altcoins tied to ethereum

Did you know that as of August 2023, the Ethereum network accounts for 68% ($50B) of the decentralized finance (DeFi) total value locked (TVL)? It also makes up 56% ($69B) of stablecoins deployed. This shows Ethereum’s key role in today’s crypto ecosystem. However, determining the altcoins’ decentralization connected to Ethereum is complex. It varies based on factors like how much they use Ethereum’s blockchain, the protocol’s own decentralization level, and the use of scaling solutions.

Ethereum-based tokens, including ERC-20 DeFi tokens and NFTs, get some of Ethereum’s security and decentralization benefits. They use Ethereum’s powerful smart contract platform and its DApps ecosystem. But, they face challenges like scalability and high transaction costs due to Ethereum’s Layer 1 network issues. These challenges affect their full decentralization.

However, the crypto world is not sitting still. Developers are working on Layer 2 solutions like Optimistic Rollups and Zero-Knowledge Rollups. The goal is to make Ethereum-based altcoins more decentralized and scalable. These solutions allow transactions off the main Ethereum chain and use advanced cryptographic methods. They might solve the issues and let DeFi and NFTs reach their full potential on Ethereum’s smart contract platforms.

Key Takeaways

  • The Ethereum network is a big player in DeFi, with 68% ($50B) of TVL and 56% ($69B) of stablecoins deployed.
  • The level of decentralization of Ethereum-connected altcoins varies. It depends on their use of Ethereum’s blockchain, protocol decentralization, and scaling solutions use.
  • Ethereum-based tokens, like ERC-20 DeFi tokens and NFTs, get some security and decentralization benefits from Ethereum. But, they face challenges like scalability and high costs on Ethereum’s Layer 1.
  • Layer 2 solutions, including Optimistic Rollups and Zero-Knowledge Rollups, want to solve Ethereum altcoins’ scalability and cost issues. They aim to improve decentralization and adoption.
  • The success of Ethereum altcoins’ decentralization lies in how well these Layer 2 scaling solutions are integrated and adopted.

Understanding Ethereum’s Blockchain

Ethereum is the second-largest cryptocurrency after Bitcoin. It has made big changes to be more efficient and scalable. At first, Ethereum worked like Bitcoin, using a method that required a lot of energy to process and add transactions to the blockchain.

Ethereum’s Transition from Proof-of-Work to Proof-of-Stake

In September 2022, Ethereum changed to a “proof of stake” system. This new system, PoS, is much less energy-hungry. It makes Ethereum use up to 99% less energy. In PoS, validators create new blocks based on the Ether they hold. They get rewarded for their work, but if they act dishonestly, they lose some of their Ether.

The Scalability Challenge on Ethereum Layer 1

Even though Ethereum adopted PoS, it still faces big issues with how many transactions it can handle. Right now, it can do about 20-30 transactions per second. This is much lower than Visa, which handles 24,000 transactions per second. Ethereum’s fees can also be quite high, with the cost sometimes going over $7 for one transaction. These problems are making it hard for Ethereum to grow and become fully decentralized.

ethereum blockchain

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Altcoins Tied to Ethereum

A big chunk of the altcoins linked to Ethereum are ERC-20 tokens. They’re a common choice for creating digital tokens on the Ethereum blockchain. These tokens are very important in the world of decentralized finance (DeFi). They help with lending, borrowing, and trading activities. Yet, they face similar issues to Ethereum, such as high costs for transactions and scalability challenges.

ERC-20 Tokens and Decentralized Finance (DeFi)

ERC-20 tokens serve as a key foundation for the DeFi sector. They play a vital role in making various finance activities possible. Still, they have issues with being able to grow and keep costs low, just like Ethereum does.

Non-Fungible Tokens (NFTs) and Digital Collectibles

NFTs are a special kind of digital asset, like unique artwork or items in games. They use the Ethereum network to exist safely. But, Ethereum’s high costs and limited growth have made it hard for NFTs to be used widely for small transactions.

Decentralized Applications (DApps) and Smart Contracts

Ethereum is a top choice for making DApps and using smart contracts. DApps can use Ethereum’s safety and rules to run. Yet, the network’s issues with rising costs and speed have slowed the growth of DApps using it.

altcoins tied to ethereum

Layer 2 Solutions and Scaling Ethereum

Scalability issues in Ethereum are being tackled by Layer 2 solutions. These technologies aim to boost the network’s speed and lower costs. They also keep Ethereum secure and decentralized.

