What is a smart contract?
A smart contract is a computer program that automatically executes the terms of a contract stored on a blockchain. The program executes itself only when the conditions in the contract are met, thus eliminating the need for intermediaries. Additionally, having smart contracts in place decreases transaction costs significantly while increasing transaction speed.
Since the invention of smart contracts, organizations have been investigating ways to use them to build decentralized applications, or Dapps. Blockchain technology can be used to streamline operations in many industries that rely on contractual relationships, such as nonprofits, trade finance, insurance, and construction.
It is more practical to use existing blockchain platforms that support smart contracts rather than experiment with new technologies in pilot projects launched from scratch. Smart contract platforms charge fees based on the amount of power required to execute contracts deployed on them.
These are some of the most popular smart contract platforms, each with its own advantages and disadvantages.
The value proposition of smart contracts is that they have the potential to disrupt current contract law. This is because they are able to automate certain aspects of contract law, which would make the process of creating and enforcing contracts much easier. They allow for programmable value transfer within an infrastructure that is low-cost, fast, secure, and trustworthy. The potential for blockchain technology to disrupt industries such as financial services, tech, and gaming is growing as more people find ways to use it.
Smart contracts are deployed in compatible distributed ledger networks, typically smart contract blockchains, often referred to as layer 1 blockchains. The number of smart contract blockchains is growing, and they offer different levels of security, decentralization, and throughput.
The native assets on these platforms can be used as a common currency within the network, representing a shift towards an economy that is owned by the users. We discuss the major smart contract blockchains and the value of their native assets. We also talk about the growing investment case for these disruptive platforms.
Key Takeaways
- Ethereum achieved a successful formula between cryptographic functions, blockchain technology, and smart contract programmability. The introduction of such a concept opened the gates for other developers to create alternative smart contract blockchains based on varied throughput, decentralization, and security features.
- The monetary value within these platforms is significant, highlighting their utility and the growing user conviction in the decentralized applications (dapps) ecosystem.
- Smart contract blockchains’ native assets present opportunities to invest in a user-owned economy, a medium of exchange, and a potential store of value opportunity.
The Smart Contract Platform Landscape Continues to Develop
In our Ethereum: The Basics report, we covered how Ethereum introduced smart contract functionality into a blockchain platform.
The growth and success of Ethereum has led to the development of other smart contract blockchains. Although Ethereum is not the only cryptocurrency, it is by far the most prominent player. It has significant upgrades in the pipeline, such as proof-of-stake (PoS) and shard chains.
However, the playing field has expanded well beyond Ethereum. Many other platforms offer solutions that are just as good or better than Ethereum in terms of throughput, security, and decentralization. The market value of all the cryptocurrency in the world that is based on blockchain technology totals around $247 billion today, or roughly 27% of the total value of all cryptocurrency.
Although these platforms have a similar purpose, they are becoming more and more different. Different platforms can offer different features that may appeal to different audiences. For example, some platforms may offer faster processing speeds or require more powerful node hardware.
Below we break down the leading smart contract blockchains by market cap:
Ethereum
The native asset of Ethereum is ETH, and its market capitalization is $130 billion USD. Ethereum’s genesis block was created on July 30th, 2015.
Ethereum is the largest decentralized computing platform for decentralized applications, and is the first of its kind. Ethereum blockchain technology offers smart contract programmability, which has resulted in it hosting the majority of active dapps today. Ethereum is planning to move to a proof-of-stake consensus algorithm, and is investing in scalability resources to increase its transaction capacity. Ethereum’s built-in security features will help protect the network.
BNB Chain
The native asset of Binance is BNB and it has a market cap of $36 billion USD. The genesis block was on April 18th, 2019.
The BNB Chain is the smart contract chain from Binance that enables the development of decentralized applications. The Binancechain blockchain’s native asset is used to power dapps within the Binance ecosystem and as a transactional currency within Binance’s leading centralized exchange. BNB Chain is a more centralized blockchain than Ethereum that offers greater scalability to users, but at the cost of being less decentralized.
Cardano
The native asset of the Cardano platform is ADA, with a market capitalization of $15.5 billion USD. The genesis block was created on September 29th, 2017.
