.

Ethereum node operators have two primary responsibilities: attesting blocks and occasionally proposing new blocks. A validator with a 32 ETH stake typically produces about three blocks per year. When proposing a block, the validator has the freedom to order transactions and insert their own transactions. This capability is often leveraged for arbitrage strategies in DeFi protocols, a practice known as MEV. This is an inherent issue in blockchains that host DeFi activities.

In practice, node operators frequently employ an MEV-boost package, which selects a block builder to construct the block and a relay to verify it before the validator proposes the block. Both the block builder and the relay receive a share (around 5%) of the realized MEV, which is then allocated to the validator who proposed the block.

When the Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash on August 8, 2022, the decentralization of the Ethereum network was put to the test. While the Tornado Cash frontend was initially shut down, it was quickly replaced by decentralized frontends via IPFS. Flashbots, one of the largest block builders and relays based in the US, decided to comply with OFAC regulations. This resulted in Flashbots-built blocks being cleansed of Tornado Cash transactions, which was a form of censorship. At peak times, 90% of node operators used Flashbots as their MEV package, leading to Tornado Cash transactions being delayed rather than censored, as they were only included in blocks by node operators who did not use Flashbots for MEV. Over time, this share dropped back below 30%. The “test” of Ethereum’s decentralization and resilience was ultimately satisfactory, as Tornado Cash continues to be utilized and function properly.

In contrast, the Cosmos ecosystem faces potential challenges related to the lack of a native token with intrinsic value (ATOM) and the security risks of its application-specific blockchains (Dapp-Chains). The limited number of validators (60-150) and shared cross-ecosystem rules could lead to collusion among validators to extract value.

The decentralization within individual Cosmos chains is relatively constrained, as a small number of validators can dominate, resulting in a centralized control structure. Temporary halts of individual Cosmos chains are not uncommon. Technical requirements and high staking thresholds make it difficult for smaller participants to join, increasing the barriers to true decentralization. This concentration undermines network security and resilience against centralized attacks, questioning the credibility of the ecosystem as a truly decentralized system.

In terms of regulatory risk, Ethereum stands out. Neither the SEC lawsuit against Coinbase in early 2023 nor the recent case against Kraken mentioned Ethereum as a security. In contrast, ATOM and SOL were mentioned. None of the Layer-2 coins, except for MATIC, nor any other Cosmos coins were mentioned. The multiple filings for an Ethereum spot ETF and the existence of an approved Ethereum futures ETF further suggest that Ethereum is unlikely to be declared a security. Additionally, the crypto exchange EDX has successfully registered with the SEC, listing Ethereum as one of the tradable assets alongside BTC, BCH, and LTC.

Hier ist eine Zusammenfassung des Inhalts in offiziellem Englisch:

The Ripple (XRP) vs. SEC case, which was decided in favor of Ripple, suggests that neither ETH, SOL, nor ATOM are likely to be declared securities. Nevertheless, the regulatory risk appears to be significantly lower for Ethereum compared to its competitors.

Risk from Competing Blockchains

Other competitors in the race for Layer-1 blockchain dominance include chains from past cycles such as Cardano (ADA), Polkadot (DOT), Avalanche (AVAX), BNB Chain (BNB), Tron (TRX), Fantom (FTM), Radix (XRD), and Terra Luna 2.0 (LUNA). Emerging “next-generation” technology concepts like Aptos (APT), Sui (SUI), Near Protocol (NEAR), Algorand (ALGO), Aleph Zero (AZERO), Internet Computer (ICP), and Kaspa (KAS) are also noteworthy.

Among these chains, Cardano stands out as one of the few that has seen genuine on-chain growth (Fig. 23). Cardano has always taken a slow, academic approach to establishing a Layer-1 ecosystem, but this has kept it largely confined within its own community, making it struggle to maintain an effective external marketing presence.

Polkadot has high developer activity and commit counts, but lacks functional DApps. The Parachain auction concept also appears to have been unsuccessful. The user experience is by far the worst, but the most hyped AI crypto project, Bittensor (TAO), is built on a DOT Parachain. The Ethereum-clone chains like BNB Chain, Fantom, and Avalanche still have some traction, but with the emergence of Layer-2 networks, their justification as Layer-1 networks seems questionable. Avalanche is attempting to establish itself in the gaming sector, and predictions here are difficult – a killer game could change everything. Tron, as mentioned above, has hosted a significant portion of stablecoin activity and must now compete with Layer-2 networks in this sector. Terra Luna went down in crypto history with the collapse of an entire ecosystem, and its successor chain is facing a massive loss of trust, with little chance of establishing itself – it also lacks a unique selling point (USP).

