How will new public chains and Ethereum evolve in 2022?

In 2021, DeFi grew at an unprecedented rate, with DEX trading volume tripling and total value locked (TVL) quadrupling. As Ethereum transaction fees soared, the rise of new L1 public chains with faster transactions and cheaper fees caused Ethereum's market share to drop by more than a third in a year. Crypto users are attracted to the vibrant new public chain ecosystem and cheap fees, especially those compatible with EVM. For example, in the past year, BSC's TVL has grown 31,000% from $62 million to $21 billion. As new public chains gain development opportunities, Ethereum's L2 expansion solution is released, and Ethereum 2.0 is approaching, the importance, complexity, and interoperability of cross-chain will continue to increase.

The formation of a multi-chain world

Ethereum has been a huge success over the past year (total fee revenue far exceeds Bitcoin). According to data from January 18, 2022, Ethereum's daily fee revenue is $46.3 million, while Bitcoin's daily fee revenue is only $380,000. In terms of the number of transactions, the Ethereum network has a daily transaction volume of about 1.28 million times, which is 4 times that of the Bitcoin network, reflecting Ethereum's amazing growth in the past year - at the end of 2020, Bitcoin's revenue was about twice that of Ethereum; since then, Ethereum's revenue has increased by more than 50 times, while Bitcoin's daily revenue has fallen by 66%.

Although Bitcoin remains the undisputed leader in the cryptocurrency industry. However, the market's interest and demand for decentralized applications driven by smart contracts is clearly stronger than the demand for value storage, and applications such as DeFi, NFT, and GameFi have all driven Ethereum's growth. However, this direct demand has also greatly raised the Ethereum block space premium, resulting in a significant increase in fees paid by users. The average transaction fee once reached a record high of $68.72 in May last year - this is still the average cost of the simplest token transfer. If complex interactions are carried out, such as smart contracts that support DeFi protocols, the transaction fee cost may be much higher.

Ethereum's high transaction costs have caused many users to look for cheaper alternatives. At the beginning of 2021, TVL on applications on the Ethereum blockchain accounted for 98.2% of DeFi protocols. Currently, this figure has dropped to 67%. The biggest winners are BSC, Solana, Terra, Avalanche, Fantom, and Polygon.

Growth of L1 public chain addresses

Ethereum: The number of daily active addresses on January 1, 2021 was 426,000, reaching a peak of 800,000 in May, and is currently about 558,000, with a TVL of US$153 billion.

BSC: The number of daily active addresses on January 1, 2021 was 49,500, reaching a peak of 1.624 million in mid-October, and is currently about 1.313 million, with a TVL of US$19.07 billion.

POLYGON: The number of daily active addresses on January 1, 2021 was 759, the peak in October was 566,000, and currently it is 367,000, with a TVL of US$4.59 billion.

AVALANCHE: The number of daily active addresses on January 1, 2021 was 22, and it currently reaches 67,000, with a TVL of US$8.2 billion.

Compared with Ethereum, these new public chains have their own advantages. However, there is no perfect solution to the impossible triangle of blockchain, that is, it is impossible to take into account speed, security and decentralization at the same time. The PoW mechanism of Ethereum's approximately 2,500 main network nodes to execute intensive network security protection makes the cost of hacker attacks extremely high, ensuring security and decentralization, but sacrificing speed, which is manifested in limited transaction throughput and high transaction costs.

BSC uses a consensus mechanism of 21 trusted PoSA validators, which greatly improves speed and reduces transaction fees at the expense of decentralization. The disadvantage of this mechanism is that it is less decentralized and less secure. For example, last September, Solana, which has a similar consensus mechanism, suffered a DDoS attack and was down for more than 18 hours. Despite this, since most retail investors cannot afford Ethereum's handling fees of tens or even hundreds of dollars, new public chains that support cheap and fast transactions have become an alternative for many retail investors. Although there are many debates about the design and advantages of each public chain, the current booming development of multiple public chains shows that as long as there is a demand for projects in the market, they may have a place in the future.

Users who value decentralization and security insist on paying the necessary high fees for transactions, while users who are more sensitive to transaction speed and fees will choose to embrace new public chains. In 2021, although Ethereum's dominance in DeFi has declined significantly, its fee income and TVL are still growing significantly, which is a positive signal for the health of the industry, as the rise of new public chains will promote continuous innovation in the public chain industry.

After June 2022, Ethereum will switch to the PoS mechanism, but according to the team's roadmap, Ethereum will need several more years of upgrades to complete sharding, the ultimate form of ETH2.0. Switching to PoS is an important step for ETH2.0, but the growth in the number of users will continue to put tremendous pressure on Ethereum L1, making it impossible to bring its speed and fees to the same level as the new public chain (users who are more sensitive to speed and fees may still not choose Ethereum). At that time, Ethereum's L2 will still be needed to help expand capacity. Therefore, in 2022, the new public chain will not compete with Ethereum, but with Ethereum L2. In addition, as the multi-chain pattern of the entire industry takes shape, cross-chain interoperability will become more important.