The goal of Cardano is to create a sustainable, decentralized, and scalable blockchain platform that can be used to run smart contracts. An update called Hydra is expected to go live this year to help scale the Cardano network. Hydra is a layer 2 solution. Cardano has a few coding languages for smart contracts that are different from Ethereum’s popular Solidity script.
Solana
SOL is a native asset with a market cap of $11.4 billion USD. It has a genesis block from March 15th, 2020.
Solana focuses on scalability and high throughput by allowing larger block sizes that require better node infrastructure. Solana is a high-speed blockchain that can handle up to 50,000 transactions per second with very low transaction costs. However, these throughput advantages come at a cost. While other blockchains boast about their decentralized nature, Solana has fewer nodes and is therefore less decentralized. The Solana programming language can be written in general-purpose languages such as Rust or C++.
Avalanche
AVAX is a native asset with a market cap of $4.6 billion USD and a genesis block of September 20th, 20206.
Avalanche is working to improve scalability and security without sacrificing decentralization. The platform has multiple blockchains, including both core and non-core networks that are specific to certain applications. Subnets are application-specific networks in Avalanche that function as Avalanche’s proposed scaling solution. Subnets are able to work with any type of smart contract package and any virtual machine- this includes Ethereum’s well-known Ethereum Virtual Machine (EVM).
The Investment Case for Smart Contract Native Assets
The native assets in these platforms can be used as a share of the network, as well as a medium of exchange for peer-to-peer transfers, paying for network fees, trading on-chain assets, and engaging with the dapp ecosystem. The value of these cryptocurrencies is based on the demand from the network. This means that investors can easily invest in smart contract platforms by buying these assets. There are three main reasons to invest in a chain’s native asset:
- A network’s native asset is typically used to pay for block space, including peer-to-peer transfers and smart contract interactions. As the ecosystem of a chain grows and users execute more transactions, the demand for a chain’s native asset increases. Therefore, investing in that cryptocurrency means exposure to the growth of the entire network, including indirect exposure to dapps in an ecosystem.
- A network’s native asset is often used as the currency to exchange for other on-chain assets. For example, non-fungible tokens (NFTs) in the Solana network are commonly bought with SOL.
- A native asset can potentially act as a store of value. Most of these cryptocurrencies have a limited supply or a fixed issuance rate. Assets like ETH, BNB, and AVAX could even become deflationary due to the burning mechanisms of these platforms, potentially offsetting the issuance rate if transaction demand is high while earning yield through a portion of transaction fees and block rewards.
The majority of these ecosystems use a proof of stake consensus mechanism, which requires users to lock the native cryptocurrency in order to secure the network. In exchange for doing this, they receive a portion of transaction fees. This process is called staking. Staking can be attractive for participants because they can potentially receive APYs of 7-10%, depending on the platform. The easiest way to participate in staking is to delegate cryptocurrencies to a validator, who typically charges a small percentage of the total yield. If you want to participate in a trustless network, it is essential that you choose a reputable validator. If a validator node tries to tamper with the network, they could have their stake slashed. If the validator follows the protocol, the risks of staking are low. When investing, it is also important to consider lock-up periods.
People who are willing to take on more risk could look into investing in DeFi within smart contract ecosystems and participate in the economy that is being developed by the users.
Overall, smart contract platforms have clever incentive mechanisms that can create positive network effects as follows:
- The native asset is needed to pay for block space/transactions
- Network validators get rewarded with fees and block rewards, which attracts more validators.
- More validators boost the security of the network.
- A more secure network with a bigger user base may attract more developers to build dapps and utility. Developer-created dapps and their utility attract users.
- With a secured and utility-rich network, demand for the native asset increases, which may boost the asset value.
The importance of each of these groups is dependent on the others – without developers, there is limited utility; without users, there is no activity or value creation; and without validators, there is low security. There is no one way to achieve the goal of onboarding smart contract-powered applications across all smart contract blockchains. The goal is to have smart contract-powered applications running on these blockchains, but the way to achieve this goal varies.
As of today, there are multiple smart contract platforms available, each with their own individual traits. We can compare these platforms by their technology and activity to find investment opportunities.
Evaluating Smart Contract Blockchains
Since the cryptocurrency space is constantly evolving, it’s important to keep up with the latest changes and understand the difference in value among platforms.
