Both market segments are very popular right now.
DeFi is popular because many projects reward investors with very high fees for putting their money there – this is sometimes called yield farming. People also like the idea of financial products run by software rather than intermediaries such as banks.
Why did Ethereum need ‘killing?’
NFTs are popular because artists, athletes, musicians and gamers are releasing digital works on top of the Ethereum blockchain. These artworks cannot be duplicated, but can be traded on open markets.
To access both segments, investors needed to own ETH, the token on top of Ethereum. These two trends were largely why Ethereum’s price soared 800 per cent over the past year.
But as more money flooded into it, and the system had to work harder to verify everything and keep up, it became slow and expensive to use.
Transaction – or gas – fees rose, and it became too costly for developers to build on.
So people began creating new, adjacent chains that plugged into Ethereum or were blockchains that also facilitated smart contracts. These were called Layer-1 or Layer-2 chains, or more sexily, “Ethereum killers”.
They are designed to help Ethereum scale as a growing number of users transact through it.
Is Cardano the real deal?
Layer-1 networks are standalone blockchains, with their own set of protocol rules that manage transaction capacity and speed. Bitcoin and Ethereum are examples.
Layer-2 solutions are third-party integrations that are used alongside a Layer-1 network.
Cardano is one such adjacent chain. Like all crypto projects, it has a token that allows it to function. It’s called ADA and that’s what many people are buying at the moment.
Before we look into the different types of Layer-1 and Layer-2 chains that are enjoying a wave of fresh investment, it’s worth noting that some sophisticated crypto investors we spoke to are less than enthused about Cardano’s prospects.
Picking good coins from bad
Henrik Andersson manages $140 million in his crypto-first Apollo Capital fund and says Cardano’s explosive growth is puzzling because it doesn’t have much activity on its platform.
“It’s kind of odd … it’s a sign of how inefficient markets are right now with capital rushing towards something that has no utility,” he says.
Kain Warwick, founder of Synthetix, a successful DeFi protocol said simply: “NGMI” (Not Gonna Make It).
Many investors disagree and Cardano is now the third-largest cryptocurrency by market capitalisation at $US79 billion ($109 billion).
So, what are these Ethereum killers and how can investors tell the good from the bad?
When it comes to cryptocurrency investing (rather than speculating), it helps to look at the utility of the token, and the adoption rate.
It also helps to see what happens when there is a big market selloff.
Solana is a Layer-1 blockchain, meaning it has its own blockchain protocol and is a rival to Ethereum. On Monday, it was processing 2000 transactions per second, and Ethereum was processing about 13.
Andersson likes Solana as it is faster and cheaper than Ethereum but can also host decentralised finance applications and NFTs.
Solana’s token is called SOL and it is now the sixth-biggest coin in terms of market capitalisation, at about $US62 billion.
Polkadot is another “Ethereum killer” that runs blockchains in parallel with each other and connects to a big main one called Polkadot Relay Chain.
This means developers can exchange information across these chains whenever they like, also making for a faster, cheaper ecosystem. The token is called DOT and the project has a market capitalisation of $US33.2 billion.
Cardano has two layers: the settlement layer, which keeps track of token balances and transfers; and the computation layer which runs all the smart contracts.
If you’ve made it this far in the article, terrific. Unlike investing in shares, where future earnings and profitability are the key metric investors look for, crypto investors (as opposed to pure speculators) generally focus on adoption (how many people are using the platform) and interoperability (how it connects with other technologies).
The battle for the next wave of Ethereum-based blockchains has resulted in a wave of speculative capital pouring into these tokens, so it helps to do some research into the underlying technologies that power them.
Or, at a pinch, ask your Saturday night Zoom club.