Compatible Competition - Empowering or Encroaching on Ethereum?

Oct 12, 2021

Challenges with Ethereum

As intended by Ethereum’s London upgrade activated in the beginning of August, transaction fees have become more predictable. Increased demand for block space has however kept the transaction fees largely higher than before the hard fork. The transaction fees have caused many users to be priced out from sending transactions. This led to significant user and asset migrations to alternative blockchains compatible with Ethereum smart contracts and the Ethereum Virtual Machine.
The EVM is a state machine maintained in the network of Ethereum clients, responsible for executing transactions and smart contracts to compute the network’s state for each new block added to the blockchain.

Illustration 1: Average Transaction Fees on Ethereum in Gwei
Source: etherscan.io, Bitcoin Suisse Research

A closer look at EVM-compatible chains

This episode of Decrypt takes a closer look at four major EVM-compatible blockchains:
Avalanche Contract Chain (C-Chain), Binance Smart Chain (BSC), Fantom Opera and Polygon.

These four blockchains were selected based on the Total Value Locked (TVL) in decentralized finance (DeFi) on each chain. As a major use case for Ethereum, it is not surprising that DeFi has taken off on other EVM-compatible chains as well. The illustration below provides an overview of the recent changes in TVL in DeFi.

Illustration 2: DeFi Total Value Locked
Source: defillama.com, Bitcoin Suisse Research

The barrier of entry for application developers to deploy existing smart contracts on EVM-compatible chains is low due to the same program code being compatible with these competing chains. Many developer tools and blockchain infrastructure providers offering services for Ethereum development are available on the other EVM-compatible blockchains. This removes the need for further expensive and time-consuming smart contract audits, rendering the chains viable for swiftly deploying existing smart contract code.

As one of the three built-in blockchains in the Avalanche platform, the Avalanche Contract Chain (C-Chain)’s Snowman Consensus features the Snowball algorithm as a way of forming consensus on the state of the network. It applies continuous random sampling of other nodes’ preferred chain state to determine the network’s preference for the state of the blockchain. The state is derived from consistent majority responses from the random nodes queried through multiple query rounds. The C-Chain’s two largest DeFi projects are Aave (lending) and Trader Joe (exchange).

The Proof of Staked Authority (PoSA) mechanism on Binance Smart Chain (BSC) is a combination of delegated proof-of-stake (DPoS) and proof-of-authority (PoA), whereas blocks are produced by a set of 21 validators taking turns. The validator set is governed through staking on Binance Chain, the first of the exchange’s blockchain products. The set election happens once every 24 hours. On BSC, the two largest DeFi projects are PancakeSwap (exchange) and Venus (lending).

Fantom’s Opera chain is powered by Lachesis consensus. Lachesis is an asynchronous and leaderless consensus algorithm based on directed acyclic graphs (DAG), a tree-like dependency structure for events, with Byzantine Fault Tolerance, which is the ability of a distributed network to achieve consensus despite incorrect information or malicious participants. Each node stores a local DAG, which is used to calculate the order of event blocks (transactions) independently on each node. Consensus produces batches of event blocks, which then again are combined locally to form the actual blocks on the final chain. Validators do not vote on blocks or on a specific state of the network, but exchange the transactions and events they observe, reducing the number of consensus messages between validators. Fantom’s two largest DeFi projects are AnySwap and SpookySwap, both exchanges.

Polygon is an Ethereum-aligned scaling blockchain which uses a delegated proof-of-stake mechanism maintained on the Ethereum mainnet. Validators are scored based on a combination of stake, age, rewards earned and deductions to define the validator set.
Polygon’s two largest DeFi projects are Aave (lending) and Quickswap (exchange). In the NFT space, Polygon is the EVM blockchain with the largest ecosystem next to Ethereum, underpinned by the launch of NFT marketplace OpenSea on Polygon, which has provided users with a way to mint NFTs with significantly lower transaction fees. In local news, the Swiss postal service has announced the launch of a Swiss crypto stamp, which is also going to be powered by NFTs on Polygon.

A comparison of these chains is shown in the illustration below. The consensus protocol is the name for the consensus protocol coined by its developers. Validation protocol describes the evidence validators use to achieve consensus. The governance token describes the token used for governing the protocol, i.e., the asset staked by the validator nodes. The minimum stake outlines the minimum amount, both in the governance token and USD, required to start operating such a node. The size of validator set is a snapshot of the current number of validators present in each of the systems, while validator limit describes whether there is a limitation to the number of active validators, and if so, what the limit is. Supply staked outlines the percentage of total supply that is currently being staked. The block time describes the rate at which new blocks are produced by the validators.

