Dec 20, 2022
Growing the Blockchain Cities: An L1 comparative deep-dive
A comprehensive analysis of the top layer 1 blockchains, featuring data-driven insights and forward-looking recommendations.
Blockchains are often compared to “cities” in the multi-chain world. 🏙. Similar to how there are multiple cities, each serving a specific niche yet generally sharing the same infrastructural traits, such as having hospitals and schools. More than 2 centuries ago, city mayors and governments, who laid up foundations for these great modern cities, promised better lives, in order to attract inhabitants. Over the years, each of these cities together became larger and acquired distinctive characteristics. Washington, D.C., San Francisco, and New York all rose to prominence as major financial, technological, and political centres. But why didn’t everyone simply relocate to one city? Of course, one of the primary reason being: they are physically constrained, but there are always trade-offs and a perfect city doesn’t exist.
Similarly, a perfect blockchain doesn’t exist, and there’s always a trade-off between decentralization, scalability, and security. The analogy of cities completely applies if we think that the globe is made up of multiple chains. Just like all people didn’t move to a single city due to physical constraints, a multi-chain world is inevitable as blockchains are also physically constrained. There can be few paths to overcome the physical constraints:
- Go up vertically: Cities, which are physically constrained like New York or Mumbai generally build taller buildings to fit more people, similarly, Ethereum is an expensive physically-constrained city, and to accommodate more people, L2s and rollups are being built.
- Network of small towns: Another approach can be to, build specialized smaller towns like mining towns, and farming towns around bigger cities. These are similar to blockchains like Cosmos or Polkadots, which offer SDKs to build their own app chains interconnecting the mainchain
- Build another city: It’s simple to build another city like San Francisco to attract a niche audience like tech folks from another big city, which later attracts even more citizens, once it attracts growing. Solana was built to offer faster and cheaper transactions and attract the DeFi crowd, but eventually also built a vibrant audience around NFTs and Gaming.
But does building a better city, attracts ‘everyone’ from other cities? Nah. However, better cities have always grown much faster and that’s the focus of the essay, Today! How are our blockchain cities growing, what are their growth recipes till now and how they can grow to become the next New York or Singapore or whatever, is your favourite city :P
In this report, we have taken a deep dive into some of the most prominent Layer 1 protocols, examining their unique features, the developer ecosystems, adoption and growth, and overall performance. Although, we aren’t any experts, but through this analysis, we have gained some understanding of the strengths and weaknesses of these protocols, and hence, we also offer recommendations for how they can rapidly grow.
We divided the topics into the following sub-themes for better readability because of the report’s intricacy and exhaustiveness.
- Layer 1 ecosystem: Where are we now?
- The growth comparison Framework: DAUs, state of developers, ease of contribution, TVL, revenue etc.
- Geographical landscape
- Use-case specific chains & the Appchain Thesis
- Future Outlook and Recommendations
Let’s dive in! 🚀
For this report, we gathered statistics and classified the projects into ecosystems using information from CoinGecko, CoinMarketCap, DappRadar, Glassnode, Gokustats, Token terminal, DefiLlama, DefiPulse, Github, and the foundations of various ecosystems.
The Vibrant L1s
Decentralization is the key foundation for blockchains, and it allows for transactions without the need for a central authority. This is what the Bitcoin whitepaper, published in 2008 by Satoshi Nakamoto, is built upon. It serves as the starting point for all web3 products, whether they are blockchains or applications. However, as the number of users on the network increased and money started flowing, scalability and security became two other crucial characteristics.
While Bitcoin is known as the most decentralized network, its slow transaction speed prevents applications from being built on top of it, a problem that other layer-1 chains try to solve. These L1 networks often claim to be the most secure, scalable, and decentralized networks ever, but they struggle to prioritize all three equally. This has led to the mission to optimize and decode the “blockchain trilemma” and the search for a maverick solution to address the challenges.
While some might call it crazy, we call them mavericks. Allows us to get past the FUDs i.e- Fear, Uncertainty and Doubt and present you some bold data-backed stories of the L1 ecosystem, the building blocks of the Web3 state.
Layer 1 blockchains are created and optimized for various purposes. For example, Bitcoin is designed to be a simple, trustless currency with enforced scarcity to preserve its value. However, its basic structure limits what can be built on top of it. Ethereum, on the other hand, introduced smart contracts and hosted the first wave of dApps and tokens that paved the way for DeFi and web3. But, Ethereum became a popular platform for Layer 2 project development, because of its previous Proof of Work (PoW) mining system and high gas fees.
