DEX Tokens Historically Tied to ETH Now Show Divergence, Outperformance
The governance tokens of decentralized exchanges (DEXs) have shown divergence in their price action from Ethereum over the last two months. Market data provider Kaiko revealed in its report that, since October 2021, DEX tokens have also outperformed ETH significantly.
Several DEXs first built on Ethreum are seeking alternatives due to its scalability issues—this has disrupted the tight historical correlation between DEX tokens and ETH.
L1’s And L2’s Provide DEXs With Alternatives
The availability of alternative Blockchains (Layer 1s) and Layer 2s have allowed popular DEXs to explore new options. The lower transaction fees and increased throughput of these platforms have made them attractive options to users. The emergence of Solana, Avalanche, Terra, and Fantom saw L1s outperform Ethereum by over 100% in 2021.
The surge in the use of other layer1’s and scaling solutions like Arbitrum and Polygon has been spurred by Ethereum’s congestion. Last year, Solana, Avalanche, and Terra reached all-time highs as investors sought to replicate the astronomic gains of Ethereum’s early days.
Other platforms like Cosmos, Fantom, Harmony One, Cardano, and Polkadot, saw their tokens post all-time highs as more DeFi protocols adopted them.
Uniswap, recently under the SEC’s crosshair, announced the deployment of its version 3 contract on the polygon mainnet, after a vote by UNI holders in support of the move. Following the decision, Mihailo Bjelic, co-founder of Polygon, highlighted the move’s importance in a chat with the press. He pointed out that the development would see Uniswap return to its original vision of offering low transaction fees and open access to all its users. He said:
“Ethereum introduced a noble vision of an open, borderless economic system accessible to everyone. With the increased usage, fees on Ethereum layer 1 have effectively ‘priced out’ most of the users; the Polygon version of Uniswap aims to change that. With this deployment, Uniswap, as the flagship Ethereum application, returns back to the original vision and again offers low fees and open access to everyone.”
Following the deployment, the price of UNI and Matic—Polygon’s native token— surged up, with the latter hitting a new all-time high of $2.92. Uniswap is already the largest DEX by trading volume; it currently has a Total Locked Value (TVL) of $8 billion. This is shared across the various L1s and L2 it uses according to data provided by DeFilama.
Curve, another Ethereum DEX, has also leveraged other network options to become the biggest decentralized finance (DeFi) protocol by TVL. According to DeFiLama, the protocol has over $23 billion locked across several L1s—Fantom, Avalanche, Harmony, and Ethereum—and L2s—Optimism, Arbitrum, and xDai.
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Ethereum Remains The Smart Contract King
Despite the scaling issues, Ethereum maintains its first-mover advantage as the premier smart contract platform for DeFi protocols.
According to DefiLama, the chain currently has over $140 billion in TLV across 409 platforms deployed on it. This is significantly more than its nearest competitor Terra with “just” $17 billion locked in 17 protocols.
Several solutions are already being deployed to cater to its scaling problems, which should continue its reign. The goal of these scaling solutions is to increase throughput without sacrificing the network’s security and decentralization.
Ethereum’s Beacon Chain, a completely enhanced Proof-of-Stake blockchain, is scheduled for launch in the second half of 2022. Meanwhile, Ethereum relies on sidechains and rollups to offload traffic to Layer 2 and subsequently feed back transaction data to the network.
Alongside these solutions, plasma chain and sharding have also been implemented which can help with on-chain scaling.
If the blockchain can solve its scaling problems and achieve its goals, it will continue its reign as the smart contract king. However, when it can accomplish this is still up for debate while other platforms continue to challenge its dominance.
Do you see DEXs token price converging with ETH once scaling solutions are implemented on Ethereum? Let us know in the comments below.