HashKey Cui Chen: Interpreting the Current Status and Trends of Ethereum-Related Public Chain Development

This article is from HashKey Research, authored by Cui Chen, reviewed by Zou Chuanwei, Chief Economist of Wanxiang Blockchain.

Public chains, as platforms that support users and applications, derive their value from users and applications. Similar to e-commerce platforms on the internet, they provide a communication and transaction platform for merchants and users, thus reflecting commercial value. As applications and users increase, the value of public chain platforms will also rise. Since applications must be built on top of public chains, public chains play a foundational infrastructure role in the blockchain industry and are also one of the most competitive areas in the industry. Ethereum, as the leader among public chains, far surpasses other public chains in application innovation and market capitalization, making it the competitive target for other public chains.

People have made multiple predictions about the competitive landscape of public chains, including homogeneous competition and differentiated competition among public chains. In past assessments, it was believed that merely mimicking Ethereum functionally would not lead to breakthroughs in the industry, as Ethereum has already established ecological barriers with developers and users. If a public chain is positioned similarly to Ethereum, it would be difficult to leverage applications within Ethereum for competition. However, the current situation differs from expectations; Ethereum-related public chains, which are similar to Ethereum in functionality and positioning, have suddenly gained a large amount of traffic and users, thereby driving the prosperity of the public chain field once again. This article mainly focuses on Ethereum-related public chains, analyzing their current development status and future trends.

Development History of Public Chains and the Rise of Ethereum-Related Public Chains

Development History and Competitiveness of Public Chains

Public chains exhibit network effects, meaning that the more users there are, the higher the value of the network, which in turn attracts more users, leading to greater value for the network. Public chains can simultaneously attract application developers and users, creating a bilateral network effect between applications and users. Users are drawn to public chains by applications, and applications are deployed on public chains due to the number of users, ultimately resulting in dual value brought by applications and users to the public chain.

Figure 1: Network Effects of Public Chains

If we consider public chains as underlying distributed systems, Bitcoin is also a public chain, albeit without smart contract functionality. Public chains in the blockchain space are completely open source, making imitation and plagiarism very easy. Therefore, since the birth of Bitcoin, there have been many imitators and competing coins, but in reality, only Litecoin and Dogecoin remain active in the public eye, while contemporaneous competitors like Ixcoin, Tenebrix, Fairbrix, and Peercoin have disappeared. This is due to their unique positioning and community building; Litecoin is positioned as a low-cost alternative to Bitcoin, while Dogecoin is positioned for tipping consumption, rather than aiming to replace Bitcoin, which is not without innovation.

The subsequent competitor to Bitcoin, Ethereum, achieved great success due to a technological revolution. It was the first to introduce smart contracts into the blockchain system, expanding the programmability of blockchain. The emergence of Ethereum opened up competition among smart contract-based public chains, and Ethereum's first-mover advantage attracted many application developers and users, giving it an edge in cultivating developer habits. Past experiences tell us that for other public chains, merely relying on imitation is insufficient to compete with Ethereum; comprehensive innovation is required.

People have become accustomed to public chains using innovation as a highlight for market promotion, which can attract more users, and developers hope to create the next great public chain. For example, EOS was once highly regarded, believed to be a strong competitor to Ethereum, especially with its powerful community and differentiated path from Ethereum. However, the reality was less than ideal; the centralization of community nodes and resource leasing created barriers for users. The homogenization of gambling applications also led to a poor reputation for EOS, which ultimately did not reach the same height as Ethereum. Furthermore, other public chains that made significant changes compared to Ethereum have almost failed to make a significant impact in the market, let alone those that made only minor changes.

