Jamie Finn is co-founder and President of Securitize, which helps companies raise capital and investors to access the private capital markets via digital asset securities issued on the blockchain. Here he shares his thoughts on how next-generation blockchains provide a much-needed alternative to Ethereum.
If Bitcoin is digital gold, then Ethereum is its more practical cousin–the blockchain protocol upon which the rise of decentralized finance (DeFi) was envisioned to grow. Or, at least, that was the idea.
There’s just one big problem: the price per transaction to use Ethereum is prohibitively high for adoption at scale. The reason: Ethereum’s algorithm (like Bitcoin’s) demands significant electricity to crunch the numbers extending its chain, resulting in transaction surcharges (known as “gas fees”) that can be many times the amount of an actual transaction — as much as $20-40 per transaction in May 2021.
The promise of DeFi is that it is designed to facilitate financial transactions without reliance on big banks, as well as to provide investors with access to capital 24/7, thereby levelling the playing field for everyone. This should ultimately create a more equitable and frictionless financial services ecosystem and DeFi offerings, for now reserved to enhancing crypto and digital asset securities exposure, will soon extend to other financial services staples currently ringfenced by traditional finance. From an investment perspective, DeFi is also attractive as it may provide yield in a low-interest-rate environment.
While DeFi is working to democratise the system and encourage smaller investors, Ethereum offers no sliding scale cost model so a retail investor working with $50 or $1,000 faces the same gas fees (the price to transact) as a larger institution working with millions or billions. And clearly $40 surcharges are prohibitive for moving small amounts of money. Therefore, Ethereum (as it is currently structured) simply cannot be the foundation upon which DeFi is built.
The reality is that Ethereum is the first generation of practical blockchains. But the second generation is now here–and these chains are far more efficient and practical in propelling DeFi’s adoption and potential.
In fact, as one of the largest providers of digital asset securities (DAS), we have seen this problem coming for a long time and intentionally built an open architecture so that we could use the best blockchains as the technology progressed. The factors to weigh in picking one chain versus another are, of course: speed, security, ease of use, and overall efficiency.
While our stable of blockchain partners currently numbers five, including Ethereum, Hyperledger and ConsenSys Quorum, we will focus on two of our most active partners: Avalanche and Algorand, and what they each offer up against the incumbent benchmark.
Avalanche is compatible with Ethereum’s assets and applications, so replicating the functionality is painless and we have been able to port clients over to this blockchain seamlessly. According to Avalanche parent AVA Labs, users have transferred more than $170 million to Avalanche from Ethereum since February and we continue to see the utility and future growth in their platform.
Here are some key reasons why:
- Provides a replica of Ethereum, compatible with its tooling
- Offers more nodes, with a lower percentage needed online for network functionality
- Virtually instantaneous settlement of less than 1 second to 3 seconds, handling more transactions per second than Ethereum
- Proof of stake system – requires node owner to put skin in the game (as opposed to Ethereum, which is a “proof of work” chain)
- The average fee is $1.20, versus $20-40 range for Ethereum over the last few weeks
Algorand, another key partner of ours, also has a key advantage over Ethereum: a fixed price model, which fits well with many of our offerings as we look to democratise the lifecycle of private markets, including making the issuance and trading of security tokens available to all investors. In addition, one of Algorand’s objectives in launching was to solve for the problem that first-generation blockchains were tough to scale. They have delivered on that promise, as well, with billions of transactions processed per second.
Other Algorand benefits include:
- First pure “proof of stake” blockchain
- Highly economical, efficient to scale up
- Fixed cost of transaction is 0.001 (1/10 of a penny) making micropayments possible
- Carbon offsets resulting in a net-zero emissions output
- Every transaction is stable and final
Ethereum still works for some, namely much larger transaction sizes to offset the gas fees; and there are still hopes pinned to Ethereum improvement proposal (EIP) 1559, which is expected to go live in July and could smoothen out the economics. We, however, remain skeptical that this will move the gas fees needle enough for Ethereum to be competitive as Defi and DAS are set to explode.
In fact, the prior EIP (nicknamed Berlin) was supposed to have solved the efficiency problem yet conversely had the opposite effect, as the vote sits with miners who have different end games. By limiting supply, price goes up which is good for them and historically, gas fees have always moved in lockstep with rising prices for Ethereum. While we are way off from all-time highs reached in May, we are still well north of the $400 equilibrium price point where we believe gas fees will be competitive with other options.
There is no question that Ethereum has the first-mover advantage and network effect needed to propel the digital asset industry forward and remain an important cog in the overall blockchain ecosystem. However, the rise of alternative options, built on more user-friendly ground will be what truly propel the adoption of DeFi at scale. Ethereum is important but the newcomers are where innovation is meeting what the market needs.