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Messari Analyses Layer 1 Development: Ethereum Lose Market Dominant Position

Messari

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What is certain in the first quarter is that the long-awaited battle for expansion has officially arrived.

原文标题：《 Messari 解读一季度 Layer 1 发展：以太坊挑战者加速增长》

原文作者： Wilson Withiam

原文翻译：屏风，链闻

In the first quarter of 2021, there are two big stories in Layer 1's world.

The first story is about Ethereum, which broke through an all-time high and confirmed the start date for what may be its most important upgrade to date (EIP-1559), with TVL in the DEFI domain growing by nearly 200% to around $48 billion. It has become the most commonly used blockchain and has accumulated enough potential energy to move on to the next round of upgrades.

The second story is about the challenger to Ethereum. With the rise of the cryptocurrency market, the ensuing retail gold rush once again pushed Ethereum to its limits, with average transaction fees (in dollar terms) reaching new heights. Users, fed up with rising costs, are looking beyond Ethereum and finding life in what was once a wasteland. Binance Smart Chain (BSC) and & NBSP; Solana And other new application ecosystems on Layer 1, as well as Cosmos And interchain solutions such as Polkadot, accelerated their growth in the first quarter and shows no signs of slowing.

While Ethereum has benefited from the growth of the overall Layer 1 space, it continues to lose market dominance. Its market dominance dropped to 51% in Q1 and is likely to fall further as newer, faster chains find their footing and their token prices "go wild" (compared to Ethereum). Next year will be a defining year for Ethereum, as developers explore solutions like Flash Bots and Rollups to extend the network. What is certain in the first quarter is that the long-awaited battle for expansion has officially arrived.

Ethereum Challenger

As things stand, this is the year of the "Ethereum Killer" revival. Most of the new Layer 1's raised a lot of money between 2017 and 2019 with little progress, while Ethereum got all the attention.

The relationship between Ethereum and its supposed challengers has subtly changed over the past six months, as Ethereum's high fees have forced users to explore new platforms. The exodus of users from Ethereum has made developers aware that they can make a living elsewhere. Developers launch new apps with token incentives, and users flock to them in search of profits. This leads to a flywheel of speculation and growth: a larger user base leads to more revenue or a better price for the development team, which leads to more developers joining and developing high-yielding apps.

The flywheel effect of token incentives is significant (both on the way up and on the way down), which is why a new low-cost, high-performance Layer 1 appears so quickly. The success of the Ethereum challengers will depend on their ability to differentiate their products from Ethereum.

There are two types of challengers: vertical, vertically integrated (single-stack) and horizontal, modular (inter-chain) networks.

Vertical integration

Vertically integrated networks are full-featured, all-in-one technology stacks. Ethereum (in its current form) is a single-stack network that overlaps different network touchpoints on top of each other, but they all share the same state. These chains achieve synchronous interoperability (also known as composability) because they are able to handle transactions that invoke multiple contracts within a block.

Binance Smart Chain (BSC) and Solana are two chains that use a single stack mode, both outperforming the other top 10 layer-1s in the past quarter.

BSC's rise is largely due to its close association with Binance and EVM compatibility. It uses BNB as a native token for gas payments, and BNB itself has a wide user base and can be used in Binance's various product suites. Binance also launched a $100 million support fund to guide the development of BSC when it launched it in September 2020.

These funds have directly or indirectly contributed to the creation of BSC as the most successful applications to date, Pancakeswap (DEX) and Venus (Lending Platform). Pancakeswap competes with Uniswap in terms of daily trading volume, and Venus has accumulated more than $5 billion in TVL (or about two-thirds of the Compound's total TVL).

The BSC is also compatible with Ethereum tools, which lowers the learning curve for most smart contract developers and helps speed up application development. A key feature of the BSC is the added support for MetaMask, which allows users familiar with MetaMask to switch between Ethereum and BSC almost seamlessly.

These building blocks for the BSC will already be in place when Ethereum's on-chain activity hits its maximum capacity in early January 2021. When the Ethereum user experience deteriorates, the BSC is able to provide a smaller but usable DEFI ecosystem for 4% of the cost and 3 seconds of block time. The results were clear: users flocked to BSC and its on-chain activity doubled in February. BNB is part of the platform and Defi's liquidity pool, and BSC's buzz is leading users to buy, deploy and hold more BNB's.

The BSC has more than $22 billion worth of tokens locked up in more than 50 Defi apps, and its TVL is second only to Ethereum's ($60.1 billion).