The Rise of Ethereum-Related Public Chains

While the market awaited a more innovative public chain that better meets the needs of users and developers, Ethereum-related public chains suddenly rose. These public chains are those that are very similar to Ethereum in both execution environment and application design. These public chains have only slight innovations, and applications on Ethereum can even directly migrate their code to the new public chains. Although they seem like an expansion of Ethereum, especially the recently popular Layer 2 solutions, they are fundamentally different. These public chains have their own independent ecological applications and independent validators to ensure security. Assets transferred from Ethereum to these chains cannot be guaranteed to be smoothly transferred back in a decentralized manner, which is the biggest difference from Layer 2. These public chains also aim to compete with Ethereum, developing their own native assets on their chains. In the past, such public chains would not have entered the public eye, but now the contradiction between the prosperity of Ethereum's DeFi ecosystem and Ethereum's congestion has spurred the rise of Ethereum-related public chains.

This rise is based on several factors. First, the business model of DeFi has already been validated on Ethereum, allowing for peer-to-peer financial applications on-chain, such as DEX, lending, and stablecoins. Moreover, liquidity mining and other mining methods associated with these applications are seen as benefits, allowing users to profit by participating in DeFi. Second, users have already been educated on Ethereum regarding issues such as how to stake and mine, which saves user education costs for DeFi applications on other public chains. Users can directly use other public chains without any learning costs. Finally, and perhaps most importantly, the high transaction fees on Ethereum make it difficult for ordinary users to participate. Suddenly, low-fee DeFi applications with similar functionalities emerged, successfully attracting user attention.

A similar phenomenon occurred with USDT on Tron. Originally issued on Ethereum and Bitcoin, USDT quickly captured market share after the launch of a no-fee version on Tron due to high fees. The popularity of Ethereum-related public chains stems from their ability to address Ethereum's current pain points, combined with the heat of DeFi and community user support. In this trend, many public chains are laying out DeFi applications and developing virtual machines compatible with Ethereum's EVM. In the short term, this approach will attract user attention, but whether these Ethereum-related public chains will continue to exist and develop in the future is worth discussing.

User Sources of Ethereum-Related Public Chains

Where do the users of Ethereum-related public chains come from? Are they competing for users from the Ethereum ecosystem or attracting new users? This question is crucial for the development of public chains. On-chain data can assist in analyzing this issue. The following charts show the differences in active addresses and daily transaction numbers between Ethereum and the most famous related public chain, BSC, starting from the second half of 2020.

Figure 2: Active Addresses and Daily Transactions on Ethereum

Figure 3: Active Addresses and Daily Transactions on BSC

It can be seen that, whether in terms of active addresses or daily transactions, the fluctuations before Ethereum raised the block gas limit on April 22 were not significant, as Ethereum's block utilization rate was already nearly full. In contrast, BSC has been rapidly increasing over the past six months, especially in the last two months, where it began to rise exponentially. Recently, BSC has caught up with or surpassed Ethereum in both active addresses and daily transactions, with daily transactions even being five times that of Ethereum. Therefore, BSC, as an Ethereum-related public chain, is not competing with Ethereum for users; rather, Ethereum's performance limitations have made it unable to meet the DeFi needs of most users, thus leaving opportunities for Ethereum-related public chains to fulfill these needs, ultimately promoting the rise of Ethereum-related public chains.

Current Status of Ethereum-Related Public Chains

Reasons for Homogeneity Among Public Chains

The previous discussion covered the process and reasons for the rise of Ethereum-related public chains, but why have past judgments failed? Why have public chains engaged in differentiated competition not received the same level of attention as the current homogeneous public chains? Why do competing public chains ultimately converge? The answer lies in the early exploration of public chains. Currently, the two most popular types of applications in the blockchain industry, DeFi and NFT, both originated from Ethereum. In particular, DeFi, which is decentralized and has financial attributes, is very suitable for deployment on public chains and meets the needs of C-end users. After a period of validation, blockchain applications in other fields, such as social communities, industrial agriculture, and consumer scenarios, have found it difficult to gain recognition from C-end users in the market. The mining incentives in DeFi are also very attractive to users, which is why all public chains favor it, and project teams can conduct IDOs in DeFi, using DEX platforms to issue tokens, making DeFi even more popular.

