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Updated 8 November 2023

The Crypto Wars

The Crypto Wars

The Crypto Wars

AJ Giannone, CFA

Joseph Gradante, Allio CEO

Blockchain:future or fiction

For most investors interested in investing in cryptocurrency, there’s usually one question that immediately comes to mind: Which one should I choose? 

Bitcoin and Ether are the largest cryptocurrencies today by market cap, and are very popular amongst both individual and institutional investors. But there are literally thousands of other crypto projects to choose from—including up-and-comers like Cardano and Solana which aim to unseat Ether in many ways.

Below, we take a look at four cryptocurrencies which are currently vying for market dominance: Bitcoin, Ether, Cardano, and Solana. 

Crypto Consensus Mechanisms

Most cryptocurrencies are built on what is known as a blockchain, which is essentially a kind of distributed database or ledger. Multiple copies of this ledger exist along different nodes of a computer network, making it very difficult to alter or otherwise change the record. The security and inherent trust that comes from these multiple, immutable copies is a key part of what makes cryptocurrencies possible.

Of course, it’s critical that each of these different copies of the ledger along the network remain in agreement with each other. If they do not agree, then that means that something has gone wrong somewhere along the way. 

When the different nodes of a blockchain network reach agreement, it is known as consensus. Exactly how the network reaches consensus will depend on the consensus mechanism that the network uses—whether it be proof-of-work, proof-of-stake, or proof-of-history. Before we look at the specific cryptocurrencies contending for the top spot, it’s first important to understand which consensus mechanism they rely on.

Proof-of-Work (PoW)

Proof-of-work (PoW) is currently the most popular consensus mechanism in the crypto space, partially due to the fact that it is the mechanism that underlies both the Bitcoin and Ethereum networks. 

Whenever a new block is ready to be added to the blockchain, it must first be verified by the network. In a network that relies on Proof-of-Work for consensus, this is achieved by having validators solve complex cryptographic puzzles. 

Technically, validators compete to solve these puzzles, and the first one to complete the validation is rewarded with cryptocurrency. (A validator who validates a block on the Bitcoin network is rewarded in Bitcoin; a validator who validates a block on the Ethereum network is rewarded in Ether, etc.) This process is also known as mining.

Proof-of-Work has proven to be a successful consensus mechanism, but it also has its limitations. 

Solving cryptographic puzzles requires a lot of energy. According to a recent analysis by the New York Times, Bitcoin mining annually consumes approximately 91 terawatt-hours of electricity—or roughly 0.5% of all electricity consumed worldwide. This has raised serious questions about Bitcoin’s effects on the environment, and whether or not it is ethical to devote so much energy to the network.

Additionally, the more complex and difficult the puzzle, the more secure the network, but the slower block creation. Slower block creation can lead to slower transaction speeds and expensive network fees (gas). This has raised the question of just how scalable Proof-of-Work networks can be.

Proof-of-Stake (PoS)

Proof-of-Stake (PoS) is another common consensus mechanism in the crypto space. It’s used by many cryptocurrencies, including Cardano and Solana. The Ethereum network, which currently relies upon Proof-of-Work, is making the transition to Proof-of-Stake as a part of its upgrade to Ethereum 2.0.

Proof-of-Stake differs from Proof-of-Work in a key way. Whereas PoW depends on miners who solve complex, energy-intensive cryptographic puzzles in order to reach consensus and add blocks to the blockchain, PoS networks rely on stakers who lock (or stake) their crypto in the network. 

In a Proof-of-Stake system, when a block must be validated, the validator is randomly selected from a pool of stakers. This removes the competition inherent in a Proof-of-Work system, and can lead to energy conservation. All stakers are rewarded for participation. 

Additionally, a Proof-of-Stake network will typically reach consensus before a block is added to the blockchain, which can lead to increased transaction speeds and greater scalability compared to a Proof-of-Work system.

Proof-of-History (PoH)

Proof-of-History (PoH) is not in itself a true consensus mechanism. Instead, it aims to work in conjunction with another mechanism (like Proof-of-Stake). Solana is widely credited with inventing Proof-of-History, which it pairs with Proof-of-Stake in its network.

A common challenge for blockchain networks is the question of time: How the different nodes in a network agree on the point in time in which a transaction occurred. Proof-of-History aims to solve this problem by essentially building trusted and verifiable timestamps directly into the blockchain through a complex process known as verifiable delay function (VDF)

Once the question of timing is solved, it becomes much easier to validate information and blocks. This can lead to faster transaction speeds, lower transaction fees, and increased scalability of the network.

