Original author: Emiri
Original compilation: Block unicorn
After the financial crisis of 2008, when all hope seemed lost, an anonymous cryptographer under the pseudonym Satoshi Nakamoto sparked an unprecedented revolution, a digital revolution. January 3, 2009 marked the birth of the Bitcoin blockchain, a technology that allowed a digital native currency to exist, a system built on the premise of transparency, censorship resistance, permissionless transactions, and trustlessness.
As the news spread, cypherpunks from around the world became fascinated with the prospect of cryptocurrency. Over the years, people have tried to iterate on blockchain’s base layer technology, but none have been successful enough to pose meaningful competition to Bitcoin.
However, just six and a half years later, competition came. July 30, 2015 marked the birth of the Ethereum blockchain. Ethereum adheres to the core spirit of Bitcoin but iterates on the blockchain by creating smart contracts. Smart contracts are essentially pieces of code that exist on the blockchain and automatically execute different processes when a transaction or other contract is triggered.
A whole range of different decentralized applications (DAPPs) can be created through these smart contracts. It is possible to combine lending, trading, insurance, DEFI services, NFT, games and the metaverse. Ethereum is the basic layer of these smart contracts, so the first layer of the Ethereum blockchain network is called L1 (Bock unicorn) by the industry. Note: Solana, Cosmos, Harmony, Fantom, etc., these blockchain basic layers are all called It is L1, and the explanation of L1 is the meaning of the first layer of blockchain).
Smart contracts essentially open up a whole new set of use cases for blockchain, as Bitcoin simply allows the transfer of value through this digital currency called Bitcoin.
As the entire industry opened up, it was inevitable to see the success of Ethereum, and this success finally arrived. Ethereum's market value quickly rose to second place, and it didn't take long for Ethereum to surpass Bitcoin in the total number of transactions. The high demand for using Ethereum was reflected in the high Gas (transaction fee) cost.
For all its success, Ethereum has hit a major roadblock, the demand to use the network far exceeds what the network can support.
The blockchain trilemma
The blockchain trilemma refers to the trade-off that all layer-1 chains must make when starting out, and this trade-off is between three factors:
1. Security
2. Scalability
3. Decentralization
Security refers to the blockchain’s ability to operate without interruption. This means that vulnerabilities and unforeseen errors should not interrupt the operation of the blockchain, nor can it be completely disabled due to a cyber attack.
Scalability refers to the blockchain’s ability to handle transaction load. If blockchain demand is high, how much will gas usage increase? How slow is transaction approval? If fees increase and transaction speeds decrease during periods of high demand, the chain is not scalable. But if it can withstand high demand, then it is scalable.
Decentralization means that the blockchain does not have to rely on a centralized point of control. The number of nodes/miners on the network is a good indicator, if there are more nodes/miners and they are geographically distributed, it means the blockchain is decentralized enough, if it relies on only one entity (node ), this entity may crash and destroy the entire blockchain system.
In this trilemma, all L1 blockchains must choose 2 out of 3. The hurdle Ethereum faces is that they optimize for security and decentralization. Therefore, starting in 2020, when demand surges, gas costs will be very expensive and transaction speeds will be very slow, resulting in a very bad experience.
Thus, a new opportunity was born. Obviously, there are different needs for using L1 blockchain and supporting DeFi and NFT products, but a large number of users are unable to use Ethereum because of the high cost. As a result, teams from across the industry see this as an opportunity to eat into Ethereum’s market share.
The result is a whole set of L1 blockchains emerging in the ecosystem, most optimized for scalability and security, and some optimized for scalability and decentralization. This kicked off the legendary “L1 Wars,” with each blockchain competing against each other for users, developers, and market share.
Currently, there are over 40 chains in the crypto ecosystem, each with its own set of advantages and disadvantages. The remainder of this article will discuss the Layer 1 ecosystem in more depth.
EVM blockchain vs non-EVM blockchain
For those who don’t know, EVM stands for Ethereum Virtual Machine. In short, EVM is the living environment for all Ethereum accounts and smart contracts. The sole purpose of the Ethereum protocol is to ensure that this machine, maintained by thousands of connected computers, runs uninterrupted. It is the heart and soul of the Ethereum blockchain.
