DeFi

Layer-1 Landscape

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By: Matías Andrade & Tanay Ved

  • The improvements happening throughout Layer-1 platforms is heating up, bringing adjustments that require us to make use of knowledge to check and distinction the completely different options and trade-offs supplied by these completely different L1s.

  • Bitcoin is evolving from a specialised chain primarily serving as a settlement layer to a extra general-purpose platform leveraging its safety for layer-2 functionalities, transitioning towards a extra general-purpose platform.

  • Ethereum is transferring in the direction of a modular blockchain structure with the latest Dencun improve, using specialised layers for its capabilities, highlighting the variations between monolithic and modular networks.

Innovation as soon as extra seems to be heating up within the digital asset area as previous paradigms are put aside and new horizons grow to be realized. Bitcoin is evolving from a specialised chain whose main function is to function a settlement layer for transactions to a extra general-purpose platform that leverages its extraordinary safety to serve layer-2 functionalities. Equally, with the latest Dencun improve, Ethereum is transferring in the direction of a modular blockchain structure, with specialised layers to deal with its capabilities. We’re additionally witnessing the beginning of recent layer-1 blockchain like Aptos, leveraging completely different digital machines, and others like Monad, bringing parallel execution capabilities to the EVM.

On this subject of Coin Metrics’ State of the Community, we discover the various panorama of layer-1 blockchain networks and perceive their implications for the broader crypto ecosystem.

Within the crypto ecosystem, a Layer-1 (or L1) is the bottom layer or the foundational blockchain community upon which different layers and functions are constructed. L1 blockchain networks are standalone, decentralized ledgers that function independently and set up their very own guidelines for consensus, transaction validation, and knowledge storage. These networks function the infrastructure and supply the important functionalities required for the event and deployment of decentralized functions (dApps) and different blockchain-based options. Quite a few layer-1’s have emerged over the previous cycles, with every gaining various ranges of traction and maturity.

Source: Coin Metrics Network Data Pro

Whereas all L1 networks share the elemental traits of being decentralized and securing their respective ecosystems, they are often broadly categorized into two varieties: specialised networks and general-purpose platforms.

Specialised Networks: These L1s are designed primarily to facilitate safe peer-to-peer transactions and function strong settlement layers. Examples embrace Bitcoin, Litecoin, and Dogecoin. Whereas they could indirectly assist advanced good contracts or decentralized functions, their main function is to leverage sturdy safety ensures and decentralization to offer a dependable and trustless switch of worth, even when further performance is added by protocols reminiscent of Omni or within the type of L2s or roll-ups constructed on prime. 

Basic-Goal Platforms: These L1s are designed to function programmable platforms that may assist a variety of decentralized functions and good contracts. Examples embrace Ethereum, Tron, Solana, Avalanche, and others. These networks usually prioritize options reminiscent of programmability, scalability, and interoperability to allow the event and deployment of varied decentralized options, together with decentralized exchanges, lending and borrowing protocols as a part of DeFi, and so forth.

Layer-1’s could be additional categorized by their architectural variations or approaches to core blockchain capabilities, together with execution, consensus, and  settlement.

Source: Celestia Documentation

Monolithic: This contains L1’s reminiscent of Bitcoin and Solana, which deal with the execution and settlement of transactions in addition to the upkeep of consensus inside a single layer.

Modular: This contains L1’s like Avalanche, Cosmos and just lately Ethereum, with its rollup-centric roadmap. Modular blockchains separate these capabilities into distinct, specialised layers.

Whereas these classes present a high-level generalization, understanding the nuances and trade-offs between these classes of L1 networks is crucial for comprehending the broader dynamics and potential of the decentralized ecosystem because it evolves. To get a deeper understanding of Layer-1s, we’ll take a data-driven take a look at how these networks span completely different approaches and supply revolutionary options to the underlying issues posed by decentralized networks. 

The efficiency capabilities of L1 blockchains could be influenced by a number of technical components reminiscent of their consensus mechanism, block dimension (quantity of knowledge that may slot in a block) and block time (time it takes so as to add a brand new block to the blockchain), to call a number of. These components can straight affect the transaction pace and community throughput of the L1 and due to this fact the person expertise of the blockchain. Because of the distinctive design decisions and architectural trade-offs of L1’s, these metrics don’t function a direct comparability, however as a method to know their technical variations. 

Source: Coin Metrics Network Data Pro

Shorter average block times, as exhibited by Solana (roughly 0.4 seconds) and the Avalanche C-Chain (2 seconds), end in a sooner execution of incoming transactions. That is notably helpful for high-frequency transactions reminiscent of monetary buying and selling on functions like decentralized exchanges (DEX’s), micro-transactions or gaming associated interactions the place pace is crucial. Moreover, AVAX-C and Ethereum additionally function fixed block instances, which make for a really tight distribution across the common (with some outliers coming from missed blocks). Then again, Bitcoin and Litecoin have bigger common block instances (round 10 minutes for Bitcoin and a couple of.5 minutes for Litecoin), which prioritize community safety over transaction pace.

