Layer-1 blockchains: How crypto winter could slow the challenge to Ethereum

It remains to be seen if L1s will thrive given Ethereum’s dominance and the current crypto bear markets. Chainalysis economist Ethan McMahon stated that Chainalysis published the report to increase awareness about the L1 ecosystem.

Decentralized finance (DeFi), which Ethereum enabled, was able to thrive in 2020. However, many layer-1 blockchains (L1s), have been created to address the problems associated with the network. As Ethereum’s proof of work (PoW), consensus mechanism and high gas prices continue to affect transaction speed and scaleability within its ecosystem. L1s such as Algorand and BNB Chain, Avalanche, and others seek to address these issues.

“Chain comparisons are important because it appears that most crypto services can only be offered on Ethereum. But this is not true. There are several other blockchains that offer competitive offerings with advantages that Ethereum does not.

McMahon explained how Chainalysis collected data from various blockchains in order to show this. The post explains that developers are choosing to create decentralized applications (DApps), on Algorand because of the high gas fees for Ethereum. Binance Smart Chain (or BNB Chain) is recognized for its ability to support new tokens, DApps, and other services without having to pay the high Ethereum gas fees. It’s quite interesting to see how people pay exorbitant gas fees on Ethereum. McMahon stated that transactions below $1,000 result in significant amounts of money being spent on gas fees.

Source: Chainalysis

Chainalysis’s overall findings show that no L1-blockchain has been able to solve all the problems associated with Ethereum. This raises the question of whether L1-blockchains can survive for long. The current crypto winter could slow down investments in these ecosystems. The merger of Ethereum 2.0, which will take place in this year, but could be delayed to 2023, could result in improvements to the Ethereum ecosystem that could impact other L1 uses.

Adoption driven by L1 developments

It is important to examine the recent developments in each of the ecosystems mentioned by Chainalysis to help determine how L1s will progress. According to the report, Algorand is ranked among the top 10 L1 blockchains by market capitalization.

Algorand’s transaction volume increased 65% in Q3 2021 while Bitcoin and Ethereum saw their volumes fall 37% and 45%, respectively. This could have been due to Algorand’s rising hype. Algorand launched in April 2019 and hit an all-time high price in September 2021.

Retail investors account for 10% of Algorand’s transaction volume, as opposed to 5% for Bitcoin (BTC), and 8% for Ether(ETH). This could indicate Algorand’s ability to enable small transactions at high volumes.

Source: Chainalysis

Staci Warden is the CEO of Algorand Foundation, which oversees Algorand’s monetary supply economy, governance, and ecosystem. She told Cointelegraph that Algorand uses the Pure proof-of–stake consensus mechanism (PPoS), which allows the network to solve specific scale problems. She stated that Algorand is different from other L1s in its ability to provide financial inclusion to the two-billion people around the globe who don’t have access modern financial systems.

Warden explained that Algorand’s PPoS consensus mechanism allows this because of its low staking requirements. The Chainalysis post stated that 1 Algorand token (ALGO), is required to stake on the network. Warden pointed out that Algorand is focused on Decentralized Finance (DeFi) development. He noted that the network can settle approximately 1,200 transactions per Second, and gas fees equal to.001 ALGO.

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Warden stated that these requirements are essential for networks to scale. Chainalysis reports that Ethereum can handle approximately 15 transactions per second. However, Eth2 intends to significantly increase this number to approximately 150,000 after upgrades are complete.

Warden revealed that Algorand is currently working on a new feature to allow transactions to be settled in 2.5 seconds instead of the current 4.5 seconds. This will help the network stay competitive. Algorand also plans to provide “state proofs,” which will enable users to transfer tokens between chains.

Warden explained that Algorand could become a router for transactions across all chains because it can handle fast transactions with little carbon footprint and sub-penny fees. Although state proofs and other developments will not be implemented immediately, it is notable that FIFA recently stated that Algorand would be used to help develop its digital asset strategy. Warden added that FIFA is creating its own wallet on Algorand, and creating an NFT marketplace to accommodate secondary ticket sales.

Chainalysis also mentions BNB Chain. It is praised for its ability to support new tokens, DApps, and without paying high gas fees. DappRadar actually found that there were more L2 projects created on BNB Chain than any other cryptocurrency. Gwendolyn Regina is the investment director at BNB Chain. She explained to Cointelegraph that the network’s goal was to assist builders in creating DApps that can scale for widespread crypto adoption. She stated:

“BNB Smart Chain will be able to run decentralized storage solutions and have 30 times more computing power than Ethereum this year. Blockchain technology will become more integrated into real-world applications.

