by Ralph Tkatchuk

Is Ethereum’s smart contract dominance being eroded?

Jan 24, 2018
E-commerce SoftwareFinancial Services IndustryTechnology Industry

Smaller companies that offer vast improvements over Ethereum's use of smart contracts.

negotiating contracts ts
Credit: Thinkstock

Even as bitcoin commands the limelight and headlines thanks to its meteoric rise in price and disproportionate volatility, other cryptocurrencies have quietly shown themselves to have more real-world applicability. Despite its popularity, bitcoin has not fully utilized the technology that makes it possible—blockchain—the way some of its competitors have.

Ethereum, for example, has carved itself a niche in the market thanks to its underlying infrastructure and use of smart contracts, which allow individuals to transact more easily with cryptocurrencies. In addition, the ERC-20 protocol empowers companies to create their own blockchain-based applications and tokens, helping to advance a useful model for fundraising and other transactional activities. This has led to an explosion in the use of smart contracts as more companies rush to integrate the potentially game-changing automation technology into their business flows.

Nevertheless, recent developments have revealed Ethereum’s limitations, from potential bottlenecks to security issues that have cast a pall on its long-term feasibility. Now, the once-unique cryptocurrency’s dominance in the smart contract arena is facing challenges from smaller companies that offer vast improvements and paradigmatic shifts related to how their contracts operate. If Ethereum cannot close the gap with beneficial changes of its own, we may see its once comfortable hegemony in the niche crumble.

The problem with Ethereum

Smart contracts are undoubtedly one of the most exciting innovations spawned from the blockchain revolution. These self-executing contracts let companies create trustless, automated agreements that are only fulfilled when specific conditions are met. More importantly, however, smart contracts allow for the creation of applications directly on the chain and tokens that allow them to be monetized. This development has led to an explosion of blockchain-based applications in myriad industries.

Ethereum, the seminal cryptocurrency to enable the use of these contracts, has enjoyed first-mover status and exhibits a strong grip on the market. Already, hundreds of companies have built applications based on the ERC-20 protocol and have raised funds at an unprecedented pace, stirring strong optimism for the market whilst also supporting Ethereum’s market capitalization. Even so, despite the overwhelming enthusiasm accompanying ERC-20, the protocol has revealed several cracks that opened the door for competitors to eat away at Ethereum’s market share.

One of the biggest problems associated with the Ethereum chain is scalability and the capacity to handle spikes in traffic without affecting processing speed. The Crypto Kitties incident, in which the blockchain-based game commanded over 13 percent of the network’s traffic and slowed down its overall speed, highlights how poorly Ethereum handles load balancing and expansion.

More importantly, smart contracts on Ethereum are still plagued by some security issues that could be a big turnoff for many larger companies seeking to eventually embrace the technology. In one instance, for example, hackers made off with nearly $50 million in cryptocurrency by exploiting a bug in the code, and a similar incident occurred less than half a year later, costing users $30 million.

Improving on the original design

Ethereum still controls a large percentage of the market, but several competitors are rising to challenge its dominance. While many don’t offer the exact functionality Ethereum provides, they tackle specific issues where ERC-20 falls short.

One of the most prominent new contenders is NEO, a Chinese rival to Ethereum that delivers many of the same functionalities, but has the tolerance of the Chinese government. While both are used to build decentralized apps (dApps) and host smart contracts, NEO’s focus on faster transaction speed makes it a capable rival. Its consensus mechanism allows the chain to process 10,000 transactions per second while Ethereum is still near 12 transactions over the same period. Moreover, adding to NEO’s advantage is support for a greater range of programming languages to develop dApps.

A more recent competitor, Qtum, has also made waves thanks to a massive spike in its market capitalization, as well as its abundant potential for businesses. By combining bitcoin’s robust and security-oriented core infrastructure with the powerful abilities of smart contracts, Qtum has built a strong competitor to challenge Ethereum. The currency eschews the Proof of Work standard in favor of Proof of Stake, which expedites transactions, lowers costs, and is less resource-intensive. Furthermore, this solution is built to appeal directly to businesses, enabling faster cross-platform transactions while accompanied by better security features thanks to its incorporation of bitcoin’s groundwork.

“The currently leading smart-contract solution Ethereum, uses computationally expensive proof-of-work validation, is expected to hard-fork multiple times in the future and requires downloading the entire blockchain. Consequently, Ethereum smart contracts have limited utility and lack formal semantics, which is a security issue,”reads the company’s white paper.

Finally, newcomer EOS is throwing its hat into the ring, making bold promises that could make it a real challenger in the smart contract arena. The platform boasts much better scalability than Ethereum as well as a unique architecture that makes resolving bugs in applications a more consensus-based exercise. While the project is still in its early stages, many have argued that the system is better than Ethereum from a technical standpoint. Moreover, the EOS chain and open-source design promises zero transaction fees.

The future rests on adoption

For now, the talk of challengers to Ethereum’s smart contract crown remains hypothetical. Despite the advances small cap platforms have made technologically, they remain well behind Ethereum in terms of adoption. Its first-mover status has given the decentralized platform a large share of the market, complemented by the fact that most blockchain-based apps still deploy the ERC-20 protocol for infrastructure and crowdfunding.

Even so, these new contenders are not out of the race yet. By building more robust systems that shun many of the problems associated with Ethereum’s own smart contracts, these newer entrants can conceivably steal real traffic from Ethereum. Should Ethereum fail to overcome the same glitches that have stained its reputation until this point that redistribution of market share could happen sooner than later. Still, unseating the hegemonic influence of Ethereum depends on these smart contract platforms showing the world that the attention they receive is merited.