In 2009, Bitcoin, along with blockchain technology, was introduced to the world and revolutionized the global payments and financial system. With it, it brought decentralization and made it possible to operate a currency without the need for a central bank or central authority. Being the first of its kind, Bitcoin along with its immediate predecessors (Litecoin, Namecoin, etc.) are considered first generation cryptocurrencies. These initial coins are thought of as “digital gold” given their scarcity, transactability, and potential for being a store of value. A few years later in 2015, Vitalik Buterin created Ethereum, which would later be labelled a second-generation cryptocurrency. Ethereum possessed a more sophisticated programming language allowing for smart-contract capabilities. It was perceived as a new type of cryptocurrency altogether, given its ability to allow developers to build new decentralized programs within the platform. Over the last 7 years, Bitcoin and Ethereum have dominated the crypto space in terms of trading volume, market capitalization, and price. Bitcoin has always been leading the pack in terms of being a liquid and easily transactable cryptocurrency and Ethereum has similarly reigned over the decentralized finance (DeFi) landscape. Interestingly, the emergence of new cryptocurrencies over the last few years are threatening to end the current dual hegemony.
Despite the key innovations brought forward, both Bitcoin and Ethereum are not without their faults. The two platforms are plagued with scalability issues. Namely, both cryptocurrencies require an immense amount of energy to function. This results in significant “gas fees” on the Ethereum network and very expensive hardware requirements to mine Bitcoin. Consequently, these expenses may prevent many potential users from even trying out the network themselves, hindering long-term growth. In addition to problems of energy consumption, Ethereum is struggling to cope with its high demand leading to very slow transaction speeds. It is now common for various transactions to take hours to process over the network. In the meantime, multiple cryptocurrencies are taking advantage of these issues to present themselves as third-generation coins, having the ability to overcome these scalability problems. We shall now take a brief look at some of these third-generation cryptocurrencies.
The Cardano blockchain platform is the first to be founded on peer-reviewed research and evidence-based methods. It is a proof-of-stake blockchain looking to solve the three major issues prevailing among the current generation of cryptocurrencies which are: scalability, interoperability, and sustainability. At the heart of the platform lies the Ouroboros system, which is what allows Cardano to solve the problems currently hindering the Ethereum network. The Ouroboros system is a peer-reviewed verifiably secure blockchain protocol running on a proof-of-stake (PoS) consensus mechanism. The PoS mechanism allows Cardano to consume a fraction of the energy costs associated with proof-of-work (PoW) platforms such as Bitcoin and Ethereum. To put these energy savings into perspective, at its best, the Cardano platform can be four million times more energy-efficient than Bitcoin. Furthermore, it does so without sacrificing security or decentralization, as it similarly uses cryptography and math game theory to secure its blockchain. The two main factors behind Cardano’s energy efficiency are its PoS consensus mechanism, as well as its compatibility with Raspberry Pi (a lower power consumption computer).
Cardano’s Ouroboros system also allows it to bolster a theoretical transaction speed of 257 transactions per second (compared to Ethereum’s 20 TPS). This allows Cardano to better serve as a global payment system and handle the growing demand of cryptocurrencies. Another unique feature of Cardano is that it strives to improve interoperability. Cardano aims to allow users to freely move assets across multiple chains as well as provide users the option to attach metadata to transactions, which will allow for better integration with commercial banks and governments.
At the outset, Cardano presents itself as the golden solution to today’s cryptocurrencies issues; however, it is important to note that this platform is still very early in its development. Currently, Cardano is only on stage two of its 5-step development plan. Therefore, there is a lot more that needs to happen before these theoretical advantages come to fruition.