As for the newer projects and their allegedly superior technological concepts, it is still uncertain whether they can capture significant market share. Even better technology may not be enough to overcome the network effects of established systems. None of the mentioned chains have yet gained significant traction in terms of users, capital, and DApps. However, the overall market could be smaller than expected, and individual killer DApps could make the difference. Time will tell how these developments unfold.

Current Market Analysis

Market Capitalization

In the comparative analysis of the three ecosystems, one must define the risk/reward-dependent portfolio weighting by comparing market capitalization. The Ethereum ecosystem is 12 or 16 times larger in market cap than its competitors, Solana and Cosmos (Fig. 25). Consequently, Solana and Cosmos are naturally more exposed to price volatility when it comes to capital inflows and outflows. Ethereum is a much heavier and more inert vehicle. However, this also means lower risk in the event of a sudden market downturn, be it a black swan event or a general macroeconomic reversal. For example, Ethereum declined -81% from its all-time high to the low in the last market cycle, while Solana dropped -97% and ATOM -88%. The difference between -80% and -90% may seem small, but it represents a 2x difference.

It is also important to note that in the comparative analysis of the ecosystems, all coins within these ecosystems must be added together. In the case of Solana, this is unnecessary due to its architecture, but for Ethereum and Cosmos, the market capitalizations of the individual coins are listed, summed, and set in relation (Fig. 25). Investments in these two ecosystems are therefore naturally more complex, as many different coins need to be purchased and weighted approximately in proportion to their market capitalization.

Price Performance of SOL vs Ethereum and ATOM

The price performance of SOL compared to Ethereum and ATOM was outstanding in 2023 (Fig. 26). Ethereum and most of its Layer-2 coins have even underperformed significantly compared to Bitcoin. The ATOM token of the Cosmos ecosystem has shown even weaker performance, but as mentioned multiple times, it is just one of many coins in the Cosmos ecosystem and is also subject to strong inflation, which can, however, be compensated by staking. Other tokens in the Cosmos ecosystem, such as KUJI, TIA, or RUNE, have performed similarly strongly to Solana. A balanced allocation to the entire Cosmos ecosystem should therefore exhibit performance roughly between Solana and Ethereum.

All these performances are now in the past and could be indicators for the overall performance of the ecosystems in this bull cycle, if one occurs. On the other hand, the view is that Ethereum and partly Cosmos still have catch-up potential here. In the crypto space, it’s always about narratives. The entire community goes through a narrative every two months or so – sometimes it’s all about Solana, then Telegram bots, then the Cosmos ecosystem is in focus, and then Layer-2 again. It is quite possible that the sentiment could soon switch back in the direction of pro-Ethereum, triggered for example by the Proto-Danksharding upgrade. Therefore, it is advisable not to always invest in the current narrative, as the upswing can soon be over, and attention shifts to the next trend. It is therefore wise to accumulate the coins and tokens when there is little attention on the corresponding narrative.

Grayscale Trust Price Influence

Another argument for the current underperformance of Ethereum compared to the rest of the crypto market is the Grayscale Ethereum Trust. This trust had a relatively high discount compared to the spot price of Ethereum, which reached up to 40-50%. Only in the last few weeks and days has this discount been reduced to around -15% (Fig. 27). This means that institutional investors who want to buy Ethereum as well as other coins first acquire the Grayscale Trust with its large discount, especially in the expectation that it may soon be converted into an ETF, before they buy Ethereum directly. This results in this “buffer” having to be exhausted before more capital can flow directly into Ethereum.

The thesis is that the trust’s discount needs to fall below 10% because only then will the purchase of the trust become less interesting than the direct purchase of spot Ethereum. A similar observation was made with Bitcoin: The Grayscale Bitcoin Trust has reduced its discount from -30-35% to now -10%. It should be noted that the Bitcoin price had already risen before this gap began to close. This could in turn be explained by the fact that there are other ways for institutional investors to invest in Bitcoin, which is not yet the case for Ethereum.

Conclusion

It is time to draw a conclusion from the insights into the three competitors Ethereum, Solana, and Cosmos in order to determine a portfolio allocation for one’s own portfolio based on this. Technologically, all three systems have their advantages and disadvantages. Ethereum is the oldest chain, and its current architecture is partly due to this age and the development over time. Millions of hours of brain power have flowed into the optimization process of Ethereum, and it has been continuously improved. Nevertheless, one could argue that if Ethereum were to be restarted from scratch today, changes in the basic structure might be chosen, and in this case, the architecture of Solana could be a possible choice. On the other hand, Ethereum has the first-mover advantage through its earlier start, which it impressively proves through current data such as TVL, stablecoins, and developer activity.