To solve these problems, other more recent Layer 1 blockchains have been developed. Solana and Algorand, for instance, use different consensus mechanisms, such as Proof of History (PoH) and Proof of Stake (PoS), to offer lower fees and faster transaction times. Other Layer 1 blockchains, such as Cosmos, are built for interoperability with other chains. In the following sections, we go deeper into the metrics, unique goals and characteristics around various Layer 1 blockchains.
Here is a yearly chart of the top 10 blockchains by daily market cap starting from Dec 2021 till today (December 20, 2022). This includes L1s and scaling solutions like Polygon as well.
Top 10 Layer 1 blockchains by market cap
For this report, we are going to primarily consider the top 10 Layer 1 blockchains (apart from Bitcoin) according to their market cap. The market capitalization of these networks reveals the total value of the tokens being traded on the market. The comparative study of those L1s on a set of indicators is presented in this report in order to help you better understand the ecosystem.
The Growth Comparison Framework
We will now look into each metric one by one, to compare their growth. Do note that, we won’t be comparing any technical parameters like the number of validators, as it’s beyond the scope of this growth framework.
1. Daily Active Users (DAUs)
Lets us first address the elephant in the room i.e — How many people use these Layer 1 blockchains. We can compare those Layer 1 blockchains by conducting an on-chain analysis and observing their trends.
Throughout the year and into the last quarter of 2022, Tron has consistently had a high number of daily active addresses. This surge in activity can be attributed to FTX announcing a $13 million agreement with Tron, allowing holders of TRX, BTT, JST, SUN, and HT to swap assets 1:1 from FTX to external wallets. This caused a panic among FTX users and led to Tron tokens selling at a 1200% premium as users withdrew their funds from the platform. The Tron blockchain, which was launched in June 2018 and focuses on file sharing and entertainment content, has seen significant growth in daily active addresses as a result of this announcement.
In the first quarter, Solana also saw an increase in active users which we can attribute to the craze around the Move-to-Earn app StepN.
That time their GMT token price skyrocketed 34,000% in over a month. StepN is a move-to-earn app which lets users earn crypto for walking, jogging or running. But after that cycle, with the FTX collapse, the no. of users seems to have also gone down, while some speculate Solana to be the dead chain. In contrast, since September, the BNB chain has maintained consistency and grown. In order to draw users from all over the world, BNB Chain makes use of Binance’s huge client base as the biggest cryptocurrency exchange in the world. Binance’s extensive language support is just one of the resources that BNB Chain can draw upon to expand its user base. Other chains, such as Ethereum, Cardano, and Avalanche, have remained stable in terms of daily active addresses(DAUs).
From the above chart, we can also see that some layer 1s coincided in their swings and that was not correlated with the other chains for the most part.
Let’s take the example of Ethereum. If we see the price action and the number of active addresses we can see a trend that shows an overflow in active addresses once the price goes up and a dip once the price goes down.
2. Transaction Volume
In December 2021, the total transaction volume per day for ETH was approximately $10 billion, and the price of 1 ETH was around $4000. However, the transaction volume remained relatively stable during the 3-year crypto winter until January 2021. Fast forward to December 2022, the price of ETH has decreased to 1/3 of its previous value at $1200, and the transaction volume per day has also dropped to $3 billion. This shows that user activity or transactions often follow the price movements
3. State of Developers:
The level of developer engagement is a strong indicator of the potential value that can be created on L1s. The war over developers to build applications within particular regimes is not new. Classic examples can be Apple vs Windows and iOS vs Android. Those platforms are worth an amount only if it is gardened by third-party gardeners, i.e., the developers. The developers make applications, and if there are enough applications, users get attracted to use them and are also willing to pay a hefty amount like $1000 for an iPhone. Once there are enough users, developers value platforms not just as technology enablers, but also as distribution channels. While some ecosystems inevitably collapse, as we have seen with operating system battles, others have beneficial network effects and viral loops.
Let’s do some developer data crunching👇
Assumption Notes: This analysis relied on the open data available for the open-source repositories, which might result in undercounting developers. Many teams working on closed-source projects or might go open-source in near future are not accounted for. Additionally, it might not fully reflect the contributions of developers working on testing, backporting, or releasing engineering projects since their work might not produce unique code contributions. Therefore, the number of people working in Web3 overall is likely significantly higher than what is reflected in our report.