Solana is competing to be the fastest, most secure, and scalable solution in the crypto world. More specifically, Solana is looking to replace Ethereum within the DeFi, gaming, and NFT world. A recurring theme among third-generation cryptocurrencies is that they are all looking to improve upon scalability and transaction throughput. In terms of transaction speed, Solana outperforms all with its ability to create a block every 400 milliseconds and process roughly 50,000 transactions per second. Solana’s highspeed platform makes its transaction capacity comparable to the internet’s. Furthermore, Solana scales as a layer 1 blockchain. This means it does not require off-chain solutions to help process transactions or bypass bottlenecks (solutions Bitcoin and Ethereum are currently implementing). Instead, Solana is able to grow and double its processing speeds every 2 years. This may be more attractive to new developers who do not wish to be isolated from those on the main blockchain.
Solana also surpasses Ethereum in terms of pricing. It currently costs approximately $10 per million transactions, whereas one would have to pay over $2 per transaction on the Ethereum chain. These revolutionary scaling solutions are owed to eight core innovations produced by Solana’s development team. The most important of these innovations is its proof-of-history (PoH) mechanism. PoH works in conjunction with PoS to allow the system to verify the order of transactions without requiring nodes to separately communicate with one another. This decreases overall node messaging overhead, as well as other computation bulk to allow for insanely high speeds and lower gas fees.
Like all cryptocurrencies, Solana has its drawbacks. First, Solana has expensive hardware requirements. This is to be expected given its extremely high transaction throughput capabilities. $5,500 is a major investment for most people aspiring to set up a node on any network. Second, Solana utilizes the Rust programming language which is similar to C++, yet built for advanced capabilities. The problem is that only a few developers know how to use Rust, as it has a high learning curve. On the other hand, Rust has been one of the fastest growing programming languages for several years now, according to GitHub. Therefore, Solana’s success is primarily dependent on whether it can attract enough talented developers to build on its platform.
Chia is the final third generation cryptocurrency we will discuss. It is an open sourced blockchain and smart transaction platform designed to improve the global financial and payments system. Created by the founder of BitTorrent, Chia’s goal is to become a useful payment instrument rather than merely serving as an investment opportunity. Among the three new cryptocurrencies we are analyzing, Chia is probably the most unique. Unlike other platforms, Chia desires to be the first for-profit company that manages a strategic reserve (“pre-farm”) and strives to be the first publicly traded cryptocurrency. Chia’s pre-farm will be formed at network launch where it will keep a large supply of coins to help stabilize and grow the Chia economy. The idea is to use the reserves to reduce coin volatility and boost adoption by offering various loans. Part of the pre-farm will also be used for platform development as Chia will use reserves to invest in new start-ups within the Chia ecosystem.
By opting for an IPO rather than an ICO (initial coin offering), Chia wishes to be listed on an American stock exchange to allow shareholders to share risk and return with management, transparency, and disclosure. Furthermore, going public allows Chia to use corporate controls to make binding statements about how it intends to use its pre-farm. Chia’s executive team suggests the stock will likely mirror the price movements of the Chia cryptocurrency and thus, alternatively trade as an ETF for shareholders.
Along with these two novel ideas, Chia is also introducing the new proof-of-space and time (PoST) consensus mechanism. This system relies on empty storage space within hard drives to store cryptographic information, which is then verified by the system. The consensus mechanism also implements a verifiable delay function (VDF) requiring sequential computation leading to huge energy savings.
Chia brings forward many new advantages and opportunities; however, like Cardano, it is very early on in its development roadmap. It has only recently launched on the mainnet and currently offers very limited capabilities. A recent study also highlights the concern that many hard drives being used by Chia farmers often malfunction quicker than they would if used for regular purposes.
It is important to recognize that the three cryptocurrencies we have identified are merely a small sample of the vast number of platforms looking to exploit the issues Ethereum and Bitcoin currently face. The struggle of one business will always lead to new opportunities for others. However, Ethereum itself is looking to overcome the challenges it currently faces by developing Ethereum 2.0 to improve scalability. Therefore, for many of these third-generation cryptocurrencies, it is going to be a race against time as they must complete development and acquire a sufficient userbase by the time Ethereum’s new platform launches. We will likely see the announcement and development of many new cryptocurrencies within the coming year, all looking to become the next Bitcoin/Ethereum.