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Ask CryptoVantage: What’s a Third Generation Cryptocurrency?
You may have heard the phrase “Third Generation Cryptocurrency” or “Third Generation Blockchain” and wondered what it refers to. In essence, the third generation of crypto and blockchain aims to solve the issues facing the first two generations, which are considered to be Bitcoin, the original crypto, and Ethereum, the first crypto to offer smart contracts and decentralized apps.
A third generation blockchain looks to solve the issues faces by Bitcoin and Ethereum, but what are those issues? And what are some third-generation cryptocurrencies on the market today? We will answer both of those questions in this edition of Ask CryptoVantage.
Issues Facing First Two Generations
Scalability
This is one of the biggest issues facing the first two generations of crypto and is already becoming an issue for uses of both. Bitcoin transaction fees are an average of around $20 USD or more, even for small amounts. In addition, the network is slow with the number of transactions trying to be processed with a processing speed of just 7 transactions a second. There are many companies aiming to solve this problem by building new layers to Bitcoin’s blockchain.
One of the ultimate goals of Ethereum is to become the “world’s computer”, but the problem with this goal is that currently Ethereum can only process 15 transactions per second. While this is more than double the throughput that Bitcoin has, it is also still not enough, and currently Ethereum gas fees for small transactions are around $15 USD, and that fee does not even guarantee the transaction will go through because of changing variables within the Ethereum ecosystem.
There are many third generation blockchains that can process thousands of transactions per second already, marking great progress in blockchain technology.
Proof of Work Consensus Algorithms
The next issue facing both Bitcoin and Ethereum are their current proof of work consensus algorithms. There is nothing wrong with the way proof of work works, but rather an issue in its long-term utility in relation to cost effectiveness.
Currently the yearly electricity used to mine Bitcoin is more than the entire country of Argentina. This is unsustainable for a number of reasons, mostly environmental, but the cost of mining Bitcoin for those that do mine it must be financially draining, and probably leads to many sell offs when Bitcoin goes up in value. Fortunately there are a number of solutions for Bitcoin that are on the way or already being used.
Meanwhile Ethereum is currently transitioning to a proof of stake algorithm with Ethereum 2.0, which would potentially solve issue completely.
Third Generation Cryptocurrency Projects
There are a number of third generation blockchain projects on the market already: Cardano and Polkadot are both good examples of third generation cryptos that are already making noise in the crypto world but Solana, Terra, Avalanche and several others would likely fall in that category as well.
Cardano
Cardano (ADA) can already process thousands of transactions per second thanks to their Hydra node system (and can scale to millions as with this as well) and operates on a proof of stake consensus mechanisms meaning you can also stake your ADA and earn interest on it.
Transaction costs are extremely low and fast, less than 30 cents for thousands of dollars being sent and it only takes a few minutes to send and receive. They are introducing smart contracts and decentralized apps soon as well.
Polkadot
Polkadot (DOT) can also process thousands of transactions per second with the same potential for millions that Cardano has. DOT also operates on a proof of stake consensus algorithm and you can earn even more interest per year than with ADA, but their mechanism for staking does not guarantee you will always receive interest, in contrast to ADA.
The DOT ecosystem is more developed than Cardano’s currently, with projects such as Kusama and Ocean Protocol already on the blockchain.
Will 3rd Gen Cryptos Supplant Bitcoin, Ethereum?
If projects like Cardano and Polkadot offer superior technology will they eventually surpass Bitcoin and Ethereum in usage and market cap? No one knows for sure but you shouldn’t underestimate the first-mover advantage that Bitcoin and Ethereum share.
Bitcoin and Ethereum are proven projects with trillions of dollars in market cap. Both networks behind the coins have been remarkably secure over the years. Furthermore Bitcoin has recently turned into an investment vehicle for wealthy corporations like Tesla and Microstrategy. Despite it’s scalability issues, it’s clear that no one is giving up on Bitcoin anytime soon.
Meanwhile Ethereum provides infrastructure for much of the cryptocurrency industry including various coins and DeFi projects. It’s also upgrading to proof of stake, which would theoretically put it on even footing with some of the third gen crypto projects.
Regardless there is still a great deal of interest in third-gen cryptocurrencies and investors will likely continue to pump money into them in the hopes they will turn into the next Ethereum or Bitcoin.
FAQ About Third Generation Cryptos
Not necessarily. Polkadot is focused on multi-chain security so there is interoperability between different blockchains. DOT also offers faster throughput and higher staking rewards.
On the other hand the Ethereum ecosystem is much more developed and stable.
No one knows for sure. Speculating on the growth of cryptocurrencies is a fool’s errand.
Cardano will keep releasing upgrades, however, and the platform should become much more usable with the proper launch of smart contracts. ADA might be falling behind other chains that already have working smart contracts, however.
This is a subjective question but in terms of market cap Cardano, Solana, Avalanche, Terra and Polkadot are all in the top 20. You might consider NEAR protocol.
Yes. But there are no hard and fast rules regarding terminology.
The main thing that separates Ethereum from first-gen cryptocurrencies like Bitcoin and Litecoin is the introduction of smart contracts.