Further, Every commit is not equal in terms of its impact and significance, some commits may be routine changes, while others may represent a significant amount of research and analysis.
Apart from these minor limitations, we believe that this analysis will give a good estimate of developer activity.
Core devs contributing to the network:
100–200 developers on each L1, what? Wait, there is more nuance to it. This data does not represent the total ecosystem which might be in thousands in some cases. This figure only includes those who have made contributions to the core network’s open-source repository. We have divided the developers who contribute to the core into three levels: full-time (at least 5 commits), part-time (2–4 commits), and single-commit developers.
For example, the following chart shows the contribution to the Solana network repository on Github. From the selected portion you can clearly see that the number does stay in the sub-100 contributors range.
How many commits are in an L1 repository: The number of commits made by core developers has likewise been on a downward trend since the bear market began, but the reduction is not uniform. Particularly, ecosystems like Cosmos, Polkadot, and Near are holding up well, this winter, while bigger ecosystems like Ethereum and Solana are seeing a relatively greater decline, as there might be lesser core developments happening in them.
In all cases, we can fairly conclude that more new developers joined the chain when the market value increased but fewer new developers joined when the prices decreased which makes sense. Although we may attribute the fluctuations in the numbers to the price of the tokens, there is a tendency for some people to stay in the ecosystem despite that. They can be attributed to the ‘power developers’ of the space who are working hard to maintain the network and are core believers in that. The developers contributing to the core remain stable while the explorers come and go away with the ongoing FUDs (Fear Uncertainty Doubt).
4. How easy it is for people to contribute to the network?
The health of any L1 ecosystem can be judged by the developer activity which is leveraged by code. The health and success of any L1 ecosystem can be accurately assessed by the level of developer activity and the impact of the code they produce. To drive growth on an L1 platform, it is crucial to minimize friction and make it as easy as possible for talented developers to contribute valuable changes to the ecosystem. Ultimately, the most important factor in the success of an L1 ecosystem is the engagement of users, who leverage their time and capital to support the platform, as well as investors, who leverage their capital to fund its development. By prioritizing the needs of these key stakeholders, L1 platforms can ensure their continued growth and success.
5. TVL across all the chains:
While some people consider TVL as a proxy for ecosystem expansion and believe it to be a strong sign of rising interest and activity in DeFi protocols in that L1, it cannot be entirely relied upon. The reason is, it is computed based on the USD-denominated value of the tokens locked in smart contracts. In most cases, an increase in TVL is fueled by token appreciation but that doesn’t necessarily mean more tokens are being deposited.
As we can see, Ethereum still occupies a Lion’s share of TVL, being the most established chain and with L2s/rollups combined, they are undoubtedly bigger than anyone else. Intriguingly, despite the lack of developer engagement, Tron is currently the second-largest ecosystem in terms of TVL. The primary reason is a good stablecoin ecosystem and DAO ecosystem, which locks some high value despite not having many innovative use cases. Due to FTX’s collapse and thetoken depreciation, Solana’s TVL has been particularly drastically impacted.
6. Fees and Revenue: The money part 💸
Fees and revenue are important aspects of the functioning and sustainability of layer 1 blockchains. Fees are typically charged to users who want to perform transactions on the blockchain, and they are usually paid in the native cryptocurrency of the blockchain. The revenue generated from these fees can be used to fund the ongoing development and maintenance of the blockchain, as well as to reward the users who contribute their computing resources to validate and secure the network.
Fees for specific kinds of transactions, such as those that have a significant social impact or are thought to be strategically important to the ecosystem, may occasionally be waived or decreased. It is important for the fees and revenue model of a layer 1 blockchain to strike a balance between providing sufficient incentives for network participation and making the blockchain accessible and usable for a wide range of users and applications.
Daily Fees
After validators take their cut, a sizable portion of the network’s income comes from the overall gas fees paid by users. If we look at the data; Ethereum wins invariably with daily $2.7m fees paid by the users currently. The peak of that is approximately $9m in fees paid around November which can be attributed to the panic liquidity drain that happened due to the FTX collapse.
Overall Ethereum has been leading the chart with the most amount of gas fees generated throughout the year and also before that. Because of their user bases, chains like BNB chain, Solana, Avalanche, and others only generate a small portion of that.
