Ethereum is practically the “homeland” of decentralized finance, or DeFi. Almost all DeFi projects were originally created on the ETH blockchain. However, with the (continued) development of Solana, Binance Smart Chain and other chains, Ethereum’s DeFi market share fell sharply in 2021. JP Morgan analysts recently made grim predictions about the evolution of Ethereum in the DeFi domain for 2022 and 2023.
According to a Bloomberg News report, JPMorgan analysts believe that Ethereum could lose its leading position in the DeFi market during the year 2022 or 2023, due to the growth of more modern blockchains such as than Solana.
Ethereum’s DeFi Dominance Declines 30% in 2021
On the graph of the DeFiLama tracking tool, we can see the evolution of DeFi’s TVL (“Total Value Locked“, Ie the value of DeFi assets placed in stacking on a protocol) from August 2020 to that date. Ethereum’s share has declined since early 2021, from 95% to around 66%. According to forecasts by analysts at JP Morgan, this downward trend could continue.
– DeFiLama
Analysts explained that Ethereum could lose its leadership role in DeFi until the introduction of its sharding technology. Currently, Ethereum is still a proof-of-work blockchain (proof-of-work), and whose transactions use crypto mining, a technique harmful to the environment.
The number of possible transactions per second (15 per second) is also quite low compared to other blockchains, such as Solana (65,000 / s). The “fusion” (or The merge) of the ETH 1.0 blockchain, proof of work, with the ETH 2.0 blockchain, proof of stake (proof-of-stake) is scheduled for mid to late 2022.
Sharding, which involves breaking data into smaller blocks to improve scalability, might not even be implemented until 2023. Analysts at JP Morgan have argued that, until the ETH 2.0 is fully developed (“The merge”And sharding), other DeFi projects could win the race:
“We are still at least a year away from fully optimizing the Ethereum network. There is a risk that it will still lose market share compared to competing networks during this period ”.
By merging the two chains, Ethereum developers do not solve the problem of scalability or the problem of high transaction fees. They just change the consensus mechanism. High transaction fees always occur when the network is overloaded and validators process the more expensive transaction fees first. Only sharding provides a solution to scalability.
Vitalik Buterin presents “Multidimensional EIP-1557”
While Ethereum will likely convert in 2022 to a more environmentally friendly proof-of-stake blockchain, it may still be at least a year or more before ETH can compete in scalability and cost with Modern DeFi blockchains. Ethereum founder Vitalik Buterin, however, recently published a blog post about the multidimensional EIP-1557, which could at least help reduce high gas costs before sharding.
The name of “multidimensional EIP -1557” is inspired by theEthereum Improvement Proposal 1559. EIP-1559 was one of the most significant updates to Ethereum in 2021. During this one, developers optimized the pricing model and introduced the so-called “burning” mechanism, or burning tokens. Since this upgrade, part of the ETH transaction fees paid is “burned” – that is, destroyed forever. After the two chains merge, Ethereum will likely become a deflationary asset, as less ETH will be created than burnt.
With this new EIP, Vitalik Buterin wants to change the way individual data is assigned to gas units. The amount of data sent per block should therefore increase. Since fewer blocks are required for a transaction, the cost of a transaction also decreases.
However, the new procedure brings new problems. The new distribution mechanism requires, for example, new calculation operations. It is not yet clear whether the Ethereum community will adopt Vitalik Buterin’s new EIP, nor how long it would take for it to be implemented.
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