While Bitcoin is the most valuable cryptocurrency by market cap and laid the foundation for all subsequent cryptocurrencies to be created, the shockwaves and disruption that Ethereum (ETH -5.54%) created are likely on par with Bitcoin.
Ethereum changed the game when it was created in 2015 due to one primary characteristic -- smart contracts. With smart contracts, developers can build applications on Ethereum that execute actions when specific conditions are met. This could be anything from automating banking processes or streamlining supply chain management. Thanks to these smart contracts, Ethereum gave rise to an entirely new sector of cryptocurrency known as decentralized finance, or DeFi -- something that just wasn't possible with Bitcoin.
Despite Ethereum's innovation, it has not been impervious to the bear market of 2022. Since the beginning of the year, Ethereum has been down more than 65%. After the astronomic rise it went on when it was worth around $500 in November 2020 to eventually be worth $4,600 in November 2021, some sort of correction was likely inevitable. Yet, even with this year's price decimation, I believe Ethereum can return to those highs again one day.
My conviction is based on a few figures. Fortunately, because blockchain data is open-source and public, we have access to data and metrics that show how widely used Ethereum actually is. And when it comes to blockchains, the more they are used, the more their value tends to increase.
To start, let's look at a statistic called Total Value Locked (TVL). This statistic is used to compare the total amount of money a blockchain supports in DeFi. You could think of it as being similar to a market cap of companies.
Ethereum's TVL is easily the largest among all other smart-contract-capable blockchains. It accounts for nearly 59% of all the value in DeFi and is worth around $23 billion. The next closest is Tron, with a measly $4 billion representing 11% of DeFi's value.
Image source: DeFi Llama.
The uphill battle that any of these other competitors face is likely insurmountable. Ethereum has an expansive ecosystem with the most developers and applications, making it the gold standard for DeFi blockchains. There is little doubt in my mind that Ethereum's grasp on the market will likely only increase as competitors are weeded out.
Despite Ethereum's history of success, the blockchain is not a finished product. Ethereum made headlines this year when it successfully completed its transition from proof-of-work to the less energy-intensive proof-of-stake consensus mechanism, known as The Merge. Still, this was only one step toward Ethereum taking its final form. Ethereum co-founder Vitalik Buterin said that with the completion of The Merge, Ethereum was still only 55% complete.
Image source: Sequoia Capital.
In order to reach that elusive 100%, Buterin and Ethereum developers want to add more updates and features so that one day Ethereum will be powerful enough "to help all of humanity." To get there, some deficiencies that have plagued the blockchain, like high transaction costs and slow speeds, need to be addressed, something that should be taken care of when sharding is introduced in 2023.
It's difficult to fathom how clearly Ethereum stands head-and-shoulders above the competition, even with only 55% of its completion. Imagine what could be in store when it reaches 100%. The fully functional version of Ethereum will run circles around its 2022 incarnation. Personally, that makes the low prices today even more enticing. While the current bear market has spooked investors, Ethereum's long-term potential is difficult to ignore at these levels.