Given that Ethereum is the dominant L1 blockchain ecosystem, the question for all new other L1 blockchains is whether they should be EVM compatible.
Being EVM compatible simply means that the chain creates an EVM-like code execution environment. This makes it easier for other L1 blockchains to interact and transfer assets with the Ethereum blockchain, and also allows developers to easily port their smart contracts from Ethereum to the new chain.
The opposite situation is EVM-incompatible chains. These are essentially chains that create their own virtual machines and execution layers that are better suited to the target audience they are trying to cater to.
The advantage of being EVM compatible is that Ethereum has achieved significant network effects (i.e. entrenched adoption), which means that it is easier for new chains to gain user adoption by being EVM compatible. However, EVM is quite limited in terms of the types of applications that can be easily built on it.
Therefore, non-EVM compliant chains usually have faster and cheaper transactions, which allows them to facilitate perpetual contract exchanges like GameFi or order book based ones.
Developer activity level
A prerequisite for a widely adopted L1 ecosystem is a strong developer community. Without developers to build a product, users have nothing to use. The developer activity also proves how well the blockchain, native code, and virtual machines are built and developed. The more seamless and secure the products developed by developers are, the more developer activity will be on the chain.
Starting in mid-2015, when Ethereum was officially launched, there were only 5 L1 blockchains and the number of joint developers was 73. These chains are Ethereum, ADA, Algorand, Binance Smart Chain, Polkadot. Ethereum has 52 developers out of 73, accounting for 71% of developer activity in the ecosystem. However, these are still early days. There is not much activity on Ethereum, while other L1 blockchains are still in their early stages.
To better understand the developer's growth, we'll fast forward to early 2020. This is when Ethereum has a well-established dapp ecosystem and all alternative L1 blockchains are fully established. This was also when interest in the crypto market started to heat up, with a lot of outside interest starting to enter the space from both retail investors and traditional institutions.
Even though there are so many chains, developer activity is still fairly concentrated in three chains. Ethereum, ADA, and Polkadot accounted for 74.5% of all developer activity at the beginning of 2020, of which the blockchain had 116, 105, and 102 developers respectively. However, over the next two years, there was a lot of movement among the developers.
From 2020 to 2021, the entire developer ecosystem grew by 12% as demand for on-chain transactions increased. Despite overall growth, developer activity at Polkadot, Algorand, and Binance Smart Chain (BSC) declined. Outside of Ethereum, other L1 blockchains that were trendier and newer at the time were seeing the fastest growth in developer activity. Among them, the developer activity of Avalanche and NEAR increased by 2300% and 61.9% respectively, which was the largest increase.
However, this is only the beginning of the "L1 War". The beginning of 2021 is the peak period when the market enters the bull market fever phase, which is a time when overall developer activity increases rapidly. From 2021 to 2022, developer activity increased by 49.9%. Although activity increased at every L1, a few stood out.
During the year, developer activity at Polygon (MATIC) increased by 350%. Technically, it is a sidechain (i.e. a chain adjacent to Ethereum that can be easily connected to Ethereum for security and scalability purposes) rather than an L1 blockchain, and its operation Very similar to most other L1s in that it has its own gas token and its own native ecosystem of Dapps. All of 2021 was when Ethereum was reaching the peak of its scalability issues, and Polygon was instrumental in allowing users to operate on a chain adjacent to Ethereum, but one that was much cheaper and faster. Therefore, many developers flock to Polygon to build.
Another standout is Solana. Solana’s developer activity increased by 223%. It is the leading non-EVM blockchain with its proprietary consensus mechanism, which makes it unparalleled in scalability. Low fees and fast transactions are something this space has never seen before. This attracted the attention of more non-crypto local players, allowing them to develop a strong NFT and gaming community.
Two other standouts are NEAR and Avalanche, which saw developer activity increase by 100% and 46% respectively. Both NEAR and Avalanche offer high scalability, and both have EVM compatibility, although NEAR is only available with Aurora, making it easy for many developers to port their work.
