Given Ethereum’s dominance coupled with the current crypto bear market, it remains doubtful whether L1 will develop. This was recently highlighted in a Chainalsys blog post titled “New Layer 1 Blockchain Expands DeFi Ecosystem, But No ETH Killers Yet.” Ethan McMahon, an economist at Chainalysis, told Cointelegraph that Chainalysis published this report to raise awareness of the current L1 ecosystem:
While Ethereum allowed decentralized finance (DeFi) to flourish in 2020, a number of layer-1 blockchains (L1s) have since been developed to address the challenges associated with the network. For example, as Ethereum’s proof-of-work (PoW) consensus mechanism and high gas fees continue to affect the speed and scalability of transactions within its ecosystem, L1s such as Algorand, BNB Chain, Avalanche and others aims to solve these problems.
“The chain comparison is important because it seems that most crypto services are only offered on Ethereum, but this is not true. There are a few different blockchains with competing offerings whose advantages Ethereum does not provide.”
To demonstrate this, McMahon explained that Chainalysis aggregated data from different blockchains to determine the strengths and weaknesses of the network. For example, the post points out that with the high gas fees on Ethereum, many developers have chosen to build decentralized applications (dApps) on Algorand. Binance Smart Chain, or BNB Chain, is also recognized for its ability to support new tokens and dApps without the high gas fees of Ethereum. “It is interesting to see that people are paying exorbitant gas fees on Ethereum’s network. Our findings show that transactions of less than $1,000 result in significant amounts being spent on gas fees,” McMahon said.
However, based on Chainalysis’s overall findings, Post concludes that none of the L1-blockchains analyzed has been successful in solving all of the challenges associated with the Ethereum network. It also raises the question of whether L1s will live longer. For example, the current crypto winter could slow down investments in these ecosystems. In addition, the Ethereum 2.0 merger – which is due this year, but could be pushed to 2023 – could bring improvements to the Ethereum ecosystem that could impact alternative L1 uses.
L1 development to promote adoption
To determine how L1s will proceed, it is important to take a closer look at recent developments within the various ecosystems outlined by Chainalysis. For example, the report classifies Algorand as a top-10 L1 blockchain by market capitalization, stating:
“During Q3 2021, Algorand saw its transaction volume increase by 65%, while Bitcoin and Ethereum saw a 37% and 45% drop, respectively. This may reflect the growing hype of Algorand – in April 2019 Algorand was a relatively new blockchain since its launch, reaching an all-time high in September 2021.
The findings also show that 10% of Algorand’s trading volume comes from retail investors, compared to 5% for Bitcoin (BTC) and 8% for Ether (ETH). Given this, the report states that this could indicate the success of Algorand in enabling high volumes of small transactions.
Stacey Warden, CEO of the Algorand Foundation – the organization behind Algorand’s monetary supply economics, governance and ecosystem – told Cointelegraph that Algorand uses a pure proof-of-stake (PPoS) consensus mechanism, allowing the network to be exclusively Allows solving problems that require scale. “The most fundamental difference between Algorand and other L1s is the network’s ability to deliver financial inclusion to the two billion people in the world who do not have access to modern financial systems,” she said.
Warden elaborated that Algorand’s PPoS consensus mechanism enables this because of its low staking requirements. According to a Chainalysis post, only 1 Algorand (ALGO) token is needed to bet on the network. Warden also pointed out that Algorand is heavily focused on decentralized finance (DeFi) development, noting that the network is capable of settling around 1,200 transactions per second, with gas fees equivalent to .001 ALGO.
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“These requirements are essential to the scale of the network,” Warden said. In comparison, the Chainalysis report noted that Ethereum can only handle around 15 transactions per second. Nevertheless, it is noted that Eth2 aims to increase this to around 150,000 once the upgrade is complete.
To remain competitive, Warden shared that Algorand is in the process of rolling out a new feature that will allow the network to settle transactions in 2.5 seconds, compared to 4.5 seconds currently. In addition, as multichain networks become more important, Algorand plans to offer “Proof of State” that will allow users to transfer tokens from one chain to another.
“Algorand can become the one router for all transactions across all chains, as it can handle transactions faster, with little carbon footprint for sub-money fees,” Warden explained. While Proof of State and other developments will not start immediately, it is notable that FIFA recently announced that it will be using Algorand to develop its digital asset strategy. “FIFA is building its wallet on Algorand and creating an NFT marketplace that can accommodate secondary ticket sales,” Warden said.
The Chainalysis report also mentioned BNB Chain and praised it for its ability to support new tokens and dApps without high gas fees. In fact, DappRadar found that more L2 projects have been created on the BNB chain than any other blockchain. Gwendoline Regina, investment director at BNB Chain, told Cointelegraph that the goal behind the network is to help builders build dApps for mass crypto adoption. He said:
“This year, the BNB smart chain will have 30 times the computing power of Ethereum and will also operate on a decentralized storage solution. As a result, blockchain technology will be increasingly integrated into real-world applications.”
