The inception of Bitcoin in 2009 could be considered a revolutionary step towards financial decentralisation. Satoshi Nakamoto’s intention was to create a digital store of value free from the authority centralised financial institutions. In this he succeeded and expanded our notion of financial markets. Bitcoin is the most widely adopted crypto currency in the world, accounting for more than half of the total crypto market capitalisation. But the new digital currency came with blind spots—most notably, the need for programmability and functionality beyond simple peer-to-peer transfers of value. Enter Ethereum.
Launched in 2015, Ethereum sought to resolve Bitcoin’s rigidity by offering an open-source blockchain driven by smart contracts. While smart contracts are not unique to decentralized networks, Ethereum was the first protocol to integrate them into its network with the aim of facilitating more advanced forms of programmable digital interactions, such as decentralised applications or dApps.
Put simply, smart contracts are lines of code that facilitate the exchange of anything that can be packaged into a unit of value, such as money, information, property, or voting rights. These self-executing protocols allow geographically dispersed buyers and sellers to engage in anonymous and trusted transactions, without the need for third-party intermediation or enforcement. Built into the lines of code are predetermined terms of agreement, enabling a seamless exchange. Today, the vast majority of on-chain user activity depends on smart contract networks, which now include platforms like Stellar, Solana, Avalanche, and Algorand.
Still, smart contracts are in the early stages of development. While to date they have solved for a number of issues first presented by Bitcoin, they are not currently as efficient as the centralized financial systems they compete against. Visa, for example, is capable of clearing more than 65,000 transactions per second. Meanwhile, Ethereum can typically handle up to 15 transactions per second. While the gap is large, it makes sense. There is an inherent tradeoff between speed and decentralisation. Companies like Visa might offer speedy services, but their role as an intermediary creates a single point of potential systemic failure. Conversely, decentralised networks aim to eliminate that vulnerability by operating through distinct, geographically dispersed hosts.
Scalability has also presented its challenges. In 2017, when non-fungible tokens (NFTs) first gained popularity, Ethereum’s network experienced significant clogging, which forced users to pay higher fees for transaction confirmations. The congestion resumed in 2020 when demand for Decentralised Finance (DeFi) services grew. Again, the influx in user activity sent fees soaring. As Ethereum’s fees began to exceed $10 per transaction, Stellar, Algorand, Solana, and Avalanche experienced strong growth in daily on-chain transaction counts. This proved to be an overwhelmingly positive force in the adoption of smart contract platforms. As of March 15, 2022, Solana has processed more than 12 billion transactions (adjusted for voting transactions) since March 2020, far eclipsing the roughly 1.5 billion total transactions Ethereum had executed since 2015.
There is little doubt on-chain user activity around P2P transactions, DeFi services, and dApps is robust and growing. Decades ago, these opportunities were unimaginable. Thanks to smart contracts, we now have the ability to build interactive programs on top of decentralised networks, creating new, vibrant digital ecosystems.
DeFi apps have proven to be the most popular of these programs, allowing users to exchange tokens, take out loans, or employ asset management strategies that are permissionless and on-chain. Without the hassle of paperwork or underwriting, these smart contract protocols enforce positions and automatically settle exchanges of value. Traditional financial services like foreign exchange, stocks, derivatives, lending, and yield aggregating may find more efficient homes on dApps that are enabled by smart contract platforms.
The forex market, in particular, seems ripe for disruption. On average, forex volume stands at roughly $6.6 trillion per day. Smart contract platforms focused on fast transactions and low fees, like Solana and Avalanche, may be poised to capture significant market share—especially given both platforms have on-chain order books and highly liquid stablecoin swap applications.
Gaming offers another unique opportunity. In 2021, gaming-related NFTs had more than $4.5 billion of trading volume in 2021, compared to global game revenue of $180.3 billion. As Web 3.0 adoption continues to gain steam in the gaming community, smart contract platforms could capture more and more of the market. Avalanche Foundation for instance has announced a $290 million fund to attract developers to their multiverse ecosystem.
Despite their impressive growth and their ability to process millions of transactions per day, smart contract protocols are still very much in their infancy. The number of transactions processed on traditional financial exchanges and marketplaces would be enough to congest the current smart contract platforms. But significant progress is being made, and while beyond current capabilities at this point, the total addressable market for on-chain transactions may signal substantial long term value accrual for smart contract platforms and their tokens. The smart contract ecosystem is navigating the early phases of a decentralised world. From this view, the kinks are being ironed out for a future that could run smoothly, without the domineering presence of central institutions.
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