Research Summary
This report explores the potential of any Layer 1 (L1) blockchain to overtake Ethereum in terms of dominance. It delves into the history of L1 blockchains, the rise of Ethereum, and the challenges it faces. The report also examines the factors that contribute to the success of L1 blockchains, including decentralization, network effects, the Lindy Effect, hysteresis, differentiation, monetary policy, and Layer 2 (L2) solutions. The report concludes that while Ethereum is likely to retain its leadership, Solana emerges as a promising contender.
Key Takeaways
Ethereum’s Dominance
- Ethereum’s Leadership: Despite the emergence of numerous L1 blockchains, Ethereum remains the de facto L1, leading in market capitalization and liquidity. However, it lags in active users compared to cheaper blockchains like Tron, BNB, and Polygon.
- Developer Engagement: Ethereum stands out for having the highest number of active developers, indicating robust network health and potential for future value creation.
- Liquidity: Ethereum leads all other L1s in liquidity on the network, as measured by Total Value Locked (TVL), DEX trading volume, number of trading pairs, and more.
Factors Influencing L1 Success
- Decentralization: Greater decentralization improves censorship resistance, network security, and user confidence, potentially leading to a higher premium placed on the L1.
- Network Effects: User growth attracts developers to the network, leading to new applications and more users. Programming languages and capital network effects also play a significant role.
- Lindy Effect: The longer a blockchain has been around and relevant, the longer it is likely to continue to be relevant. This suggests that mature L1s that are still relevant have better odds of eventually overtaking Ethereum.
Potential Contenders
- Solana: Among the current alternative L1s, Solana emerges as the most promising candidate to overtake Ethereum due to its fast throughput architecture, multiple validator clients, and vibrant community.
- Layer 2 Solutions: Layer 2 solutions like roll-ups are part of the Ethereum ecosystem and have gradually taken share from other alt L1s, raising the barrier to “overtake Ethereum”.
Actionable Insights
- Investigate the Potential of Solana: Given its unique architecture and vibrant community, Solana could be a promising investment opportunity.
- Consider Layer 2 Solutions: Layer 2 solutions like roll-ups, which are part of the Ethereum ecosystem, could offer significant potential for growth and innovation.
- Stay Adaptable: The crypto landscape is nascent and ever-evolving, making it crucial for investors to remain adaptable and open to changing their minds.