2022 is shaping up to be a disaster for the crypto industry, but developer statistics suggest otherwise. Developer activity was expected to drop sharply, but it actually increased, but only by 7%.
Developer activity at the most popular blockchain companies, Avalanche and Solana, declined in 2021, while Polygon maintained strong momentum with a 37% increase in activity. Data shows that developer activity is now moving back to older, more mature chains, likely for security reasons, as they have been stress-tested. BSC, Polkadot, Algorand, and Ethereum will all see an increase in developer activity in 2022.
However, time will tell whether this growth is due to a strong belief in the industry or whether it is due to late hiring. If the market continues to weaken, the number of these developers is likely to continue to decrease next year. If not, it would be a sign of the industry's strength.
Ecosystem growth
Directly related to developer activity is the growth of the ecosystem. Ecosystem growth refers to the number of new and unique projects launched on various chains. The general expectation is that the more developer activity and projects there are, the higher the usage will be.
Seeing that Ethereum is the leading chain both in terms of market cap and developer activity, let’s start with it. According to DeFillma, there are approximately 566 unique projects on Ethereum, but most projects have almost no total value locked (TVL), so we can reduce this number to 470 projects. Including games and NFT projects, this number will increase to more than 600 projects.
The dapp with the highest TVL of all cryptocurrencies originated on ETH and still runs on ETH. The pillars of the DeFi ecosystem, such as MakerDAO, Curve Finance, Lido, Uniswap and AAVE, are all native products of Ethereum and later became multi-chain applications. These products have withstood numerous stress tests and are still in use today.
Ethereum is the strongest L1 blockchain with the highest adoption rate. Since 2020, the network has now reached 217 million unique addresses and more than 1 million transactions per day.
Considering Ethereum’s resiliency and adoption rate, it’s safe to say that, overall, it has the highest quality projects among all L1 ecosystems.
One of Ethereum’s most notable competitors is Solana, which at its peak had an estimated 607 projects running on the chain, but at the time of writing, that number has dropped to 347 projects according to Solscan. Since FTX played a key role in the success of Solana, and the subsequent collapse of FTX also caused the Salana ecosystem to lose most of its funds or be hacked, the current projects in the Solana ecosystem will be lower than the current statistics.
However, it is mainly the DeFi ecosystem that has been affected. Fortunately for Solana, they have a stronger NFT and gaming ecosystem. According to Solscan data, 151,000 new NFTs were minted in the past week. In addition, there are some successful game projects, such as Star Atlas, StepN and Aurory, etc., who take advantage of Solana's fast and cheap features to build their games.
Currently, Solana is facing its biggest stress test yet. Fortunately, they have built a strong enough community around their NFT and gaming ecosystem to hopefully see them grow.
Let’s take a look at a third contender that was once in the top 10, the Avalanche. Avalanche had a phenomenal 2021, with transaction numbers soaring during the year as they captured the attention of crypto natives who had been squeezed out by Ethereum. Throughout its development, Avalanche has seen the development of 133 projects.
The Avalanche ecosystem mirrors the Ethereum ecosystem in almost every way, with a greater DeFi focus to begin with. The most prominent applications are Trader Joe, GMX, Pangolin exchange, and Benqi Finance. The transactions of these four applications accounted for 14% of all transactions on Avalanche last year.
An important differentiator for Avalanche is their subnet expansion solution. Simply put, it basically allows applications to operate as their own chain. This subnet architecture spawned an entire family of gaming projects that became extremely popular in a short period of time.
Currently, liquidity has exited the ecosystem along with developers, but the chain is still running as planned. Time will tell if the Avalanche can survive their stress test and come back.
Polygon has been another standout project. What started as a sidechain has blossomed into a thriving ecosystem with around 400 unique projects. It has around 200 million unique addresses and has facilitated a total of 2.2 billion transactions.
While most of the projects are existing Ethereum projects also launched on Polygon, or are copies of Ethereum projects, Polygon has started to see a lot of unique local projects pop up recently. They are very popular in gaming projects and have recently seen the emergence of many DEXs such as IDEX and Gains Network. The new wave expected to drive Polygon is decentralized social, and many Web 3 projects are looking to create decentralized social media platforms, many of which want to choose Polygon as their chain of choice.