Daily Revenue
If we exclude Ethereum from the narrative just for a moment, the next L1 which stood out generating large sums of revenue was Avalanche, the L1 trying to while trying to become the so-called ‘Platform of Platforms’. But then something happened. Take a look at the chart and you will notice how it went from generating hundreds of thousands to even millions of dollars to a fraction of that in no time.
AVAX maintained a good position among the top 10 crypto tokens based on market cap before to the cryptocurrency market meltdown in May 2022. However, after experiencing a decline of over 91% in 2022, AVAX fell to the 19th spot on the list of most valuable cryptocurrencies as of December 17, 2022. The majority of these losses occurred in April and May, with AVAX posting monthly losses of over 40% in April and over 50% in May due to tightening monetary conditions and the collapse of the Terra ecosystem. AVAX’s decline continued in June as it posted its third consecutive monthly loss.
The total value locked (TVL) in the Avalanche ecosystem has also significantly decreased. As of December 17, 2022, TVL on Avalanche was down to roughly $800m from its peak of more than $12bn in December 2021.
How much do these L1s make?
ZERO! Yes. It is in the minuses. Ethereum, like many other Layer 1 blockchain projects, has struggled with profitability and has often operated at a loss. There have been some instances where Ethereum has experienced short-term profits, but for the majority of the time, it has been in the red.
Geographical landscape:
While all L1s have been growing in different niches and are also inherently global in nature, it’s also important that these blockchains also grow in all parts of the world equally to achieve maximum decentralization. Geographical diversification can be either through:
- Projects: The builders and operators running the projects are from all parts of the world. Remote teams, Web3-friendly regulations, business environments, and the distribution of the number and quality of projects in each geography can be good indicators.
- Users: This is similar to Web2 apps like Facebook, which is also inherently global, but financial applications in Web2 are constrained by regulations and different money rails in each country, whereas Web3 provides a global wallet, enabling global financial access. However, unlike Web2 applications, tracking user distributions across geographies is not native in Web3, since most of the dApps don’t have an onboarding process, where they ask you for identity information and your country.
There can be other geographical diversification parameters as well. For instance, the validator’s geographical distribution is also a measure of decentralization, which blockchains like Solana actively track. If you observe, Ethereum is fairly distributed, hosting Ethereum hackathons and projects all around the globe. While Solana was initially focused on the US, it has grown rapidly in ascending markets, via its mass applications like StepN, Chinagri, hacker houses initiatives, and Superteam. To grow their geographical presence, L1s primarily open up a country-specific chapter like Near India, which is responsible for promoting Near amongst developers via events, fellowships, hackathons, and incubating projects in India.
Roughly, the strategy here is: to focus on one geography in your initial days, while you are inherently global and keep applying the playbooks from initial markets to global markets.
Use-case specific chains & the Appchain Thesis:
With rising demand for block space, the appchain space is getting smokingly hot, particularly with one of the largest decentralized exchanges, moving from Ethereum to building their very own L1, using Cosmos SDKs. Reason? They want to make it customizable for their own use-case i.e Trading. Not just that, other popular projects like Axie launched their sidechain, Ronin in early 2021 and DeFi kingdoms announced its move from the L1 i.e Harmony to an Avalanche subnet in late 2021.
But, why would someone take the hassle of launching their own chain? Here’s why:
- Performance: In L1s like Ethereum, dApps compete with each other for block space, which affects transaction costs and latency.
- Customisability: Larger applications will want to make certain design choice trade-offs, such as throughput, finality, security level, permissions, ecosystem alignment, and so on. For instance, traditional FinTechs would want it to be permissioned i.e only onboard KYC’d users into their chain.
- Value capture: Users on dApps running on L1s pay gas fees in a native L1 token which is being leaked to underlying L1s, application can internalize these fees and capture value efficiently using app chains.
That being said, they come up with their cons as well like fragmented liquidity, isolated ecosystems, bootstrapping security, and additional development efforts.
There is another L1 thesis getting developed, which is in between Appchain and Monolithic L1s, which are sector-specific chains. Sei is one example, where they are developing L1 using cosmos SDKs, catering particularly to DeFi-applications by building an order book on-chain. The chain is permissionless for users, but for projects they are permissioned — only DeFi projects can build on Sei. They have already 100+ projects building on their ecosystem, as they are leveraging Cosmos’s interoperability.