Regina stated that the BNB Chain 2022 roadmap will focus on decentralization and multichain integration. There will also be a greater focus on developers and sustainability. Regina explained that BNB Chain has recently published plans to further decentralize via the BEP131 proposal. This will allow for candidate validators to BNB Smart Chain.

She stated that the proposal would increase BNB Smart Chain Mainnet validaters from 21 to 41. This would provide more decentralization and incentive for validators to continuously innovate their hardware, and infrastructure. This may increase decentralization but there have been critics about whether DeFi is actually decentralized after Solend’s spontaneous governance proposal relating to one of the whale wallets at high risk of liquidation.

It’s important to note that BNB Beacon Chain, a blockchain created by Binance and its community, which implements a decentralized digital asset exchange, was recently made open-sourced. Regina said that BNB Beacon Chain was now open-source and available for developers to use. Regina explained that there are many benefits to the BNB Beacon chain, pointing out its high-speed order books based decentralized exchange and fast transactions. She noted that native cross-chain secure support will allow for blockchain interoperability. Users can then seamlessly navigate through the chains they use.

Chainalysis also mentioned Algorand, BNB Chain and Avalanche in its findings. Avalanche is a company that specializes in customization, scalability, and interoperability. John Wu, the president of Ava Labs and the main developer of Avalanche’s blockchain, told Cointelegraph that Avalanche aims to address a variety of issues within Web3 ecosystems. He stated:

At 500 milliseconds to two seconds, Avalanche is the fastest to reach finality in the industry. All cross-chain and subnet transactions can be redeemed in a flash. Near-instant finality is required by financial institutions that create DeFi products, and Web3 gaming studios that develop AAA shooters and RPGs. It is essential for success. Their apps will not work without it.”

Wu’s point is that finality becomes more important as more institutions join the DeFi sector. Avalanche’s speedy finality could be even faster than Eth2’s, which many believe might never exceed 15 minutes. Ethereum currently processes approximately 15-30 transactions per second, with a finality time of over one minute.

Wu stated that the Avalanche community would continue to grow regardless of market conditions. Wu mentioned that subnets, which are a group of validators who work together to determine the state of a particular set of blockchains, will be a new way for DeFi. He mentioned, for example, that subnets can be used to integrate Know Your Customer (KYC), and avoid bottlenecking on chains that are shared with third-party apps. This appeals to institutions. He said that the first Subnet specifically designed for institutional DeFi was in production.

Survival of the fittest?

Chainalysis still sees Ethereum as the “dominant player”, despite L1 blockchains being more advanced. This is due to market conditions, expected upgrades to Ethereum’s network and other factors. Raul Jordan, one the core developers working on the Eth2 merger, stated to Cointelegraph that anyone can soon run an ETH Node. This is a testament to the power of decentralization.

It is crucial that all people, especially those in developing countries, have the ability to run full nodes for consumer software. Full nodes preserve the security of the protocol by enforcing its rules #ethereum https://t.co/UVucpOQnzM
— rauljordan.eth (@rauljordaneth) April 21, 2022

Alex Tapscott (author and co-founder, Toronto-based Blockchain Research Institute) further stated to Cointelegraph that L1s are not long-lasting.

First, bear markets tend to see a drop-off in interest for cryptonative applications. If gas fees drop on Ethereum, then why use a more reliable or newer chain when you could use Ethereum? The second is that Ethereum’s performance will be improved by merging to proof-of stake. This means that even if there is a rebound in demand, it might still be able handle new growth.

Tapscott said that any decrease in interest in L1s would be temporary. “Long-term, there will be a surge in demand for block space with some developers and users willing and able to trade security (Ethereum), speed, and convenience. I believe that many alternative L1s, for all their potential, are still in very early stages tech. They will mature and become more reliable, usable, and widely adopted.

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Tapscott also pointed out that L1s did not succeed because they attracted capital from investors, but because they drove interest and adoption. And if history has taught us anything, it is that bear markets are the perfect time to start projects. Regina said that a bear market is a great way to support and assess projects that make a real difference in the blockchain ecosystem, as long as new teams are constantly forming to solve real-world problems with blockchain technology.

However, bear markets can also cause many projects to fail. Warden stated that there will be fallout for many L1 blockchains. “Crypto Winter” is a time when all components of the crypto ecosystem are going to be questioned, tire-kicked and questioned, not just DApps but all aspects crypto infrastructure including L1s.

Warden said that projects that can handle transactions and scale will continue to grow, which poses a challenge for Ethereum. “Businesses and projects that are built for long-term utility, real-world adoption, and will accelerate will be noticed during this period.”

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