Fantom: The Definitive Ethereum Killer?
Summary
- Fantom's value has more than tripled in the last few months.
- Fantom's network structure makes it one of the best blockchains in terms of security, scalability and decentralization.
- However, Fantom relies on Ethereum so I expect both to be winners in the future.
PhoThoughts/iStock via Getty Images
Thesis Summary
Ethereum (ETH-USD) has become one of the most successful and best-performing cryptocurrencies of the last few years, thanks to its ability to empower decentralized applications and smart contracts. The uses of this technology are practically endless, so it is no surprise that we have seen hundreds, if not thousands of other cryptocurrencies pop up aiming to replicate and try to improve on the Ethereum blockchain and its thriving ecosystem.
Many of these “Ethereum killers” have gained traction in the last few months. Solana (SOL-USD), for example, has climbed all the way to become the seventh-largest cryptocurrency by market cap. These new blockchains aim to strike the right balance between security, scalability and decentralization (The Blockchain Trilemma).
Today, I’d like to introduce Fantom (FTM-USD), a blockchain that has been outperforming the crypto space in the last month, and which holds a lot of potential due to its unique protocols and consensus mechanisms.
Fantom may have what it takes to dethrone Ethereum, but does this mean it will?
What is Fantom?
The Fantom token has been on an absolute tear in the last 3 months, increasing by over tenfold as we can see in the chart below:
Source: coinmarketcap.com
Rallies like these are not uncommon in the crypto space. Oftentimes they happen out of pure hype and speculation, but I can safely say that there are some strong “fundamentals” backing up the appreciation of Fantom.
So what is Fantom exactly, and what makes it “special”?
Like Ethereum, Fantom is a decentralized, permissionless, open-source, smart-contract-enabled platform. Fantom’s blockchain is powered by a consensus mechanism known as Lachesis. This is the result of combining Asynchronous Byzantine Fault Tolerance (or aBFT) and Proof-of-Stake (or POS).
Through PoS, blocks are created by validators who are staking Fantom. This is not revolutionary, but what is revolutionary is the aBFT protocol, which allows blocks to be created “independently”:
Through aBFT, nodes can reach consensus independently by making use of a two-stage block confirmation process using a two-thirds supermajority. The first stage proposes a last irreversible block (LIB), while the second stage finalizes the proposed LIB to make the block irreversible. ABFT consensus is considered leaderless, with no independent leading node responsible for block creation and finalization, resulting in a faster and more secure network.
Source: Gemini.com
aBFT is not unique to Fantom, and other blockchains like Hedera use it too. Ultimately, what Lachesis allows is for a more efficient network, completing transactions in an average of one second. This also makes the network more secure. Hypothetically, the blockchain could tolerate up to ⅓ of the validators being “bad actors” without suffering any kind of problem.
The other interesting point here is that, due to the independent nature of the blocks in the Fantom blockchain, Fantom could be said to be more decentralized. Each application on Fantom runs on an independent blockchain, all of which are then plugged into Lachesis. If Ethereum is a decentralized computer, Fantom is like an infinite network of decentralized computers.
Lastly, in terms of smart contract functionality, the Fantom mainnet is hosted by Opera. This open-source platform supports smart contracts written in Solidity that can operate with the Ethereum Virtual Machine. In other words, the Fantom blockchain can “interact” with Ethereum.
Fantom vs. Ethereum 2.0
The question is, how does Fantom fare against Ethereum? Or to make things more relevant, how does it fare against Ethereum 2.0 which is currently being rolled out and should be fully functional by 2022-2023?
To answer this question, let’s put things in terms of the cryptocurrency trilemma, to see how Fantam and Ethereum solve the issues of Scalability, Security and Decentralization.
Scalability
As explained above, Fantom relies on an aBFT protocol to reach a consensus. aBFT is by nature more scalable as it can handle transactions faster. In theory, the Fantom blockchain can handle around 20,000 tps. If we look deeper into how Fantom works, we can see that each network node contains its own Directed Acyclic Graph (DAG). The DAG is what allows for a “chronology” of blocks to be established, allowing each block to achieve consensus independently. The beauty of Fantom is that it creates a separate blockchain for each application. These blockchains can then interact, but they are independent of each other. Fantom is a network of networks, which makes it a lot more scalable.
Meanwhile, Ethereum 2.0 will rely on sharding to achieve more scalability. Sharding involves breaking up the network into smaller “shards” that are easier to manage and maintain. Allegedly, Ethereum 2.0 should be able to carry out 100,000 tps.
Ultimately, it’s hard to say with certainty which network is more scalable. Scalability is a complex matter. Ethereum is currently quite limited but will solve these problems if/when it launches Ethereum 2.0 successfully. However, Fantom’s technology seems more interesting and holds more potential, but the network hasn’t been put to the test in real life.
