Waves (WAVES -10.06%) has been one of the best-performing tokens of 2022 so far. Ethereum (ETH -5.95%), on the other hand, is a blockchain protocol whose token, Ether, is the second most popular after Bitcoin.
Comparisons between the two are practically inevitable. So which crypto looks like a better bet now?
An ocean liner versus a speedboat
Ethereum currently has a $402 billion market capitalization. If it was a stock rather than a cryptocurrency, it would be breathing down the neck of companies like Bank of America, Mastercard, and Home Depot in terms of market cap, and just outside the top 20 public companies in the world. This is an unbelievable achievement for Ethereum and its community in a very short time. However, the law of large numbers means that it will be more difficult for it to make equally explosive gains over the next few years.
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On the other hand, Waves just hit a $4.1 billion market cap -- just about 1% of Ethereum's. In and of itself, this doesn't necessarily mean anything, but it is more feasible for Waves to double or triple from here, taking it to a $8 billion or $12 billion market cap, than it would be for Ethereum to double or triple from here, taking it to a $700 billion -- in the neighborhood of companies like Berkshire Hathaway or Nvidia -- or a $1 trillion market cap, which would put it on par with Tesla (NASDAQ: TSLA). I don't think it's out of the realm of possibility that Ethereum will get there over the next few years, but it seems like it would be much easier for Waves to become a multibagger from here over a shorter time frame.
This is no "fault" of Ethereum. It is just a more mature asset that is at a different point in its growth trajectory. It's easier to turn around a speedboat than an ocean liner.
Valuation
One of the methods that investors can use to gauge the valuation of cryptocurrencies is by comparing a token's market cap to its total value locked (TVL). TVL is the total value of crypto assets deposited, or locked up, in a protocol. Divide a token's market capitalization by its total value locked, and you get its market-cap-to-TVL ratio. Waves has a market cap of $3.5 billion and a TVL of $3 billion, giving it a compelling market-cap-to-TVL of just under 1.2. Ethereum's market cap of $343 billion against its TVL of $127 billion gives it a ratio of 2.7. Based on this valuation method, Waves looks like a better bargain.
For context, a value closer to 1 indicates the market is not yet assigning a premium to the protocol in question. However, should the cryptocurrency's adoption, and hence the total asset value, increase faster than expected, the market will bid up its value, possibly assigning a larger premium, similar to a growth stock.
Bored Apes versus Waves Ducks
Ethereum is clearly the 800-pound gorilla in the decentralized finance (DeFi) space, and all other DeFi projects utilizing smart contracts owe a great debt to it. No other blockchain can compare to Ethereum in terms of decentralized apps (dApps) or non-fungible tokens (NFTs). CrytpoPunks and Bored Apes NFTs routinely sell for prices well over $1 million, and the innovations that happened on Ethereum were what led to many of the apps we see today on other blockchains.
That being said, Waves has plenty of development happening in its own ecosystem, from NFT projects like Waves Ducks to decentralized exchanges like Waves.Exchange and stablecoin platform Neutrino. Ethereum has a huge lead in this department, but Waves is developing at an impressive pace.
Performance and looking ahead
In terms of speed and cost, Ethereum can process 15 transactions per second, and has come under some criticism for its high "gas fees," which can often be as much as $16 to $20 for a small transaction, and can sometimes reach as high as $200. As Ethereum transitions to Ethereum 2.0 and a proof of stake protocol, its throughput could improve to 100,000 transactions per second. Waves currently has a throughput of about 100 transactions per second, and transaction fees of 0.001 Waves (currently about $0.03), making it more attractive in this regard. And Waves is also making a transition to Waves 2.0 that should improve its performance as well.
The caveat here is that Ethereum is much larger and used by millions more users for transactions every day. It's not yet clear whether Waves would be able to maintain its impressive speed and cost structure if it was operating at the same scale as Ethereum.
Which is the better buy right now?
I'm long both Ethereum and Waves, and think that both will be good investments over the next several years as they become bigger parts of our daily lives and of global commerce. I think that in the future, investing in Ethereum will be like buying shares of a stable, steady company that keeps innovating and keeps chugging along, providing impressive compound returns over the long term. Let's be honest, that's not a bad thing! To continue the analogy, investing in Waves is like buying shares in a tech start-up that is riskier, but has much more potential to deliver explosive returns.
Going back to the earlier analogy, both the speedboat and ocean liner will get you to your desired destination. But they'll do so at very different speeds, and via very different types of rides.