Source: Coin Metrics Formula Builder

This identical relationship will also be understood as a tradeoff between the convenience of participation within the consensus course of and the efficiency of the underlying community. That is evident after we think about the scale of the blockchain as a operate of the scale and charge of creation of recent blocks. Blockchains which have longer block instances and “smaller” blocks, like Bitcoin, are simpler to synchronize with as an impartial node operator. In comparison with Ethereum, the necessities are higher because the community efficiency necessities for together with blocks on a sooner foundation add as much as a bigger obtain dimension and require a extra performant pc and community infrastructure to keep up comparable oversight over the community as could be afforded.

A main product of Layer-1 blockchains is blockspace. Customers and functions entry this useful useful resource by paying charges, usually within the community’s native token (i.e., ETH on Ethereum). These transaction charges serve two essential functions: firstly, they disincentivize community spamming and secondly, they act as a subsidy or compensation for miners/validators accountable for setting up blocks. Nevertheless, the particular building of price markets can differ throughout L1’s. Whereas some blockchains like Ethereum make use of an auction-based mannequin the place customers bid for blockspace, others like Solana use a extra static price construction based mostly on knowledge dimension and computation required. These variations in price constructions imply that L1’s reply to adjustments in demand in another way, thereby impacting the person expertise of transacting on the blockchain.

Source: Coin Metrics Formula Builder

Solana hosts the bottom transaction charges among the many L1’s depicted on the chart above. Though common charges rose to ~$0.059 just lately as a consequence of elevated congestion, its low charges make it one of many most cost-effective blockchains to transact on. The Avalanche X-chain, accountable for the switch of AVAX, and the Avalanche C-chain the place good contracts reside, even have comparatively low charges. The price mechanism for Avalanche works equally to Ethereum’s EIP-1559 with a dynamic base and precedence price that fluctuate based mostly on the utilization of blockspace.

Then again, customers on Ethereum have grappled with excessive transaction charges previous to the Dencun improve, which launched an adjoining price mechanism to cost using blobspace. Though common charges on Ethereum L1 nonetheless stay comparatively excessive (round $3), fees on Ethereum Layer-2 solutions are successfully costless. Bitcoin has usually seen common charges ranging between $1 to $4. Nevertheless, on the day of its 4th halving, common charges surged to $124 as a consequence of a spike in demand for the newly launched “Runes” protocol in the identical block because the halving occasion. 

Having grasped the technical capabilities and price constructions of varied L1’s from a excessive stage, we are able to delve into how they evaluate when it comes to adoption and utilization metrics. Energetic addresses (the rely of distinctive addresses that had been lively within the community), have remained comparatively flat for Bitcoin and Ethereum L1, at round 800K and 600K, respectively. Because of the existence of externally-owned accounts (EOA’s) and program-derived accounts (PDA’s) on Solana, the lively deal with rely could be deceptive. Nevertheless, distinctive wallets on Solana rose to 1.2M in March, earlier than truly fizzling out to ~900K. Different L1’s like Avalanche and Cardano have seen spikes, however have did not maintain excessive ranges of exercise.  

Source: Coin Metrics Formula Builder

With stablecoins starting to proliferate across various L1’s, the value transferred in each stablecoin provides a crucial proxy for their usage across these blockchains. Tether (USDT) has maintained a strong footing on Tron due to its low fees and proclivity to emerging markets, with an adjusted transfer value of $14B and a median transfer value of $312.

Source: Coin Metrics Formula Builder

That is adopted by USDC and USDT on Ethereum presently displaying a switch worth of ~$6B, with median transfers of ~$800 and ~$1000, respectively. With the re-emergence of the Solana ecosystem, USDC has additionally gained traction on the blockchain, with an adjusted switch worth of $3B.  On account of its low charges, the median switch worth of stablecoins on Solana are the bottom—$20 for USDC and $75 for USDT, respectively.

Adoption and utilization metrics present insights into the traction of various L1 networks. Bitcoin and Ethereum L1 have maintained comparatively secure lively deal with counts, whereas Solana has seen progress in distinctive wallets. Stablecoins like Tether (USDT) and USDC have gained important traction on varied L1s, with Tron main in USDT utilization as a consequence of its low charges and enchantment to rising markets.

The panorama of Layer-1 blockchain networks has important implications for the broader crypto ecosystem. As we’ve got seen, L1 networks could be categorized based mostly on their specialization (transaction settlement vs. general-purpose platforms) and their architectural approaches (monolithic vs. modular). These variations result in variations in community efficiency, price constructions, and adoption metrics.

Because the crypto ecosystem continues to evolve, understanding the nuances and trade-offs between completely different L1 networks might be essential for comprehending the broader dynamics and potential of the decentralized ecosystem. The emergence of recent L1s and the evolution of present networks spotlight the continuing innovation and competitors within the area, finally benefiting customers and driving the expansion of the decentralized economic system.

Try our Layer-1 Dashboard, which shows a number of metrics throughout the L1 panorama.

Source: Coin Metrics Network Data Pro

Following the Bitcoin network’s halving, we noticed a rise in speculation round Ordinals and Runes that had been being minted shortly thereafter, which introduced a speedy rise in charges being paid to miners, with block #840,000 being price round $2.5M in block rewards and costs.

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