In addition, Ethereum's first-mover advantage has allowed it to establish a large developer community that is unmatched. Excellent developers gather on Ethereum and try different ideas, leading to the birth of innovative applications. Other public chains, in order to compete with Ethereum and attract talent, have no choice but to homogenize their development environments.

Currently, Ethereum-related public chains can be divided into two types. The first type consists of established public chains that were originally exploring on-chain DApp applications but have recently shifted their focus to DeFi-centric application scenarios. The second type consists of recent Ethereum imitators that directly use DeFi or NFT as their main features.

Established Public Chains Shifting Focus

In the early days, or before the DeFi concept became popular in 2019, the public chains on the market did not primarily target DeFi. However, in the long-term competition with Ethereum, they had to make homogeneous changes and shift their application focus to DeFi. Examples include Cardano, Tron, Neo, and Near. The table below shows their attempts at DeFi within their ecosystems and their current status.

Table 1: Established Public Chains Shifting Focus to DeFi

For these public chains, the current state is that while some DeFi applications are running, most users have low loyalty to the public chain and projects. This leads to users participating in DeFi mining to "mine and sell," ultimately not contributing significantly to ecosystem expansion. If liquidity mining subsidies in DeFi cannot help with project promotion and development, continuous mining and selling by users will lead to project imbalance.

Emerging Ethereum-Related Public Chains

Currently, some new public chains have emerged, with designs and positioning related to DeFi, making it their primary ecological application. For example, BSC, Solana, and Heco have seen their native public chain tokens perform remarkably well under the boom of DeFi. Compared to those established public chains that have transformed into DeFi chains, these new public chains attract more attention for two main reasons. First, compared to Ethereum, these public chains can achieve fast transactions at low fees. Second, these public chains bring in a large number of users through various means. For instance, Solana has been heavily promoted by FTX founder Sam, who is also a whale participating in Ethereum DeFi; naturally, public chains recommended by DeFi veterans receive a lot of attention. BSC is a public chain launched by Binance, attracting users from the exchange. Especially since BNB circulating on BSC itself carries functionality and value, the BSC public chain ecosystem further enhances its appeal.

Solana is still in its early stages but has already attracted many development teams. BSC is the most advanced Ethereum-related public chain, and its DeFi applications have formed a rich ecosystem, attracting a large number of users and creating a clustering effect among DeFi developers. The BSC ecosystem has already developed its own fan base, mostly consisting of staunch holders of BNB and supporters of the Binance platform.

Sidechains and Ethereum-Related Public Chains

Sidechains and Ethereum-related public chains share similar characteristics; both have independent validators, and their on-chain applications and user groups are also similar to Ethereum. The biggest difference between the two lies in their positioning. Sidechains are primarily used to scale Ethereum, represented by Polygon and xDai, with xDai planning to merge into Ethereum 2.0 as a shard chain in the future. The goal of public chains, on the other hand, is to compete with Ethereum for its users. In fact, the boundary between sidechains and public chains is not very clear; sidechains can develop into independent public chains, and public chains can also evolve into sidechains, depending on the team's positioning.

Both sidechains and public chains face cross-chain issues, and their cross-chain mechanisms are very similar. Generally, for sidechains, the mechanism is designed at the outset, with validators or other roles ensuring the security of cross-chain assets. For public chain platforms, third-party projects like Polkadot are used to achieve cross-chain functionality. However, the current situation is that assets on Ethereum are more popular, and public chains hope that Ethereum can circulate on their chains, leading public chain operators to actively facilitate cross-chain transfers.