Solana impresses with a technology that delivers on its promises: The chain is extremely fast and very cost-effective. There have been no more failures for almost a year, which, according to its own statements, has been solved by a technological upgrade. Nevertheless, there remains a lingering aftertaste with Solana that there could be failures again if the transaction volume exceeds the peak values of the 2021 bull market. The Solana network has not yet undergone full testing. Additionally, regarding transaction fees, we need to determine if Solana can remain sustainably scalable and cost-effective. Furthermore, we must consider whether Solana is sufficiently decentralized. This test is still pending, while Ethereum has satisfactorily passed this with the OFAC sanctioning of Tornado Cash. What would happen if this happened to Solana or even one of the Cosmos chains – would the protocol still be available? Because only then does decentralization really make sense if protocols continue to work unstoppably and indestructibly, no matter who tries to stop them.

Cosmos shows its success through the onboarding of additional projects and dapp chains. The parallel structure with the inherently integrated bridge seems sensible for many applications. As an investment vehicle, however, Cosmos is more difficult to handle than Ethereum and Solana, and the Cosmos assets also lack the monetary character.

The comparison of the Ethereum ecosystem with the two competitors is also somewhat flawed in that an established blockchain ecosystem that now functions sustainably and dominates the vast majority of the entire crypto universe (with the exception of Bitcoin) is compared with two newer ecosystems that are much smaller but are currently receiving the bulk of the attention. It is comparable to the juxtaposition of a cash-flow-positive corporation with two emerging startups in the same sector. Of course, startups have greater growth potential, but also more risk.

Solana clearly wins in terms of user experience. Transactions are not only cost-effective, but everything takes place on a single chain, making asset bridging unnecessary. All DApps can communicate freely with each other, and the available wallets and the staking process are also well-designed. This is also the main point of argumentation of many influencers. From an entrepreneurial perspective, the user experience is crucial for whether a product achieves mainstream adoption or not.

But crypto is not just about user experience. In the crypto world, security and decentralization, especially in the financial sector, are also critical – this is exactly why this is the first use case of crypto. In terms of accounting, finance, and money, it can be crucial to prioritize security and decentralization (summarized as resilience) over user experience. Whether Solana can also deliver on these aspects remains to be seen. Security and decentralization are indispensable in the crypto world to ensure trust and stability, especially when it comes to financial transactions and values. This is exactly why the Ethereum ecosystem could also establish itself in this area and allow Solana and Cosmos to excel in other areas like gaming, NFTs, AI, or the metaverse.

Fundamentally, it is conceivable that there will be a multichain universe where the underlying blockchain protocols are so secure and well-interwoven that users no longer know which chain they are on. Perhaps there is room for all three – Ethereum, Solana, and Cosmos – or even more blockchain ecosystems.

This vision of a seamlessly integrated multichain universe would take the interoperability between different blockchains to a new level, allowing users to benefit from the strengths of each individual system without having to worry about the technical details. This could usher in a new era of blockchain technology, where the boundaries between different ecosystems increasingly blur and the user experience comes to the fore.

It is noteworthy that since October 2023, although the altcoin markets have bounced back and all three ecosystems are rising in price – with Solana leading the way – there is actually no growth in the on-chain data. This is even less the case for Solana than for Ethereum and Cosmos. Therefore, one cannot necessarily claim that Solana and Cosmos are the better investments just because they are growing stronger. The narrative on Crypto Twitter, however, seems to be a different one, where apparently new projects are popping up left and right, mostly focused on Solana. Either the price is racing ahead of actual development here, or it is purely macroeconomic factors that are decisive.

The updates to Ethereum, particularly with Proto-Danksharding, will also be crucial. If the transaction costs on Layer-2 compete with Solana, it will be exciting. We should no longer expect new blockchains targeting the Layer-1 use case, as there’s little reason for a new chain when I can leverage Ethereum’s security foundation and provide a clear decision path. It remains to be seen whether Ethereum can establish a foothold in the gaming sector, win the payment use case, or reclaim stablecoins from Tron.

As an investor, you often face the toughest question in the end: How do you weigh the collected insights, place them on the time axis, and determine which unknown information could significantly impact your decision?

Ultimately, the only strategy left is diversification by investing in all three ecosystems – Ethereum, Solana, and Cosmos – and weighting them according to their probability of success. The time horizon of the upcoming bull cycle also plays a decisive role here.

A long-term oriented portfolio that should also survive an upcoming bear market should probably have a weighting more towards Ethereum, with a focus on staking to generate cash flow. A more short-term oriented portfolio specifically for this cycle could be weighted more towards Solana and Cosmos .