You can read about the specific technological mechanisms behind Proof-of-History here

The Contenders

Bitcoin (BTC)

Consensus Mechanism: Proof of Work 

Current Market Cap (05/02/2022):$732.61 Billion

Created and launched in 2009, Bitcoin is the world’s first cryptocurrency. 

Bitcoin was originally designed to facilitate decentralized digital transactions as a peer-to-peer payment system. It’s recently begun making headway in this area, with a growing number of merchants beginning to accept payment via the cryptocurrency.

That being said, Bitcoin is also viewed by many to serve as a store of value and potentially a hedge against inflation, due to the fact that only 21 million Bitcoin will ever be mined. If demand for Bitcoin continues to grow, that increasing demand, paired with limited supply, will cause the price of each Bitcoin to increase.

Of course, as we’ll see with all of the cryptocurrencies in this list, Bitcoin isn’t perfect. It currently relies on a Proof-of-Work consensus system, which as we’ve noted above is only made possible by having miners solve complex mathematical puzzles. These puzzles require a tremendous amount of computing power and energy to complete, which is both bad for the environment and also leads to slower transaction speeds compared to other consensus methods. 

Bitcoin is attempting to solve the challenge of transaction speeds with the launch of the Lightning Network, a second layer technology built on top of the original Bitcoin blockchain. This network aims to allow for micropayment channels which allow for quicker and cheaper transactions.

Ether (ETH)

Consensus Mechanism: Proof-of-Work; soon to be Proof-of-Stake

Current Market Cap (05/02/2022):$343.05 Billion

Ether was released in 2015, and has since become the second largest cryptocurrency by market cap after Bitcoin. Like Bitcoin, Ether can be used to facilitate transactions between individuals, but it was also designed with additional capabilities in mind.

The Ethereum blockchain network was designed specifically to allow for the development and deployment of smart contracts. These are pieces of code which are stored on a blockchain and which automatically execute once predetermined conditions have been met. Smart contracts play an essential role in decentralized applications (dApps) which underlie both the decentralized finance (DeFi) and Web 3.0 industries.

Because Ethereum was the first blockchain network with smart contract capabilities to gain traction, it is currently home to the largest collection of dApps. That being said, other emerging blockchain networks also allow for smart contracts, and many (such as Cardano and Solana, below) aim to dethrone Ether’s dominance in that area.

Ether, like Bitcoin, is not without its limitations. As with Bitcoin, the Ethereum network relies on a Proof-of-Work consensus mechanism, which means that it must contend with the same issues that Bitcoin does. In particular, the Ethereum network has become somewhat infamous for its high gas fees during times when the network is particularly congested and demand for its resources is high.

That being said, the Ethereum network is currently undergoing an upgrade (known colloquially as The Merge) which will see it transition over to Proof-of-Stake. It is believed that this transition will lead to faster transaction speeds, lower network fees, increased scalability, and less environmental impact compared to the current system. This is expected to be completed in 2022. Future planned upgrades will introduce “shard chains” with a goal of further increasing transaction speeds, among other goals.

Additionally, in August of 2021, Ethereum completed the London Hard Fork, known as EIP-1559. This hard fork was designed to make gas fees more predictable. As a part of EIP-1559, a portion of all gas fees paid to complete a transaction on the network must now be burned. This will help to control the supply of Ether and may, over time, eventually make the cryptocurrency deflationary.

Cardano (ADA)

Consensus Mechanism: Proof-of-Stake

Current Market Cap (05/02/2022):$26.34 Billion

Cardano was founded in 2015 (and released in 2017) by Charles Hoskinson, one of the co-founders of Ethereum who aimed to create a next-generation blockchain that could be more scalable, flexible, and sustainable than its predecessors. It is often touted as the “peer-reviewed blockchain” due to the fact that it was founded based on peer-reviewed scientific research. 

ADA is the native cryptocurrency of the Cardano network, much as Ether is the native currency on the Ethereum network. With this in mind, ADA can be used to facilitate transactions between parties much like Bitcoin and ETH. Users of the Cardano network must also pay gas fees in ADA when they leverage the network’s resources, for example by completing a transaction. 

Unlike the Ethereum and Bitcoin networks, the Cardano network relies upon a Proof-of-Stake consensus mechanism. This system requires less energy and allows for faster transaction processing compared to Proof-of-Work systems. 

Of course, there are similarities between Cardano and its rivals. Like the Ethereum network, Cardano was designed to implement smart contract functionality, which allows for the development of decentralized applications. This smart contract functionality officially went live on the network in September of 2021 following an upgrade known as Alonzo

And like Bitcoin, Cardano has a maximum upper limit on how many coins can ever be created: 45 billion. This fact means that Cardano may prove to be a store of value and potentially a hedge against inflation, especially if demand continues to rise while supply remains constant.

