DeFi’s potential means more institutional demand for next-gen tokens

Ether’s impressive YTD gains have largely been overshadowed by the profits accrued by other smart contract-enabled projects.

There’s no denying that the last couple of years have seen the altcoin sector blossom and have a major impact on the crypto market at large. In fact, a quick look at data available on Google Trends shows us that searches related to the term “Ethereum killer” have been soaring over the past 90-days, signaling a growing interest among investors in various altcoins.

In this regard, a few cryptocurrencies — such as Cardano (ADA), Solana (SOL), Polkadot’s DOT and Terra (LUNA) — have made a major market push recently. SOL, in particular, has been turning a lot of heads among investors, thanks in large part to its most recent rally, which saw the cryptocurrency surge despite the market experiencing a massive selloff. 

In this regard, a few cryptocurrencies — such as Cardano (ADA), Solana (SOL), Polkadot’s DOT and Terra (LUNA) — have made a major market push recently. SOL, in particular, has been turning a lot of heads among investors, thanks in large part to its most recent rally, which saw the cryptocurrency surge despite the market experiencing a massive selloff. 

In addition, there are several other networks that have shown a lot of promise. For example, following the completion of its much-hyped Alonzo hard fork, Cardano, too, has been able to record substantial profits, posting numbers of +70% and +1,200% over the last 90 and 180 days, respectively. 

Demand for next-generation tokens soars

To gain a better idea of what the aforementioned developments mean for the market at large, Cointelegraph reached out to Antoni Trenchev, managing partner and co-founder of lending platform Nexo. In his view, there is growing institutional demand for coins such as Solana’s SOL and Terra’s LUNA, something that is made evident by the fact that both assets have been able to make their way into the list of top 15 cryptocurrencies by total market capitalization. Trenchev told Cointelegraph:

“This is a reflection of companies going deeper into crypto. Over the first two months of 2021, major institutions like BlackRock, Square and MicroStrategy were only just dipping their toes into Bitcoin. Now they’ve tasted its benefits and are looking to harness the untapped potential of up-and-coming blockchains and DeFi coins that could yield higher returns.”

Trenchev highlighted that such developments suggest that the crypto market may currently be in the midst of an alt-season; however, what’s different this time around is that established coins such as ETH and Bitcoin (BTC) are showing a higher level of stability in comparison to some of these newer assets. “Think of the current situation as alt season meets institutional interest, and yes, I think we will see more and more trends like this in the future,” he said.

The stability these institutions bring became fairly evident on Sept. 16 when Solana experienced a major outage wherein instead of going into a panic-induced sell frenzy, SOL barely lost any of its value, dropping less than 10%.

Solana’s run puts the market on notice

Earlier this month, institutional traders flocked to Solana as demand for Ether and Bitcoin (BTC) exposure seemed to plateau. In this regard, over the first week of September, SOL-centric investment products represented a whopping 86.6% of the total weekly inflows into the crypto investment market.

More specifically, per data made available by digital asset management firm CoinShares recently, SOL’s combined investment products witnessed inflows in excess of $49.4 million between Sept. 6 and 10. Not only that, for the week, SOL saw a 275% week-over-week increase in its value, representing 86.6% of total capital inflow into the crypto investment sector.

Lastly, other digital asset products have also continued to see major cash inflows for the fourth consecutive week, with demand for different altcoins quite easily exceeding that of BTC products, with the latter only witnessing minimal inflows of $200,000. For example, it is worth highlighting that during the first half of September, multi-asset products, XRP, Polkadot’s DOT and Bitcoin Cash (BCH) were able to register sizable financial inflows of fa$3.2 million, $3.1 million, $1.7 million and $600,000, respectively.

“Undiscovered” projects pique institutional interest

Kadan Stadelmann, chief technical officer of end-to-end blockchain infrastructure solutions provider Komodo, told Cointelegraph that rising demand for undiscovered projects is nothing new for the crypto market. However, what separates this time from previous cycles is the sheer amount of capital flowing in from institutions. He said:

“The risk is that this will lead to faster market cycles for specific cryptocurrencies that are outliers from overall market movements. We see extreme FOMO and price increases, followed by a large sell-off and price declines. With SOL, in particular, prices are down 20% this week. That doesn’t mean it won’t quickly return back to its all-time high. It’s just that people who are new to crypto should be aware that volatility is par for the course.”

Lastly, echoing Trenchev’s view, Stadelmann believes that as we move into an increasingly decentralized future, it will become more common to see a sharp increase in the price of different altcoins. “Hundreds of DeFi projects are flying under the radar. Many of these projects have solid technology and can gain upward price momentum once institutions recognize their potential,” he said.

The rise of altcoins is justifiable

One of the core reasons underlying the rise of many of the above-stated altcoins has been the lack of scalability offered by the Ethereum network. In this regard, despite all of its recent highly touted functional updates, the platform is only able to process around 15–25 transactions per second in its current state — all while offering an extremely low throughput capacity.

Not only that, even though the recently concluded London hard fork was designed to help regulate Ether’s rising gas fees — after rates rose as high as $40 and $70 earlier this year during Q1 and Q2, respectively — the figure still seems to be hovering around the $15–$20 range, which is quite high for the average Ethereum customer. 

Furthermore, during peak traffic hours, minting a nonfungible token (NFT) on the Ethereum network can cost up to 3 ETH, which, in many cases, may actually work out to a price point that is more than the actual NFT itself. On the other hand, Solana, as well as many other projects, not only offer faster transaction speeds but far lower gas prices, allowing for the more economical issuance of NFTs.

With Ethereum gearing up to make its transition to a proof-of-stake framework, it is expected that once the move is finally done, the platform will be able to process up to 100,000 transactions per second. However, until that day comes, it looks as though a growing list of smart contract-enabled platforms may continue to eat into Ethereum’s mammoth market share.

Is Ethereum on the verge of being overshadowed?

Ethereum’s most recent overhaul, the all-important London hard fork — which incidentally contained crucial updates such as the Ethereum Improvement Proposal 1559 — was supposed to deploy a new transaction pricing mechanism for the network, resulting in the ecosystem becoming deflationary in nature. 

Available data suggests that over 336,000 ETH tokens have already been burned, with the current burn rate currently sitting at 4.9 ETH per second or about 2.7 million ETH tokens per year, which would basically take the project’s yearly supply growth rate to 2.3% while taking its issuance to around 5.3 million tokens per annum.

Moreover, Ethereum is not the only project to make use of such a deflationary setup, since Solana is also known to burn 50% of its transaction fees to regulate the supply of its native SOL token. Khalid Howladar, chairman of MRHB DeFi — a Shariah-compliant decentralized finance (DeFi) platform — told Cointelegraph:

“While it’s clear that Ethereum is the current smart contract backbone of the DeFi ecosystem, Solana is emerging as a solid competitor with potentially more upside to come. Key factors such as cost and speed mean that Solana has become a solid challenger to Ethereum’s position both within the realm of programmable money (DeFi) and programmable media (NFTs).”

In Howladar’s view, institutions are only just getting their toes wet when it comes to DeFi, and therefore, the next few months could be extremely interesting in terms of how they become further involved. “If DeFi platforms can somehow ensure basic things like consumer protection using decentralized KYC and AML, they will take vast chunks out of banks’ market share, especially as peer-to-peer economic systems take hold,” he said.

Moving forward, it will be interesting to see whether Ethereum is able to maintain its current dominance levels, especially as a growing list of smart contract-enabled alternatives continues to garner mainstream market traction.