Blockchain Layer One Proliferation

There are numerous Layer 1 networks which have proliferated over the past 24 months, in part to Ethereum’s limited ability to scale.

Side stepping ETH2.0’s story, there still are new(er) networks and private capital being deployed to this space. Some are simple forks of ETH, but many of these being built are different, even if in terms of decentralization, security, speed, and developer resources.

They also use different consensus mechanisms, for example: Proof of Work, Proof of Stake, Proof of Authority, and Proof of History. Additionally, each network has their own unique block times, TPS (ETH is ~15 while Solana is 50K), differing market caps, amount of developer mindshare, etc.

I have looked at two alternative layer 1’s, beyond Ethereum, who still by far has more developers, daaps, and mindshare associated with it, Solana and Avalanche. Solana is one I am particularly excited about, even if it’s CEO recently said that it doesn’t matter if the network goes down. Avalanche is the other.

Both are differ from Bitcoin and Ethereum’s original Proof of Work (PoW) consensus mechanism, in that they are Proof of Stake (PoS) / History in varying degrees.

You can think of PoW as computationally focused and PoS as capital focused. It is important to understand that anyone (or entity) in the world can mine and put computational resources at validating the blocks being produced.

  • PoW favors people or entities that have the best machines who compute the fastest.
  • PoS is when you stake an asset – the native token of the network. This favors people or entities with the capital to have that asset (or capital + network to get in early). For example, in order to stake with ETH 2.0, you need 32 ETH (unless done through Coinbase or other aggregator protocols). In today’s dollars, that’s about $140,000 worth of ETH ($4.4k+) you need to lock up. Not everyone can do that.
  • PoH is most analogous to providing nodes and validators with a synchronous clock for ordering transactions.

Solana (SOL) is a network that launched in March of 2020. This year it gained massive attention. Even CNBC is writing articles about it. A major reason it gained popularity recently beyond the price increasing over 10,000% is because the PoH algorithm allows it to operate a 400 millisecond block time. As a benchmark, the speed of light travels at 186 milliseconds. The ease to build upon it is also easier than other competitors, for example, Cardano and it’s notoriously difficulty tooling suite. This speed allows transactions and dapps being built on it to execute quicker than Ethereum, and cheaper.

Currently there is $14.41BN in TVL of DeFi, has a large number of core GitHub contributors, and over 78% of the native token’s total supply’s staked.

Solana uses PoS for the consensus and security and more than 66% of the network must agree to finalize a block. Solana also uses another variant, PoH. PoH enables validators to verify the time that passed between events (i.e., a synchronous clock for ordering transactions).

Validator’s nodes for Solana need more than 2.5 GHz (processing), 128gb of memory, and 500gb of storage. Compare this to ETH 2.0 with more than 2.8GHz, 16gb of memory, and more than 100gb of storage. This means that validators need equipment with 12 core CPU. That’s a lot. It is also notoriously expensive, and quite hard to do this from your home’s equipment. Because of these requirements, becoming a validator is expensive and consuming. And these costs could eventually make it so that there is less decentralization, a key to any successful layer one network.

In order to become a go-to network, Solana has a long way to go. As in any smart contract platform, you want (1) security, (2) scalability, and (3) decentralization.

Avalanche (AVAX) is a network that was ironically also launched in March of 2020. The network has not received as much press as SOL, but holds many promises because of way it’s architected. The way it is built is that it has three chains interlinked executing separate properties:

  • C-Chain: which executes EVM smart contracts
  • P-Chain: which handles the creation and exchange of assets
  • X-Chain: which coordinates validators

If you recall, Solana has to have more than 2.5 GHz (processing), 128gb of memory, and 500gb of storage. ETH 2.0 will need to have more than 2.8GHz, 16gb of memory, and more than 100gb of storage. But Avalanche is 2.0 GHz (processing), 6gb (memory) and 200gb of storage. You must have at least 2,000 AVAX to stake in order to become a validator. In today’s price, that’s around $214K. Again, not cheap. But transaction volumes continue to stay strong regardless.

Transaction volumes also continue to stay strong on Avalanche.

The network also differentiates itself by deploying Avalanche Consensus, their own system instead of PoS. This makes it so they don’t burn any negligent or malicious validators. What happens here is that validators (in a leaderless fashion) randomly sample the staked chain until a majority forms consensus on the current stake.

Ava Labs is the entity that still builds a majority of the network for both funding and node creation. Ava was successful in the beginning of their journey to pull some mindshare in the market and help start the process. But the architecture, low fees, high TPS (4,500), and support for an EVM daap makes this a great alternative and future incumbent. Lastly, the TVL of DeFi is over $12BN.

As ETH 2.0 continues to roll out over the next two years, alternative layer one networks will only increase in my opinion. There is a rising-tide across this whole market. 2022 will showcase where the developers are putting their mindshare, what DeFi 2.0 behaves like, and which networks are being preferred.

If you have any interest in monitoring L1’s, I’d recommend some easy sites to track: Dune Analytics, DeFi Lama, GitHub, CoinMetrics, and Chainanalysis. You can review some items around (i) total transaction volume, (ii) number of deployed smart contracts, (iii) contributors, (iv) and total value locked to gauge how each is performing.

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