According to Regina, the key focus areas of BNB Chain’s 2022 roadmap include decentralization, faster transaction speeds, multichain integration, and a focus on supporting developers and sustainability. Speaking specifically, Regina shared that the BNB Chain community recently released plans for further decentralization through the BEP-131 proposal, which will introduce candidate validators to the BNB Smart Chain.
“The proposal will increase the number of BNB Smart Chain mainnet validators from 21 to 41, providing more decentralization and incentives for validators to continually innovate their hardware and infrastructure.” While this could lead to more decentralization, there has been criticism about whether DeFi is decentralized following Soland’s spontaneous governance proposal, which pertains to one of the whale wallets at risk of liquidation.
Decentralization aside, it is worth mentioning that the BNB Beacon Chain – a blockchain developed by Binance and its community that implements a decentralized exchange for digital assets – has recently become open source. “BNB Beacon Chain is now available to developers,” Regina said. He further explained that the benefits of BNB Beacon Chain are broad, given its high-speed order book based decentralized exchange to ensure quick transactions. “Using native secure cross-chain support will open the door to blockchain interoperability, meaning users can seamlessly navigate the chains they use,” she commented.
In addition to Algorand and BNB Chain, the avalanche was mentioned in Chainalysis’s findings. According to the report, Avalanche specializes in adaptability, scalability and interoperability. John Woo, president of Ava Labs – the lead developer of the Avalanche blockchain – told Cointelegraph that the network aims to solve a number of problems, particularly within the Web3 ecosystem. he said:
“Avalanche has the fastest time of finalization in the industry from around 500 milliseconds to 2 seconds. This means that all cross-chain and subnet transactions are immortalized in the blink of an eye. The financial institutions that build DeFi products and Web3 gaming studios developing AAA shooters and RPGs needs to be finalized almost immediately. It’s a precondition for success. Without it their apps can’t work.”
According to Wu, finalization is extremely important as more institutions enter the DeFi space. In fact, the quick end time of Avalanche can be much higher than the Eth2 end time, which some believe may never reach less than 15 minutes. Ethereum currently processes 15-30 transactions per second with a finality of over a minute.
Wu added that the Avalanche community will continue to build, regardless of market conditions. For example, Wu shared that the subnet – a set of validators working together to achieve consensus on the state of a set of blockchains – would open new doors for DeFi. For example, he mentioned that a subnet’s ability to incorporate Know Your Customer (KYC) requirements and remove the constraints on shared chain with third party applications appeals to institutions. “The first subnet built specifically for institutional DeFi is currently in production,” he said.
survival of the fittest?
Although the L1 blockchain is moving forward, the Chainalysis report still notes the potential for Ethereum to become a “major player” due to market conditions and expected upgrades in the network. For example, Raul Jordan, one of the lead developers working on the Eth2 merge, told Cointelegraph that soon anyone in the world will be able to run an ETH node, demonstrating the true power of decentralization.
It is important that we give people around the world, especially in developing countries, the power to run full nodes on consumer software. Full nodes preserve the security of the protocol by enforcing their own rules #ethereum https://t.co/UVucpOQnzM
— rauljordan.eth (@rauljordaneth) 21 April 2022
Alex Tapscott, author and co-founder of the Toronto-based Blockchain Research Institute, further told Cointelegraph that there are two reasons to question the longevity of L1:
“First of all, bear markets usually see a drop in interest for crypto-native applications, so if the gas fee on Ethereum drops on its own, when you can use Ethereum then use a newer or less proven chain. Why? Second, merging into Proof-of-Stake will improve the performance of Ethereum, so even if demand returns, it may still be able to handle the new growth.”
However, Tapscott said he believes any dwindling interest in L1s will be short-lived. “In the long term, there will be an increasing demand for block space, with some developers and users willing to trade between security (Ethereum) for speed and convenience. Furthermore, I think there are still many alternative L1s for all their potential.” Technologies are very early stage, and as they mature they will become more reliable, useful and widely adopted.
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Tapscott further explained that “L1s were initially successful not because they attracted investor capital, but because they increased user adoption and interest.” And, if history has taught the crypto space anything, it will be that the bear market is a perfect time to build projects. Regina said, “A bear market will be a great way to assess and support projects that really make a difference in the blockchain ecosystem, as long as innovative teams are able to use blockchain technology to solve real-world problems.” Keeps emerging.”
On the other hand, many projects also fail in bear markets. Warden commented that would indeed have repercussions for many L1 blockchains: “The crypto winter is a time when every component of the crypto ecosystem is being questioned and tire-kicked, and not just dApps, but All aspects of the crypto infrastructure, including L1s.”
However, Warden said that projects that can scale and handle transactions will continue to grow rapidly, posing a challenge for Ethereum: “Businesses or projects that are building to long-term utility and real-world adoption.” , will accelerate during this period and attract attention.”
