Ethereum (ETH -0.36%) and Polkadot (DOT -0.50%) are programmable blockchains, architected to support smart contracts (i.e. self-executing software). In turn, that type of technology forms the heart of decentralized finance (DeFi) applications, tools that make financial services more efficient by eliminating intermediaries like banks.
Not surprisingly, that value proposition has translated into rapid growth. DeFi investments have skyrocketed over 1,300% to $248 billion in the past year, and that massive uptick in adoption has not gone unnoticed. Institutional investors are increasingly interested in cryptocurrency. And in terms of programmable blockchains, Ethereum and Polkadot are the two most popular digital assets among crypto hedge funds.
That fact alone is a compelling investment thesis. But both Ethereum and Polkadot are also undergoing upgrades that could supercharge adoption in 2022 -- and beyond. Here's what you should know.
Ethereum was the world's first programmable blockchain, and it remains the most popular. Today, there are approximately 2,900 decentralized applications (dApps) deployed on the platform, and $155 billion invested in DeFi products. Put another way, Ethereum accounts for the vast majority of all dApps and 63% of all DeFi investments.
That popularity creates a virtuous cycle. Users tend to migrate toward the platform that offers the most variety, and developers tend to build dApps for the most utilized blockchains. However, Ethereum's popularity has also exposed a serious problem: It lacks scalability. In fact, Ethereum can handle just 30 transactions per second (TPS), while credit card processor Visa can theoretically process 24,000 TPS. And as the Ethereum network has become more congested, transaction speeds have slowed, causing delays and skyrocketing transaction fees.
Fortunately, the Ethereum 2.0 upgrade aims to solve that problem. Next year, the blockchain will transition from energy-intensive proof of work consensus to eco-friendly proof of stake, making the platform more sustainable. In 2023, side chains will be added to the core blockchain, dividing the network load more efficiently. And with a few more tweaks, Ethereum 2.0 could boost throughput to 100,000 TPS, preparing the platform for mainstream adoption.
That's why Ethereum looks like a smart buy right now. Assuming dApps and DeFi products on the blockchain continue to gain traction, demand for the underlying ETH token should rise, because users are required to pay transaction fees with the blockchain's native cryptocurrency. In turn, rising demand for ETH should translate into higher token prices.
Gavin Wood was a co-founder of Ethereum, and he actually invented Solidity, the programming language used to build smart contracts on the Ethereum blockchain. However, Wood eventually left the project to pursue his own vision. In 2017 he founded the Web3 Foundation, a nonprofit institution dedicated to building a decentralized internet. Under his leadership, the Web3 Foundation launched Polkadot in May 2020.
From the beginning, Polkadot was built to be scalable and interoperable with external networks, two qualities made possible by its unique architecture. Specifically, a single central chain (i.e. relay chain) uses proof of stake consensus to secure the entire network, while numerous programmable side chains (i.e. parachains) support a diverse ecosystem of dApps. Additionally, bridges -- a special type of parachain -- allow Polkadot to share data and assets with other blockchains.
In November, Polkadot auctioned the first parachain slots to developers, and in December, the first five parachains were attached to the relay chain. Going forward, Polkadot will continue to auction parachain slots for the foreseeable future, aiming to build an ecosystem of 100 parachains. At that time, Wood believes Polkadot could achieve speeds of 1 million TPS.
Notably, the Moonbeam parachain was among the first group to be onboarded. That's particularly important because Moonbeam is a bridge that allows Ethereum dApps to run on Polkadot. That catalyst could spark tremendous growth in the ecosystem in the coming months as developers rush to take advantage of Polkadot's interoperability.
From there, the investment thesis mirrors that of Ethereum. As more consumers use dApps and DeFi products on the Polkadot blockchain, demand for the DOT token should rise, sending its price higher. That's why this cryptocurrency looks like a smart buy right now.