Cardano can currently process approximately 250 transactions per second. A future planned upgrade known as Hydra aims to allow for the existence of “side chains” that branch off of the base network. While the impacts of this upgrade cannot fully be known until it actually launches, it is theorized that Hydra could allow the Cardano network to process up to 1 million transactions per second. 

Because of this increased scalability and faster transaction speeds, Cardano is often dubbed an “Ethereum killer” (as with its rival Solana, below) which aims to eventually supplant Ethereum as a center for dApp and Web 3.0 development. 

Whether this will come to pass remains to be seen, and will depend on the network attracting more users and developers to build on top of its block chain. That being said, it is worth noting that Cardano regularly ranks amongst the top ten cryptocurrencies by market cap.

Solana (SOL) 

Consensus Mechanism: Proof-of-Stake & Proof-of-History

Current Market Cap (05/02/2022): $29.17 Billion

Solana also launched in 2017, and like Cardano ranks amongst the top 10 cryptocurrencies by market cap. The project was initiated by Anatoly Yakovenko, a former software engineer for Qualcomm.

Like Cardano, Solana is often dubbed an “Ethereum killer” due to the fact that the Solana network allows for smart contract functionality (and thus for the development of dApps, DeFi projects, and Web 3.0). Also like Cardano, Solana depends on a Proof-of-Stake mechanism for achieving consensus, which leads to faster transaction speeds and lower fees.

But unlike Cardano (and soon, Ethereum) Solana pairs Proof-of-Stake with Proof-of-History. In short, this means that incoming transactions are timestamped, which makes it easier for the network to reach consensus as to when a transaction occurred.

This leads to much faster transaction speeds versus just relying on Proof-of-Stake alone. The Solana network can currently theoretically handle up to 50,000 transactions per second—without the need for an upgrade like the one Cardano is currently working on. 

But unlike Bitcoin and Cardano, which both have set a maximum supply of the number of coins that can be minted or mined, Solana has not set such an upper limit. Ether also does not have an upper limit of coins, but thanks to EIP-1559 may become deflationary over time as ETH gets burned during transactions. This means that while the other cryptocurrencies in this list may all at some point serve as a hedge against inflation, to an extent, Solana currently does not fulfill this purpose. 

Choosing an Investment

Cryptocurrency, as an asset class, is still very young. With this in mind, it’s important to recognize that it’s very difficult to predict which crypto projects will succeed in the long run, which will burn intensely for a short period of time before falling by the wayside, and which will fail to gain traction altogether. 

It’s possible that Bitcoin will maintain its market dominance in the coming years, but it’s also possible that one of the other cryptocurrencies discussed above—or even one that didn’t make it on our list—may rise to eclipse it.

In this way, the world of crypto today is much like the Dot Com boom of the late 1990s and early 2000s. Back then, hundreds of internet-based businesses were conceived, and many went public. But many of those businesses didn’t have staying power, and either folded or were acquired when the bubble popped. 

Investors who went all-in on the wrong stocks (we’re looking at you, Pets.com) didn’t just lose their initial capital, but also missed out on some of the biggest success stories that emerged during that time. Some of the companies that made it to the other side of the bubble—like Amazon, Adobe, and eBay, amongst others—have some to be stalwarts of both today’s internet and stock market.

So while it’s tempting to think about the possibility of investing in the next Amazon, for most investors the prudent decision will be to diversify their holdings—both across asset classes and within it. This means that instead of just holding cryptocurrencies, you’ll want to invest in other assets as well, such as stocks, bonds, real estate, and commodities. And when it does come to investing in crypto, selecting a basket of cryptocurrencies instead of just one token will help you to diversify your exposure. 

Here at Allio, we believe that cryptocurrency has exciting potential to help build the infrastructure of tomorrow’s technological and financial ecosystem but currently as an asset, doesn’t have the regime in place to drive its price up. Bitcoin, due to its limited supply could come into high demand if the global financial system ever experienced hyperinflation. Rather than have our clients purchase a wallet or trade on a messy exchange with hidden fees to purchase coins, we prefer to seek this upside via the use of an ETF which includes the added benefit of not being directly exposed to the speculative underlying asset. That said, they are still volatile and investors should only purchase them if they’re willing to lose that entire portion of their portfolio. For that reason, we offer our clients the choice for whether they’d prefer to have crypto exposure, alongside traditional asset classes—like stocks, bonds, commodities, and real estate— for a truly diversified macro investment strategy.

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