Unique use cases
It’s no secret that the cryptocurrency market is correlated in almost every aspect. Even if it is L1, most of the alternative L1 ecosystems can be considered Ethereum knockoffs, as they all have money markets, DEXs, NFT exchanges, etc. However, the technical differences between L1 mean that the technical obstacles are different for each chain. This difference means that certain chains will better suit certain different types of projects, which in itself opens up unique use cases for some industry chains. So, let’s take a look at these unique use cases.
A unique use case for Ethereum is Layer 2 rollup. Everyone knows how the Ethereum chain is decentralized and secure, but without scalability, the user experience is very poor, making a secure and decentralized chain redundant. With layer 2 rollups and other expected future features, Ethereum can finally scale while maintaining its security and decentralization, effectively solving the trilemma.
Solanas’ unique use case is the efficiency of their blockchain in gaming projects. Games require a lot of transaction processing, and the Solanas architecture is one of the best suited to handle this high throughput. The blockchain has had many downtime issues in the past. If it continues, it will still have problems, but if the problems are solved, the game could be a huge success for Solana.
Avalanche has their scaling solution, which is subnets. As mentioned before, they essentially allow the protocol to become part of its own chain, allowing for the accumulation of value in the token and greater scalability. So far, few projects have decided to go the subnet route, but judging from those that have, there are no complaints. If they manage to get more projects on board, the Avalanche subnet could prove to be a major game-changer.
Polkadot’s unique use cases are built in interoperability. This is achieved by having many smaller chains (called side chains) that are all connected to each other through the main chain (called relay chains). Therefore, regardless of the purpose or use of side chains, they can automatically interoperate with any other side chain in the polkadot ecosystem thanks to the existence of the relay chain.
There are also unique L1 blockchains such as Arweave, whose sole purpose is storage. Arweave provides a longer and cheaper way to store data than traditional storage methods. Arweave storage method is used by website data, news industry, journalists, content bloggers, NFT, content creators, and has achieved great success in these aspects.
Although there are many L1 blockchains out there, none of them are particularly different from those mentioned above. They all achieve similar purposes and differ mainly in terms of scalability, decentralization, and security. Modular blockchains like Celestia are forming a new wave of innovation, but they are not yet live, which makes it difficult to discuss them.
The biggest wins and losses of 2022
Due to the crazy and volatile nature of these markets, it's inevitable that there will be some notable successes, but also some notable failures. Unfortunately, 2022 will be overshadowed by more failures than successes.
The first is hackers and vulnerabilities. In Ethereum alone, more than $1 billion has been hacked or various protocols have been exploited. Among them, Ronin bridge ranked first in hacker attacks, with $600 million stolen. Solana has also faced a fair number of hacks, with the Mango markets perpetual contract exchange leading the ecosystem in hacks, with $115 million being exploited from the protocol. The third chain with the most hackers and vulnerabilities is BSC, which faces approximately more than $300 million in vulnerabilities.
Another notable failure, arguably one of the biggest in the industry last year. The fall of the Terra blockchain, an L1 blockchain that supports the algorithmic stablecoin UST, requires Terra's native volatility token LUNA to maintain UST's price stability. The project's market value once reached $60 billion, but UST entered a death spiral, reducing the market value of UST and LUNA to $0. This not only destroyed Terra, but also its investors. This triggers a contagion effect that can lead to the collapse of many companies in the industry.
While the LUNA crash was the biggest L1 outage of 2022, there were still some notable issues that occurred. One of them is Salana. Last year, it faced difficulties with multiple block production halts. One downtime lasted up to 8 hours, which is unacceptable in an industry that operates around the clock. Time will tell whether these issues have been resolved.
Amid these failures, there are some signs of hope. A major success is the Layer 2/L2 network built on top of Ethereum L1. Not only did they gain adoption with almost every project ported to L2 during the year, but developer activity has been increasing throughout the year. Optimism launched their OP token, proving favorable for adoption, while the Arbitrum network maintained a steady increase in user activity without the token. As ZK-rollup begins to enter the competition between Starkware and ZK-sync, the future prospects of L2 (layer two network) are brighter.