Optimistic Rollups: Arbitrum, Optimism, and Base

Optimistic Rollups are a key type of Layer 2 solution. They include Arbitrum, Optimism, and Base. These systems handle transactions off Ethereum’s main chain. They then submit a summary of these transactions to the blockchain.

This method makes transactions faster, with up to 40,000 processed every second. It also cuts down on costs compared to using Ethereum directly.

Zero-Knowledge Rollups (ZK-Rollups)

Zero-Knowledge Rollups (ZK-Rollups) are another innovative tool. They ensure transaction validity without sharing personal details. This approach keeps Ethereum secure and decentralized.

Hermez Network and Loopring are working with ZK-Rollups. They want to help Ethereum’s apps grow and support DeFi.


The issue of decentralization in altcoins connected to Ethereum is not simple. It depends on many things. Tokens like ERC-20 DeFi and NFTs get some security from Ethereum.

Yet, they face problems with scalability and high costs like Ethereum does. But, thanks to Layer 2 solutions, things are looking up. Solutions such as Optimistic Rollups and Zero-Knowledge Rollups aim to fix these issues.

They work by handling transactions off the main Ethereum chain. Then, they send just the final results to Ethereum. This setup means faster speeds and lower costs but keeps things secure.

So, as the tech around Ethereum grows, altcoins may get more decentralized. Using Layer 2 technology can make Ethereum and its altcoins more open to everyone. It can also help bring them to the mainstream.


What is the level of decentralization of altcoins tied to Ethereum?

The decentralization of altcoins linked to Ethereum varies. It depends on several factors such as the use of Ethereum’s blockchain. Also, it considers the level of decentralization in their protocols and how they adopt scaling solutions.

How does Ethereum’s transition from Proof-of-Work to Proof-of-Stake affect the network?

Ethereum moved from “proof of work” to “proof of stake” in September 2022. This change greatly reduced its energy needs by about 99%. Moving to PoS made Ethereum’s network more eco-friendly and efficient.

What are the scalability challenges faced by Ethereum Layer 1?

Even with the move to PoS, Ethereum Layer 1 is still slow. It can only handle 20-30 transactions per second, far less than Visa. Additionally, the average gas fees in 2023 surpassed per transaction, making it costly to use.

What are ERC-20 tokens and how do they relate to decentralized finance (DeFi)?

ERC-20 tokens are a type of token standard on the Ethereum network. They are key in the DeFi world, powering lending, borrowing, and trading within the DeFi ecosystem.

How do non-fungible tokens (NFTs) utilize the Ethereum blockchain?

NFTs are unique digital assets that rely on Ethereum’s blockchain. They benefit from its security and decentralization but face issues like high transaction costs. This affects their mainstream use.

How do decentralized applications (DApps) and smart contracts leverage the Ethereum network?

DApps and smart contracts on Ethereum use its features for secure and decentralized operations. Yet, they face challenges due to Ethereum’s scalability limits and high costs. This slows their adoption.

What are Optimistic Rollups and how do they address Ethereum’s scalability issues?

Optimistic Rollups work off the main Ethereum chain. They submit summarized transactions. This method improves speed and reduces costs, addressing Ethereum’s scalability problems.

What are Zero-Knowledge Rollups (ZK-Rollups) and how do they contribute to the scalability of Ethereum-based applications?

ZK-Rollups use zero-knowledge proof for verifying transactions without all details. They offer high efficiency and low fees while maintaining Ethereum’s security and decentralization principles.

By Eric

I am Eric, the creator behind Block Brilliance. As a cryptocurrency enthusiast, I have dedicated myself to empowering investors at all levels with comprehensive knowledge in this dynamic field. At Block Brilliance, we believe in the fusion of in-depth research, practical trading strategies, and innovative educational resources. Our platform is designed to cater to aspiring and seasoned investors alike, providing them with the tools necessary to succeed. Join me on this exciting journey as we explore the world of cryptocurrency trading and unlock the potential for financial brilliance together. Welcome to Block Brilliance, where education meets innovation.