The Ethereum (ETH 1.64%) blockchain is powered by the ETH coin, a cryptocurrency with a market value of $320 billion. Only Bitcoin is worth more. And Ethereum's success can be attributed to its programmability. Specifically, developers can use the platform to build and deploy decentralized applications (dApps), software that exists on a peer-to-peer network rather than centralized corporate services.
Decentralized finance (DeFi) products are a type of dApp. They allow investors to lend, trade, and earn interest on money without having to pay for going through a traditional bank or brokerage. And by eliminating intermediaries from the equation, DeFi products make financial services more efficient and more accessible. Thanks to its first-mover status, Ethereum is the largest dApp and DeFi ecosystem in the blockchain industry. But that popularity has also exposed a significant weakness: It lacks scalability.
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As Ethereum's transaction volume has risen, network traffic speeds have slow. And because each transaction is competing for limited mining power, transaction fees have skyrocketed. Of course, an upgrade is underway that aims to address that problem, but scalability isn't expected to improve until 2023. In the meantime, other blockchains have already solved that problem, and they are gaining ground on the market leader.
Here's one cryptocurrency that could eventually overtake Ethereum.
Scalability keeps costs low
Avalanche (AVAX 0.60%) is a programmable blockchain designed by Ava Labs. Its core innovation is the snowman consensus protocol, a type of proof of stake in which validators confirm transactions by randomly sampling a small subset of nodes (computers) rather than engaging in a time-consuming message exchange with every other node on the network.
That makes Avalanche very fast. In fact, with a throughput of 4,500 transactions per second (TPS) and a finalization time of two seconds, Ava Labs believes Avalanche now is the world's fastest blockchain. For context, Ethereum handles about 14 TPS and it requires up to six minutes to finalize transactions. That lack of scalability has made the platform expensive; the average transaction fee is more than $20 on Ethereum, but you'll likely pay just a few cents on Avalanche.
Compatibility expands use cases
Avalanche is designed to be compatible with Ethereum smart contracts, meaning developers can easily port their dApps from one blockchain to the other. In fact, stablecoin exchange Curve and lending protocol Aave are two of the most popular DeFi platforms on Ethereum, and both went live on Avalanche in October, offering investors a faster and cheaper means of access.
Shortly after, Ethereum-native USD Coin (USDC -0.01%) -- a stablecoin pegged to the U.S. dollar -- was added to Avalanche in December. As the cryptoeconomy's second-most-popular stablecoin, USDC could supercharge the Avalanche DeFi ecosystem, because it allows people to invest in DeFi without holding volatile cryptocurrencies. For instance, you can earn a 1.56% annual percentage yield (APY) by lending USDC to the Aave protocol right now. That's orders of magnitude more than the 0.06% paid by the average bank savings account.
Utility could supercharge adoption
In short, Avalanche is fast, cheap, and compatible with Ethereum. Over the past year, that value proposition has fueled rapid adoption. Avalanche's daily transaction volume crossed 1 million for the first time in January 2022. That's up from just a few hundred transactions per day in January 2021, and it's nearly equal to the 1.2 million average daily transactions seen on Ethereum so far this year.
Moreover, Avalanche currently features 175 blockchain projects -- including an array of video games, NFT marketplaces, and DeFi protocols -- and it ranks as the fourth-largest DeFi ecosystem, with about $11 billion invested on the blockchain. Going forward, as those dApps and DeFi products draw more developers, consumers, and investors to the platform, demand for the AVAX coin should rise, pushing its price higher. And given enough time, I believe Avalanche could surpass Ethereum in terms of price and popularity.
