Given the dominance of Ethereum paired with the current bearish cryptocurrency market, it remains doubtful whether L1s will thrive. This was recently highlighted in a Chainalsys blog post titled “New Layer 1 Blockchains Extend DeFi Ecosystem, But ETH Hasn’t Been Killed Yet.” Ethan McMahon, an economist at Chainalysis, told Cointelegraph that Chainalysis published this report to raise awareness of the current L1 ecosystem:
While Ethereum has allowed Decentralized Finance (DeFi) to thrive in 2020, a number of Layer 1 blockchains (L1s) have been developed to address network-related challenges. For example, as Ethereum’s Proof of Work (PoW) consensus mechanism and high gas fees continue to affect transaction speed and scalability within its ecosystem, L1s such as Algorand, BNB Chain, Avalanche, and others aim to solve these issues.
“The chain comparison is important because it seems as if most crypto services are offered only on Ethereum, but this is not true. There are a few different blockchains with competitive offerings that have advantages that Ethereum does not.”
In order to prove this, McMahon explained that sequence analysis collects data from different block chains to determine the strengths and weaknesses of networks. For example, the post notes that with the rise in gas fees on Ethereum, many developers have chosen to build decentralized applications (DApps) on Algorand. Binance Smart Chain or BNB Chain is also known for its ability to support new tokens and DApps without the high gas fees of Ethereum. “It is interesting to see people paying huge gas fees on the Ethereum network. Our findings show that transactions under $1,000 result in a significant amount of money being spent on gas fees,” McMahon said.
Based on Chainalysis’s overall results, however, the publication concluded that none of the analyzed L1-blockchains succeeded in solving all of the challenges associated with the Ethereum network. This also raises the question of whether the L1s will survive in the long term. For example, the current crypto winter may slow down investments in these ecosystems. In addition, the integration of Ethereum 2.0 – which is scheduled to take place this year but may be pushed into 2023 – could lead to improvements in the Ethereum ecosystem that could affect the uses of alternative L1.
L1 developments to drive adoption
In order to determine how L1s are progressing, it is important to take a close look at the recent developments within the different ecosystems mentioned by Chainalysis. For example, the report ranks Algorand as the top 10 L1 blockchain by market capitalization, stating:
During the third quarter of 2021, Algorand saw its transaction volume grow by 65%, while Bitcoin and Ethereum saw trading volumes drop by 37% and 45%, respectively. This may have reflected the growing hype for Algorand — after its April 2019 launch, Algorand was a relatively new blockchain, reaching its highest price ever in September 2021.”
The results 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 notes that this may signify Algorand’s success in enabling a large volume of micro-transactions.
Staci Warden, CEO of the Algorand Foundation — the organization behind the economics of money supply, governance, and the Algorand ecosystem — told Cointelegraph that Algorand uses a Proof of Stake (PPoS) consensus mechanism, allowing the network to specifically solve problems that require scale. “The primary difference between Algorand and other L1s is the network’s ability to provide financial inclusion to the two billion people in the world who do not have access to modern financial systems,” she said.