Future Development of Ethereum-Related Public Chains

From a Functional Perspective

The future development of Ethereum-related public chains can be judged from their functional perspective. Currently, public chain applications are primarily focused on DeFi, and the distribution and innovation capabilities of these applications are crucial to the future of public chains. If all applications on a public chain are merely imitations of Ethereum's DeFi projects, it will be difficult for the public chain to form its own ecological community, catering only to users who could not have their needs met on Ethereum. If Ethereum's Layer 2 or Ethereum 2.0 goes live, or if DeFi projects on related public chains struggle to maintain "yield farming" style mining rewards, the users attracted will quickly dissipate.

Innovation in DeFi comes from DeFi project teams and developers; the more developers a public chain has, the more innovation and competitiveness it possesses. Therefore, Ethereum-related public chains must align their operating environments closely with Ethereum to reduce the learning costs and barriers for developers. Of course, if a public chain innovates in its development environment, it can create its own moat effect, which is beneficial for forming a competitive advantage. Attracting and nurturing developers requires time and financial investment; for example, Polkadot frequently holds Substrate boot camps, which have indeed formed a unique developer community, but future innovations in on-chain applications will still need time for validation.

From a User Perspective

The proportion of user sources for Ethereum-related public chains can indicate the development prospects of the public chain. If users come solely due to Ethereum's congestion or are attracted by economic rewards on-chain, they will leave once congestion is resolved or rewards decrease. Such users are unstable, and their continuous yield farming activities may even harm the public chain's development. If the public chain has its own native users, it will be more beneficial for ecological development.

Compared to Ethereum, Ethereum-related public chains face significant criticism regarding centralization issues, such as a low number of nodes and lack of openness, as well as deep connections between DeFi project teams and public chains. Moreover, their security is somewhat weaker than that of Ethereum's Layer 2. However, as long as user demand exists, meaning users do not have the same complete decentralization requirements as Ethereum, these Ethereum-related public chains can continue to exist. In other words, if Ethereum-related public chains can attract users sufficiently in certain aspects, issues of insufficient innovation or centralization will not hinder the development of the public chain.

Reflection and Conclusion

In the past development of public chains, emerging public chains have always undergone upgrades. For example, from Bitcoin to Litecoin and Dogecoin, they created differences in positioning compared to Bitcoin, and from Bitcoin to Ethereum, which innovated in smart contracts. For the next upgrade of blockchain, everyone hopes for a more innovative technological revolution that can enhance efficiency and security while ensuring the current level of decentralization. However, reality differs from imagination; some public chains that are similar to Ethereum in both execution environment and on-chain applications have emerged and gained market popularity, but their slight innovations do not represent progress for public chains.

The underlying reason is that Ethereum's popularity in DeFi and NFT applications has attracted many users, while Ethereum's block utilization rate is nearing full capacity, and high transaction fees have kept ordinary users at bay. Therefore, in the context of overflowing user demand, the emergence of a low-fee solution aligns with user expectations. Ethereum's performance has limited the number of transactions, suppressing user growth, so this portion of users that originally belonged to Ethereum has been absorbed by Ethereum-related public chains.

Ethereum-related public chains that come with their own traffic are more likely to be welcomed by the market, as user demand exists and is met, making issues of innovation and centralization less significant. Aside from emerging Ethereum-related public chains, other established public chains that have shifted to an "Ethereum-related public chain" positioning have not gained much popularity in the market, as their past development did not accumulate native users for their ecosystems, and DeFi applications are also controlled by public chain teams, with mining users' yield farming activities damaging the public chain's value.

Sidechains, as a scaling solution on Ethereum, are essentially also Ethereum-related public chains, but secure sidechains can be regarded as part of the main chain and will not compete for users with the main chain. The ultimate goal of other public chains is still to compete with the Ethereum main chain, although the boundaries between sidechains and public chains can be fluid. For the future development of Ethereum-related public chains, if there is innovation in DeFi projects, the establishment of development teams belonging to the ecosystem, or the formation of a developer moat effect, it will lead to healthy development. Alternatively, if they can attract users in unique ways, such as exchange public chains that come with their own traffic, then issues of centralization and innovation may become less important.