Bitcoin has shown an incredible rally since September 2020, increasing more than sixfold from $10k to its current all-time high at ca. $65k. However, its share in the overall cryptocurrency market – as indicated by the Bitcoin dominance – has been dropping since January 2021.
Illustration 1: The Bitcoin dominance, Bitcoin’s share in the overall crypto market cap, reached its peak in January 2021 at 72.56%.
Accordingly, altcoins have outperformed since then. This is not least due to the strong performance of ETH, and best illustrated by the ETHBTC ratio – increasing almost twofold since the beginning of this year.
Illustration 2: ETH has rallied on a relative basis to Bitcoin since the beginning of this year, putting in close to a 100% gain (vs. Bitcoin) currently and bringing it back to levels not seen since August 2018.
This strength may have been in anticipation of a few fundamental catalysts on the horizon. EIP-1559, which might reach mainnet as early as in July, will burn part of the transaction fees paid on Ethereum, putting deflationary pressure on the ETH supply. It also improves the user experience by providing a clear indication how much needs to be paid for gas to get a transaction included in the next few blocks. Miners recently raised the gas limit per block from 12.5 million to 15 million, and hence increasing the throughput by ca. 20%. Besides other innovations such as flashbots, this has brought some relief to the high gas prices on Ethereum.
Illustration 3: Average fees for transactions on Ethereum have dropped from ca. $25 to $8, despite an increase in ETH price.
Layer 2 on Mainnet
Additionally, development and integration of layer 2 solutions are progressing. Aave has chosen to integrate with Polygon (formerly Matic), which launched a $40M liquidity mining program to incentivize users to switch to the new platform. The integration will bring down fees for protocol interactions massively to ca. $0.00001. Uniswap, which recently announced their v3, will build on Optimism. The total value locked in DeFi has recently surpassed $60 billion. Being able to cheaply utilize these DeFi protocols through such scaling solutions might further grow the user base.
On top of these advances in the Ethereum ecosystem, the timeline for the merger between the current Proof-of-Work chain and the new Proof-of-Stake based Ethereum 2 has been accelerated and is now planned for late 2021/early 2022. The merger will further bring down ETH supply inflation to possibly less than 1% p.a., a reduction similar to two halvings at the same time.
Other Base Layer Protocols
Besides ETH, various base layer protocol tokens have majorly contributed to the overall strength of the altcoin markets. Some examples are shown in Illustration 4.
Illustration 4: Since the beginning of this year, Solana (SOL) and Binance’s BNB have outperformed other base layer protocols and are up ca. 25x and 14x, respectively.
On the side of blockchains focusing on interoperability (“Layer 0” protocols), Polkadot (DOT), its canary network Kusama (KSM), and Cosmos (ATOM) have continued to attract interest – both from investors as well as developers.
Meanwhile, blockchains focusing on smart contracts and their applications have performed even stronger. Cardano does not support smart contracts yet, but should do so soon – after years of development – on their Alonzo testnet coming in late April or early May. The anticipation of this fundamental change, after which Cardano will have to battle other chains for users, may have played a role in its ca. 600% rally this year.
The Rise of Binance Smart Chain
Speaking of users, Binance Smart Chain (BSC, with BNB is used as the native token) has benefitted greatly from the high ETH gas prices and hence transaction fees. As an Ethereum Virtual Machine (EVM) compatible chain based on Proof-of-Staked Authority (using 21 validators), the transition from Ethereum to BSC is simple – wallet infrastructure developed for Ethereum, such as Metamask, works seamlessly with BSC as well. As transaction fees spiked on Ethereum in February 2021 (Illustration 3) and interacting with DeFi protocols became very costly, a corresponding large uptick in the number of unique addresses on BSC was observed.
Illustration 5: The number of unique addresses on BSC grew rapidly in the second half of February, from ca. 2 million to 60 million distinct addresses.
Decentralized exchange Pancakeswap, which is a fork of Uniswap deployed on BSC, currently has more than $8 billion in total value locked and its trading volumes rival those of Uniswap. Its governance token, CAKE, shows a year-to-date return of more than 5’000%.
In the long run, however, it remains to be seen whether the limited decentralization of BSC provided by having 21 validators is sufficient to avert malicious behavior.
Another challenger in the area of smart contract platforms is Solana. The idea for the technology behind Solana dates back to November 2017, when the white paper describing Proof-of-History (PoH) – a trustless mechanism for synchronizing time between nodes – was published. PoH should drastically improve the performance of blockchains, allowing thousands of transactions per second. In the case of Solana, it is coupled with staking of the native SOL tokens to select validators. After a slightly rocky periods of the Solana Mainnet Beta in December 2020, the blockchain has been running smoothly since. Currently, there are about 600 validators active on Solana.
The Solana ecosystem includes Serum, and orderbook-based decentralized exchange that currently holds $0.5 billion in value locked, and whose SRM token rallied by ca. 900% year-to-date. Other notable projects are Raydium, an automated market maker protocol and liquidity provider to Serum; Oxygen, a DeFi prime brokerage protocol; and Bonfida, a data aggregator and visualizer.
Altcoins have contributed massively to this year’s growth of the total crypto market capitalization to over $2 trillion – with both tokens related to DeFi as well as various base layer protocols outperforming Bitcoin.
While certainly not all of the currently more than 6’000 individual cryptocurrencies contribute in a meaningful way to the ecosystem, there are many that are worth keeping an eye on.