Table 1: Comparison of Key Attributes of EVM-compatible chains (\*Snapshot as of 04.10.2021)
Sources: avax.network, Binance, Dune Analytics, Fantom Foundation, xdaichain.com, polygon.technology, ftmscan.com, bscscan.com

A few differences between the chains are noteworthy (Table 1): (1) The blockchains all use DPoS in some way, with BSC adding a PoA layer on top. PoA enables BSC to have further scalability due to validators taking turns at producing blocks in a pre-defined order. (2) The number of validators differs (19 – 1027) between the chains. While BSC and Polygon limit the number of validators, Fantom and Avalanche define a minimum stake requirement for validator nodes as an entry barrier. A larger number of validators however does not automatically guarantee a higher grade of decentralization. The degree of distribution of the parties controlling the validator nodes is essential to prevent validator collusion. (3) The smaller the percentage of the total supply staked, the easier it gets for new players to gain a dominant role. The opposite holds as well. Lastly, the block times do not vary much and are in general lower than on Ethereum (ca. 13 seconds).

Connecting Chains: Cross-Chain Asset Bridges

Migrating assets from one EVM blockchain to another is possible through bridges. There are three types of bridges: centralized, pairwise, and swaps.
Centralized bridges are controlled off-chain by a trusted counterparty, the other two types are smart contracts on-chain. Pairwise bridges lock an asset in a smart contract and create a representation of the asset on the paired chain. This is however limited to one specific pair of chains (for example from Ethereum to Polygon) which means that locked assets can only be unlocked by moving assets back through the bridge. Swaps follow a third approach. They let the user pay tokens on one chain to receive the equivalent representation on another. Instead of locking tokens, they use market makers, either human or automatic, as the counterparty of the cross-chain swap.

Illustration 3 shows the TVL locked in pairwise smart contract bridges from Ethereum to the four EVM chains. Polygon was the first mover in using bridges with its release back in May 2020. Its ecosystem has had time to grow significantly, attracting a large asset value reflected in Illustration 2. Therefore, it is not surprising that the TVL in smart contract bridges is the highest for Polygon. Recently, after the release of the bridge from Ethereum in February, Avalanche has however caught up in this metric, not least also due to a DeFi incentive program announced in August. With Binance centrally operating the largest bridge between Ethereum and BSC, BSC’s TVL in Illustration 3 is small as only smart contract bridges are considered.

Illustration 3: Cross-EVM-Chain Assets locked in Ethereum Smart Contracts, Snapshot on 06.10.2021
Source: etherscan.io
Other Approaches

Besides base layer EVM support, two other approaches to EVM compatibility and scaling exist – one of them being EVM support on other L1 chains, and the other one being Layer 2 (L2) scaling solutions.

Due to the popularity and the developer community surrounding the EVM, independent Layer 1 (L1) chains without native EVM compatibility are moving to become EVM-compatible, thus facilitating an easier entry into their blockchain ecosystems. Moonriver and Moonbeam are EVM parachains on Kusama and Polkadot, respectively, designed with the aim to extend the base Ethereum feature set. On Solana, Neon combines Ethereum compatibility with Solana’s scalability and liquidity. Lastly, Ethermint, an Ethereum-compatible PoS blockchain, uses the Cosmos SDK and runs on top of Tendermint.

Compared to L1 blockchains powered by their own sets of validator nodes, Ethereum’s L2 chains use the underlying security of Ethereum’s mainnet as their L1. With L2s spinning up, another dimension of EVM scalability chains has appeared recently. Arbitrum and Optimism, both Optimistic Rollups, have already accumulated significant asset inflows. While not yet compatible with the full set of EVM specifications, Optimism has announced full support for the EVM to be rolled out within a few weeks. Arbitrum supports the ability to run unmodified EVM contracts since its launch.

Conclusion

Each of the EVM-compatible blockchains described above comes with its own design choices and implied security and trust assumptions. Bridging assets from one EVM blockchain to another can be done through various service providers using different types of bridges, each with different functionalities.

Ultimately, Ethereum and its asset Ether benefit from competing chains enabling scalability for developers and users in the Ethereum ecosystem. These chains could be seen as staging environments for Ethereum, providing additional block space and the possibility of “battle-testing” a smart contract prior to launching on Ethereum. On the other hand, some projects aspire to reduce some of Ethereum’s market share as the largest smart contract platform.

Bitcoin Suisse