Cryptocurrency prices have been off to a rough start in 2022, with the total market's value falling 14% to $1.9 trillion year to date. But investors should keep a long-term perspective because crypto has a track record of bouncing back from its slumps. Ethereum (ETH -1.30%) and Polkadot (DOT -1.93%) look poised to lead the recovery because of their strong brands and innovative designs. Let's dig deeper.
Coined by Warren Buffett, economic moat describes a company's ability to maintain its market share against rivals offering similar products or services. For Ethereum, this boils down to a first-mover advantage and brand recognition. These factors will help the asset hold its own in the increasingly competitive cryptocurrency landscape.
Launched in 2015, Ethereum was the first blockchain optimized for decentralized application (dApp) development. DApps are autonomous programs that use self-executing smart contracts to offer services on the blockchain. And they dramatically expanded blockchain technology's use cases to support things like crypto exchanges and digital art markets.
But while Ethereum was the first public blockchain to support dApps, it is no longer necessarily the best, from a technical standpoint.
With a transaction capacity of just 15 per second, it has fallen behind newer platforms like Cardano and Solana, which can handle 250 and 50,000, respectively. That said, Ethereum still dominates the industry, hosting an estimated 3,000 of the roughly 4,000 existing dApp projects. It also continues to attract blockbuster projects like the Shiba Inu token (worth $13 billion), which chose to build on Ethereum because it is quote "already secure and well-established."
Ethereum's developers plan to resolve its scalability challenges through an update called the "consensus layer" (renamed from Eth2), which will change its proof-of-work (POW) consensus mechanism (where miners solve puzzles to validate transactions) to a faster proof-of-stake system where miners verify transactions with existing coins.
As the tenth-largest cryptocurrency (with a market cap of $21 billion) Polkadot doesn't enjoy Ethereum's trust and brand recognition. But it makes up for it with its speed and unique take on dApp development.
With a transaction capacity of 1,000 per second, Polkadot is significantly faster than Ethereum. And it accomplishes this through a technique called sharding, which breaks down the blockchain into "shards" to process transactions separately instead of one after the other. This can be thought of as adding more lanes to a one-lane highway. But it doesn't stop there. Polkadot's unique architecture also applies to the way it hosts dApp development.
Unlike Ethereum, where dApps are built on the main network, Polkadot's dApps can be built on its shards (known as parachains). According to developers, this allows dApp creators to better optimize their projects for specific use cases instead of adopting a one-size-fits-all model.
Polkadot began its first round of parachain auctions in November, which involved selling shards on its blockchain to dApp developers. The first project to launch is Moonbeam-- an Ethereum-compatible smart contract platform that can share data with Ethereum-based dApps as well as future Polkadot parachain projects.
Betting on the recovery
Cryptocurrency is a volatile asset class that isn't for the faint of heart. But Ethereum and Polkadot can help lead a crypto rebound. Ethereum is the top pick for investors looking for staying power because of its first-mover advantage and rock-solid economic moat. The lesser-known Polkadot is a more speculative buy. But its cutting edge architecture and unique take on dApp development could also lead to long-term success.