Apart from fulfilling design requirements, the question of whether dApps should spin off their own L1 lies in the theme of the essay — growth! The only dApps that should consider spinning off their own L1 are those that have reached a certain degree of the scale (such as in terms of users, revenue, or TVL) or have crossed the gap and established product-market fit. Web2 giants, Institutions or even central banks issuing CBDCs, who already have a huge distribution and customized requirements are well suited for having their own L1 app chain from day 1.
Future Outlook and Recommendations:
Bear markets prioritize fundamentals while bull markets prioritize narratives. While it’s true for any industry, but most distinctly visible in markets that run on stories of future growth potential like tech. Crypto is simply, Tech on steroids, which tends to overshoot on both up and downsides when such narratives get too extreme. Here are the general topics we are thrilled about as we make our way through the prolonged crypto winter if we had to summarize what the future of the L1 warfare holds!❄️
1. The Turnaround Kings: Until now, crypto hasn’t seen a better turnaround story than Ethereum, which fell to just $80, down 94% from its peak in 2018 and the rest was history as Ethereum is now the face of Web3. We are certain, we will see some great turnaround stories, in this bear market too and we are betting on Solana and Flow!
a. Solana was the 2021 investor darling but has now dropped ~94% from its peak, primarily due to its FTX connection and poor market sentiments. But we all know, how rapidly its ecosystem has grown over the last 2 years.
b. Flow is another NFT-specific blockchain, famous for its fantasied games like NBA Topshot has also fallen ~90% from its peak, however, it’s still growing rapidly.
There are many others, which are badly down, it would be interesting to see, who can make yet another Ethereum-like turnaround story!
Our Recommendations: Blockchains like Solana and Flow, have already seen a lot of glamour and proved that they can handle scale and innovations. They just need to keep their heads down and continue building, and acquiring developers and applications, figure out strategic partnerships and once they attract capital again, they will be the turnaround story.
2. The Ethereum scaling warriors: Ethereum is no doubt, a giant ecosystem and we believe it will continue to be. Riding on Ethereum, L2s like Arbitrum & Optimism have been growing a lot, while zk scaling solutions will also be launching soon. The scaling space will be particularly exciting to watch for the next 1 year.
Our Recommendations: To draw talent and funding based on EVM, L2s and rollups are currently in a fierce rivalry with one another. There’s no doubt the Ethereum ecosystem as a whole will continue to attract projects and capital, however, how they grow their own ecosystems by leveraging Ethereum’s interoperability will be key.
3. The grass-root survivors: Cosmos is one of the oldest blockchains and one of the resilient ecosystems, which hasn’t any crazy growth cycles but has successfully survived the Terra crash, which used to be the largest chain in their ecosystem, and now, their app chain thesis is now growing rapidly. While the cosmos may not be the L1 growth leader, we are definitely bullish on its survival instinct and steady growth.
Our Recommendations: While generic use-cases like stablecoins, and NFTs will still be dominated by Ethereum and alt L1s, ecosystems like Cosmos and Avalanche subnets have a unique opportunity to double down on niche use-cases like on-chain order books, gaming and vertically grow from there.
Who will win the L1 war: Closing Thoughts
Well, we don’t think anyone will win the “L1 war” and the future is certainly multi-chain. At least for the next 5–10 years, Ethereum will continue to be the most valuable chain but doesn’t make others worthless. L2s, rollups, and scaling solutions will also be crucial to defending Ethereum as the most valuable chain. Alt L1s like Solana will also be growing rapidly, and for applications, we have barely even scratched the surface. A single cycle of the market brought us unique utilities like AMMs, Shiny JPEGs as PFPs, trustless lending protocols, stablecoins, and much more. As we see unlocking more use cases, we will see more L1s continue to differentiate. We are particularly bullish on application-specific chains, as more use cases develop.
Overall, we are excited by how these L1s will build cities of the emerging web3 state!
That’s all folks!
Found it insightful? Share it with your friends! If you have any suggestions or want us to deep dive into your project, we would love to connect — Sitesh Sahoo and Yash Agarwal
Until then…
References:
- Blockchains are cities by Haseeb Quereshi
- Frameworks for analyzing L1s by Jump Crypto
- The state of Web3 report by Chainalysis
- Alchemy Dev report Q3 2022
- Layer-1 Chain Rotation Thesis by ChainLinkGod
- You can check the data sources which are mentioned in the charts and captions themselves.