The main questions to ask when evaluating smart contract blockchains are:
- What dapps are on the platform? What is the platform’s activity like?
- How does the native asset accrue value?
- What are the supply dynamics of the native asset?
- How scalable is the platform?
- Is it secure and decentralized?
- Are there any prominent upgrades currently under development?
The Developments, Activity, and Dapp Ecosystem
The ideal smart contract blockchain ecosystem is full of dapps with high levels of user activity and transaction growth over time. Developers are constantly working to improve the utility of the network.
The numbers shown for Ethereum are only for the Ethereum mainnet. The study does not take into account active addresses on layer 2 protocols like Arbitrum or Optimism. The figures shown for Avalanche are only for the C-chain, which is the chain intended for general use with smart contracts and dapps. The figure doesn’t count addresses on subnets. For Solana, we only consider non-vote transactions. All numbers are a 7-day average.
The number of transactions may include transfers between people, the deployment of contracts, and interactions with apps. Although the digital asset space has been going through some challenges lately, the overall trend seems to be positive, with potential for growth in the long term.
Despite current conditions, developers are continuing to build new utilities on top of these platforms. The ability of user wallets to interact with various buckets of dapps available in these ecosystems shows the disruptive potential of smart contracts.
It is important for these ecosystems to generate revenue through transaction fees. People who help to secure the network and confirm blocks can earn part of the fees that are charged for transactions, earn new cryptocurrencies that are issued as rewards for confirming blocks, or may see the value of their holdings increase because some cryptocurrencies are destroyed as part of transaction fees.
The Scalability of Smart Contract Blockchains
The ability of a network to allow new users and support a high volume of transactions while still having low fees is called scalability. If these blockchains cannot be scaled efficiently, they will not be able to support large-scale dapps effectively and could become less competitive.
The numbers shown are specific to the Ethereum mainnet and do not include other networks. This text is discussing active addresses in layer 2s such as Arbitrum or Optimism and how they are not considered. The Avalanche C-chain is the main chain used for smart contract interaction and dapp deployment. The numbers shown are only for this chain. The figure doesn’t count addresses on subnets.
** TPS stands for the average number of transactions processed per second.
*** Theoretical TPS capacity is the average number of transactions the network can handle at its busiest times.
Layer 1 blockchains can have layer 2 solutions that can improve transaction speed. Layer 2 solutions can increase the number of transactions per second to 1000-4000. These scalable solutions are a necessary part of Ethereum’s roadmap, however they have not yet been proven to be the best possible solution for scaling. Problems faced by infants might cause some centralization issues that have not been solved yet. Even though layer 2 scaling solutions are strong, they haven’t been proven to work for all applications yet. This means that layer 1 scalability plans are still important.
Security & Decentralization of the Blockchain
Blockchains need to be secure so that they can be used as a settlement layer for different types of transactions between many different users. The decentralization of a system is crucial as it plays a key role in ensuring that the system is resistant to censorship and secure. Nodes are used to validate blocks and determine how assets should be distributed among staking participants. The number of nodes, the mechanism by which assets are distributed, and the accessibility of running a node are all factors that help to determine how decentralized a network is. The aim of decentralization is to get rid of single points of failure and make things more secure. This is because distributed ledgers need most people to agree before any changes can be made. Blockchains that are more secure because they have more people validating them and that don’t require expensive hardware to participate are considered more decentralized.
A low number of validators can signal less decentralization, but this might be a trade-off for greater scalability through faster transactions and reduced costs due to a single node having greater capacity. Token allocation should also affect decentralization. People with inside knowledge may be able to control whichblocks are added to the blockchain if they are given a large number of tokens, which could be a problem with censorship. In addition, a blockchain’s development may be controlled by a centralized organization or the community of token holders. The way tokens are distributed can have a big impact on how a decentralized organization is governed, since groups that hold a lot of tokens can end up wield a lot of power and potentially make decisions without consensus.
There is no right or wrong way to think about whether centralized or decentralized governance is better for developing a blockchain. The positive side of having centralized control is that technology can be upgraded faster, but the negative side is that not everyone may agree with the decisions made by the people in charge. As a project progresses and develops, it will often become more decentralized. When assessing smart contract platforms, it’s important to consider upcoming upgrades and compatibility.
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