Data Contradicts Narrative: Ethereum Continues to Dominate Layer 1 Sector

Ethereum, touted as the world computer, continues to command first place among blockchain networks.

According to data compiled by CoinMarketCap, Ethereum dominates the smart contracts sector with 62% of the $695 billion market cap, the highest it's been in 2024. Additionally, the network is top for revenue, commanding 70% of income collected by Layer 1s, and has doubled its DeFi total value locked (TVL) since the beginning of the year.

BNB Chain trails Ethereum in the smart contract space with $85 billion, followed by Solana with $59 billion. The ranking is the same for DeFi TVL, with BNB Chain accounting for $5 billion in Q2 and Solana hosting $4 billion.

These numbers, however, contradict the pervading narrative that Ethereum has been losing its stronghold on the industry and has allowed other ecosystems like Solana to claim some of its market share.

What gives?

“Most Crypto Twitter narratives are driven by VCs, and VCs can’t charge 2% carry and 20% performance fees to hold ETH, but they can for SOL,” said the pseudonymous Millie, a member of the Synthetix Spartan Council.

Milli told The Defiant that on Ethereum, activity is mostly DeFi related, whereas Solana activity is entirely seasonal and fuelled by the speculative nature of memecoins. “Solana blockspace is filled with memecoin belligerence that any serious analyst would be highly skeptical of,” Milli said.

Solana Wins On Some Metrics

Analysts point out that in certain areas of the market, Ethereum is slipping while Solana is stepping up.

Mert Mumtaz, CEO of Helius Labs, told The Defiant that Solana has surpassed Ethereum in terms of economic activity “a few times,” pointing out that MEV + priority fees are higher, along with validator revenue.

His views are backed by research from Blockworks, which indicated that Solana is enjoying its most profitable months in terms of blockspace. It is also closing the gap against Ethereum when it comes to trading volumes on decentralized exchanges (DEXs).

When pressed with concerns that activity might be fuelled by an unsustainable trend like memecoins, Mumtaz brushes them away. “The model of a lot of low fee activity combined with high volume has now been proven out empirically,” he said. “Doesn’t matter what the source is.”

“Extremely Shocked” To See Ethereum Lose Dominance

Millie said she would be extremely shocked to see Ethereum lose dominance in smart contracts, revenue, and DeFi TVL. But the network doesn’t have the same stranglehold on all three metrics.

“Revenue for L1 is tricky because it’s not clear how long this memecoin activity will sustain,” Milli told The Defiant. However, for smart contracts and TVL, she believes “chances are slim” because the network has optimized for chain legibility, auditability, and openness.

The latter is an important feature, she explained. Closed-source protocols pose less risk than open-source networks, but that culture, said Millie, also becomes a huge barrier to attracting TVL.

Even Mumtaz is skeptical that Solana will overtake Ethereum for DeFi TVL.

According to DefiLlama, TVL for Ethereum sits at $58 billion, while Solana has $4.5 billion. In the middle, Tron lands in second with $7.7 billion, and in third is BNB Chain with $4.8 billion.

An interesting note is Ethereum's continued dominance in the L1 sector despite users flocking to L2s in recent months. Millie reckons the seeming disparity is due to whale activity.

She said Layer 2s are “still way too permissioned for the majority of ETH whales” because they don't offer proper censorship resistance yet.

She also elaborated that low gas fees are also a symptom of L2s taking the majority of activity while whales continue to trade on the base chain, especially in terms of lending and borrowing.

“Whale movements like lending and borrowing aren’t computationally heavy, and they are not really time-sensitive,” Millie said. “Also, when volatility is low, DEX volumes are also low, which in turn drives most of the gas fees.”