Security
Another key issue with blockchains is security. Fantom boasts what is referred to as a “leaderless” PoS system. PoS requires people to stake coins to validate blocks. Fantom emphasizes that its system is leaderless, meaning there are no block leaders or special roles. Anyone can join or leave the node network whenever they wish, and all nodes hold equal weight in the consensus protocol. In other words, this prevents centralization. Furthermore, through Lachesis Fantom offers absolute finality. This means that transactions can’t be reverted like in blockchains with probabilistic finality.
Ehtereum 2.0 also introduces the concept of finality, by dividing blocks into epochs. Once these epochs have been validated by over ⅔ of validators, the transactions in this epoch become finalized. In other words, it’s like introducing “checkpoints” into the blockchain.
Ethereum 2.0 is also moving to a PoS system, which does raise issues about security and centralization. The new system will require at least 16,384 validators, but there is still a worry that power could be concentrated into the hands of a few big players with most of the staked ETH. To solve this, Vitalik Buterin has talked about the idea of deposits, which will give stakers strong incentives not to act disingenuously. In theory, all of the staked Ether could be taken away from someone if they are found to be acting maliciously.
Again, it’s hard to say which network will be more secure. Ethereum has a long and proven track record, but Fantom’s Lachesis does seem to have stronger fundamentals thanks to its leaderless approach.
Decentralization
Lastly, we have the issue of decentralization, though I have already covered it somewhat in the sections above. The issue is that scalability and security often come at the expense of decentralization. Striking the right balance between these three elements is the key to solving the Blockchain Trilemma. For example, PoS systems can help improve speed and security, but they also open up the door to more centralization, which is why certain measures have to be put into place to prevent it.
Fantom, from what information we have on it, does seem to always keep decentralization at the forefront of its priorities. Fantom is made up of various decentralized blockchains, which we could argue makes it one of the most decentralized platforms out there. Meanwhile, Ethereum’s move to PoS could come at the risk of increasing centralization, but this is not what evidence shows. One way to measure decentralization is through the Herfindahl–Hirschman Index (HHI). This is a metric used in traditional economics to measure centralization by looking at market share and competition, though it has also been used by blockchain analytics firms like Nansen for cryptocurrencies.
Nansen calculates HHI for Eth 2.0 by squaring the share of each source account that has staked on the network and summing the resulting numbers. Though it is clearly not the case that all deposit accounts are independent, the trend does indicate a gradual decrease of HHI over time.
Source: Coindesk.com
Ultimately, though Ethereum is moving towards more decentralization, Fantom’s leaderless PoS and system based on interacting blockchains does seem to offer the best solution available.
Can Fantom Dethrone Ethereum?
With all that said, do I expect Fantom to dethrone Ethereum as the go-to platform for DeFi and Decentralized Applications? Out of all the contenders out there, I do think that Fantom has the best odds.
The technology behind Fantom is one of the best, especially when it comes to decentralization. Fantom has the right technical properties to become a leader in DeFi, and it also has some notable support from the likes of Mark Cuban.
However, one of Fantom’s biggest strengths may also be its biggest weakness. Though Fantom has its blockchain and mainnet, all the applications are built using Solidity and integrate with the Ethereum Virtual Machine, Fantom doesn’t have a proprietary software development kit, though there are plans to release the Fantom Virtual Machine in the near future.
For the time being, Fantom is therefore only a great complement to Ethereum, and its success is tied to the success of Ethereum. My vision for the future is one with many blockchains interacting and bringing something to the table, and there is definitely a spot for both Fantom and Ethereum.
Final Thoughts
Ultimately, I believe Fantom and Ethereum will both be winners in the crypto landscape of tomorrow. However, Fantom does have a much larger potential for appreciation. Fantom only ranks 29th by market cap, which is around $7 billion. Simply looking at its current size and its disruption potential in the DeFi space leads me to believe that Fantom could more than triple in the next few years. Some estimates suggest Fantom could reach $25 by 2025, which would be close to a ten-fold increase. Thanks to its recent appreciation, Fantom has become the largest holding in my crypto portfolio and I intend to keep it that way.
This article was written by
James Foord is an economist by trade and has been analyzing global markets for the past decade. He leads the investing group The Pragmatic Investor where the focus is on building robust and truly diversified portfolios that will continually preserve and increase wealth.
The Pragmatic Investor covers global macro, international equities, commodities, tech and cryptocurrencies and is designed to guide investors of all levels in their journey. Features include a The Pragmatic Investor Portfolio, weekly market update newsletter, actionable trades, technical analysis, and a chat room. Learn more.Analyst’s Disclosure: I/we have a beneficial long position in the shares of FTM-USD, ETH-USD, BTC-USD, SOL-USD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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