Another positive is the retention rate of some existing blockchain users, and that is Polygon. Despite the tough market conditions, Polygon's daily trading volume remained well above 2 million throughout the year. This is a testament to their partnerships with brands like Disney and the growing ecosystem of DeFi and gaming applications. Look forward to more information from Polygon as they prepare to launch their own Zk-rollup compatible EVM.
geographical location
Before diving into this section, it is important to remember that blockchain is permissionless. This means that anyone, anywhere in the world with an internet connection can choose the blockchain they need to use. Regardless, the teams building these blockchains often like to focus on specific markets where they think their blockchain will be popular.
A good way to gauge this is to look at where the meeting is held. For example, Solana and Polygon appear to target similar geographic types. They both host conferences and hackathons in Asia, with a deeper focus on India and across the United States. The aim is not only to attract developers in the area, but these events are also meant to market to potential users.
Blockchains like Algorand also seem to be focusing on the Asian market, holding conferences in places like Singapore, Japan, India and South Korea. However, one of Algorand’s unique strategies is to work with government agencies to make Algorand the chain of choice for digital assets in specific countries, which has already been successful in Italy and the Marshall Islands.
Another way to check the geographical makeup of an L1 blockchain is by looking at Telegram and discord channels. Telegram and discord are the main ways to interact with the community in this industry. In discord there are separate channels for different languages, but even in general chat one can see which demographic group is catered for more. For example, in the NEAR protocol chat, there are a lot of people from Asia, especially Vietnam and Thailand.
When it comes to Ethereum, they seem to be globally recognized at the moment. Their core community contributors come from all over the world, they host conferences and hackathons around the world, and their users are generally distributed around the world. They were the first L1 blockchain to exist, and due to this, they gained the network effects that put them in this position. What other blockchains seem to do is target specific important markets and then grow from there.
suggestion
It’s no secret that most alt (other) L1 blockchain ecosystems are struggling as the entire industry enters a bear market. Their woes can be attributed to a number of factors, but one thing is clear, there's plenty of room for improvement. So, what are some possible changes that could improve these L1s?
As a more general solution for all L1s, the main solution is to work with the team to focus on improving the user experience, more specifically from a wallet perspective. Once self-custodial assets and on-chain interaction become easier, there will automatically be a bigger uptick in user activity.
Another suggestion is to narrow your focus. Instead of trying to be a blockchain that facilitates everything, understand your unique strengths and the most effective projects on the blockchain and create an environment where these projects can do their best. Will help blockchain grow into a powerful basic use case.
Another concern, especially for the newer and trendier alt (other) L1 blockchains, is the focus on decentralization. Relying on venture capital funds and a handful of validators to achieve L1 ecosystem success has proven problematic. To achieve long-term success, you must eliminate as many potential centralized points of failure as possible.
Otherwise, the cryptocurrency market is generally less focused now. In order to effectively cut into Ethereum’s market share, Alt (other) L1 needs to become the chain where innovative projects occur. DeFi, NFT, and games all started on Ethereum and were copied elsewhere. Booming Blockchain puts a unique and innovative project in a good position to capture existing cryptocurrency native users, as well as some completely untapped markets. So far, the only L1 that does this is Arweave’s decentralized storage.
If any Alt (other) L1 can do this, they will put themselves in a good position to compete with Ethereum for years to come.
final thoughts
Throughout 2021, many L1 blockchains were born, and the use and adoption of some of them peaked during the year. 2022 is the exact opposite, with a number of other L1 blockchains facing unprecedented stress tests as over $2 trillion in market capitalization has been wiped from the cryptocurrency ecosystem. The result is an exodus of users, capital, and liquidity that is returning to the safety of Ethereum.
Ethereum and Layer 2 Roll up make people doubt whether the alt (other)-L1 blockchain can compete with Ethereum. If second-layer rollup blockchains prove to be the answer to scalability, then Ethereum will successfully solve the trilemma. This raises the question, will we see an “L2 war” in the future, or will Alt-L1 blockchains find innovative ways to continue to challenge Ethereum’s dominance?
Time will give us the answer.