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Exploring the Multi-Chain Universe Amid Incentives & Upgrades

On-Chain Markets Update by Lucas Outumuro, IntoTheBlock

Smart contract platforms’ tokens have been amongst the top performers of 2021. While Ether has recorded a remarkable 330% return year-to-date, newer platforms such as Solana, Avalanche and Terra have seen their tokens grow over 1,000% in 2021.

The rise in these platforms has been driven initially by their lower fees and more scalable blockchains, but more recently sizable incentives programs have also buoyed their tokens. At the same time, Ethereum is pushing further with upgrades improving its proposition as a store of value and scalability. As so-called “Ethereum killers” have quickly grown, it is worth taking a step back and analyzing the evolution of the space to better understand how the multi-chain universe is unfolding and creating opportunities for both users and investors. 

In terms of market cap, the top 10 smart contract platforms reached an all-time high in early September with an aggregate valuation of over $750 billion. 

The recent run-up in valuations has been driven by platforms such as Cardano and Solana hitting new all-time highs. While Ethereum has remained below its May high, Luna, Avalanche, Solana, Cardano, Algorand and Cosmos reached new heights in late August or early September. 

This has resulted in Ethereum’s market share dropping in terms of valuations. 

Ethereum’s market share out of the top 10 smart contract platforms is currently around 60%. However, as many will know, valuations of many of these platforms are not necessarily rational given that some do not have applications currently running on top of their blockchains. 

Looking at the top 10 smart contract platforms by total value locked (TVL), we obtain a better understanding of their market share based on traction in DeFi. 

As decentralized finance has grown into one of the most relevant sectors for applications on top of smart contract platforms, TVL has become widely used as its gauge for adoption. Though imperfect for reasons we won’t discuss here, TVL does provide a measure for the amount of capital entrusted by investors to each protocol and its underlying blockchain. 

In Ethereum’s case, its market share of TVL (70%) is significantly higher than its 60% share of market capitalization. This points to Ethereum being priced at a discount relative to the adoption of its DeFi ecosystem. Regardless, the charts are similar with Ethereum losing market share in May and September. 

The leading contenders in terms of TVL have been BSC and Solana, which managed to attract users with lower fees and faster transactions. Applications built on top of these blockchains also gained momentum offering high yields through liquidity mining. This approach has become mimicked by chains like Polygon and Avalanche offering incentives in their own native tokens to users of certain applications, especially for “blue-chips” such as Aave and Curve. 

These incentives have accelerated the path towards a multi-chain world. As yield-seeking participants enter the market or deploy more capital, liquidity mining has proven effective at driving both usage and appreciation of native tokens as seen with Avalanche below.  

As seen above, the announcement of the incentives program on Avalanche — dubbed Avalanche Rush — led to a parabolic increase in both TVL and AVAX’s market cap. A similar pattern occurred on Polygon when their incentive program kicked off in April. Throughout the three months of the initial program, TVL on Polygon increased over 60x from $150M to $10B. Afterwards, MATIC rewards were decreased by 70% and TVL dropped by 50% to $5 billion, still 30 times higher than prior to the program. 

Given the success of these incentives, several more smart contract platforms have announced their own liquidity mining programs and many more are likely to continue to do so. Just like we saw with DeFi Summer at the application layer, liquidity mining incentives by smart contract platforms are propelling the quick rise of the multi-chain universe. 

While these programs are likely to continue to take market share from Ethereum, the first smart contract platform has an arsenal of upgrades pushing it forward. The release of Arbitrum and Optimism are likely to lead to greater adoption of Ethereum as layer 2 solutions significantly lower fees for users. 

Moreover, Ether’s proposition as a store of value is growing in momentum. Following EIP-1559, Ether’s issuance has halved on average and even been negative for a few days. 

Source: IntoTheBlock’s Ether Supply Metrics

The decrease in issuance and strong adoption of Ether for applications in DeFi and NFTs support its potential for it to become a store of value and be priced as such. Furthermore, following the merge of the Beacon Chain, which is expected in early 2022, net issuance is projected to sustain negative levels, benefiting ETH holders from transactions on the Ethereum blockchain and boosting its potential to develop a monetary premium. 

That being said, in seeking this path the Ethereum community risks losing ground to the emerging smart contract platforms that already offer lower fees and in many cases subsidized usage through incentive programs. This sets the base for quick growth and strengthening competition in a multi-chain world where ultimately users and investors stand to benefit. 

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