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Digital Asset Markets. Part 5

Ethereum Dominates, But Must Scale to Service Mass Adoption

In this fifth installment of our series on digital asset markets, we return to the heart of Web3, where the potential for Real-World Assets (RWAs) and blockchain technology intertwines with Ethereum's leadership. As we have explored the captivating realm of RWAs in DeFi, we now refocus our lens on Ethereum, the cornerstone of decentralised finance and NFTs.

Ethereum's Stalwart Position

Ethereum, often hailed as the "World Computer," has maintained a commanding presence in the blockchain landscape. It currently reigns with 60% of the decentralised finance (DeFi) total value locked (TVL) and an impressive 85% share of NFT transaction volume. Its prowess is evident, but its journey forward comes with a unique set of challenges.

Scaling Ethereum: The Imperative

As Web3 gains momentum and draws millions into its fold, Ethereum faces an imminent challenge. The surge in user activity could potentially overwhelm the network, leading to soaring transaction costs, thereby jeopardising its accessibility and affordability for all. It's clear that for Ethereum to serve as the backbone of Web3, scaling solutions are paramount.

The Three Paths to Scaling

In our exploration, we discern three primary approaches to address Ethereum's scaling challenge:

1. Monolithic Blockchains: Blockchains like Solana offer an all-in-one solution, encompassing execution, settlement, consensus, and data availability within a single structure. However, achieving both decentralisation and high security within this framework can be a delicate balance.

2. Modular Blockchains: Ethereum 2.0, on the other hand, adopts a modular approach by separating execution, settlement, consensus, and data availability layers. It incorporates "Layer 2" solutions like sidechains and rollups to augment scalability without compromising security or decentralisation.

3. Interconnected Blockchain Universes: Platforms such as Cosmos facilitate secure inter-blockchain communication, enabling the seamless exchange of data and value between different blockchains, fostering a unified ecosystem.

The Path Forward

Given Ethereum's current dominance and the Lindy effect, modular blockchains, like Ethereum 2.0, appear poised to lead the way in resolving scalability issues. Nevertheless, smaller positions in alternative blockchain-scaling models, particularly those backed by robust tokenomics and attractive relative valuations, may offer valuable diversification.

To conclude our series on digital asset markets, we've explored the multifaceted landscape of Web3, ranging from the underrated benefits of NFTs to the transformative power of Real-World Assets (RWAs) in DeFi. We've navigated the evolving terrain where blockchain technology and traditional finance intersect, uncovering a world of opportunities and challenges.

In this final installment, we've shone a spotlight on Ethereum, the reigning champion of DeFi and NFTs. While Ethereum's dominance remains unquestioned, the crucial challenge of scalability looms on the horizon. As the world embraces Web3, Ethereum's capacity to handle this surge is of paramount importance. We've discussed three possible approaches to scale the Ethereum network, paving the way for a more accessible and efficient blockchain ecosystem.

The journey of digital assets and blockchain technology is a dynamic one, marked by continuous innovation and transformative potential. As we part ways in this series, we invite you to stay curious and keep exploring the ever-expanding universe of Web3, where the digital meets the tangible, and the possibilities are limitless.

Thank you for joining us on this enlightening journey through the world of digital assets and blockchain technology.

Contact SAXE Global for more insights or consultation here.

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