Solana's story is rather similar. The turning point was the arrival of Sam Bankman-Fried and the launch of SERUM in August 2020. Unlike the AMM model popular on Ethereum, SERUM uses an order book model featuring an on-chain matching engine. Because of Solana's fast processing times (more than 50,000 transactions per second) and low costs ($0.001 per 100 transactions), this on-chain order book is considered a more efficient capital model. By contrast, Ethereum's 15-second block time and erratic fees make the order book DEX seem inflexible and inefficient.

The foundation of almost all Solana applications is SERUM, whose order book has become an important part of lending agreements for AMM or Oxygen, such as Bonfida and Raydium. Non-financial applications such as Audius and Solible also plan to use Serum's matching engine on the back end to facilitate the trading and distribution of NFT or social tokens.

It wasn't until January, when Ethereum fees spiked, that Solana's development began to accelerate. Since then, Solana's DEFI has grown from SERUM and a handful of projects to nearly 40 applications, which now have a TVL of over $750 million, which is far from the same as Ethereum, but has grown by more than 4000% since early February.

BSC and Solana benefit from their overall (Monolithic) design, respectively. Synchronous composability is arguably Ethereum's defining feature. Integrating existing building blocks enables developers to quickly innovate and create applications. With the right integration or differentiation, some of the core building blocks can give birth to a new DEFI ecosystem.

The problem is that vertically integrated networks have historically struggled with scalability. The amount of data in a single chain is large, and every application has to abide by the same trading rules. As a result, node storage costs and network expenses increase with the increase of traffic on the chain. Ethereum has reached its ceiling and must find a way to unload the burden, which lowers storage costs and fees but breaks the link of synchronous compositability.

BSC and Solana have solved this problem by reducing the number of validators and increasing the cost of validators, respectively. BSC set its validator set to 21 to minimize the time required to reach a consensus. Its consensus layer also relies on Binance Chain (another of Binance's older standalone blockchains), which has only 11 validators (as shown below) to minimize on-chain complexity. Solana's validator requires an order of magnitude higher node cost than Ethereum's. Since the storage cost of a validator only increases over time, the facility best suited to running Solana nodes is a high-end data center. These methods make it difficult to decentralize the power dynamics of the network (how many entities control the network).

Finally, do users care about centralization? Most people have sacrificed privacy for convenience. The same may be true of decentralization, where users gravitate toward centralized products for profit. But political decentralization has become the cornerstone of Ethereum Defi, as almost every application strives to build a DAO-based governance system. The devolution of power to the community is a good conservation strategy. As the cryptocurrency market adjusts, yields will drift toward zero, and the user experience across networks will converge in the long run. But those communities that are empowered and embrace decentralization will be more likely to ignore market fluctuations and persist in actively contributing to projects.

Decentralization doesn't really matter if the project's controlling entity doesn't cross the line. To protect the development of the community, the centralized approach is not sustainable. When decentralization is compromised, people will realize its importance.

modular

Unlike all-in-one networks, modular systems divide processing, consensus, or storage responsibilities into separate chains. These chains often use their own ecosystem of software frameworks or shared modular toolkits to build the infrastructure. Standalone chains can either be specific to a single application and provide one major function, or, like Ethereum, provide a more general platform for application development.

Modular systems are often similar to hub and branching topologies, where independent chains are inserted into a central hub or chain to facilitate cross-chain communication or assist in network security. Because these systems allocate computing resources, no single chain can undertake the operation of the entire ecosystem. This is extensibility through parallelism.

Polkadot and Cosmos are two of the oldest and most well known modular networks, but the ones that stood out in Q1 price were Ftom and Avalanche.

FANTOM has a separate consensus layer and application execution layer. The consensus layer, called Lachesis, provides a validator resource to support and protect multiple external execution layers. FANTOM's first executive layer, an EVM-compatible platform called Opera FTM, was launched in December 2019, but didn't gain widespread attention until January 2021. Its recent resurgence is due to all-star DEFI developer and longtime FANTOM consultant Andre Cronje helping build and market FANTOM's cross-chain solutions and technical capabilities.

FTOM started the bridge to Ethereum in early March, which prompted Yearn Ecosystem's Defi apps -- Curve, Sushiswap, and Cream Finance -- to deploy versions of their contracts on Opera FTM. Alameda Research and BlockTower Capital made headlines by buying large amounts of FTM tokens in late February and early March, respectively.

Avalanche is similar to FTOM in that it has multiple layers and performs core network functions (consensus, application execution, and token creation). Developers can also create custom execution layers called subnets that have use-case-specific network parameters but can secure transactions by using a subset of Avalanche's validator set. A subnet can have overlapping sets of validators, but is otherwise modular.

On-chain activity accelerated when Avalanche's first Defi app, Pangolin, launched on February 9, 2021. The network's native gas and pledged token, Avax, went from around $15 to nearly $60 in the ensuing frenzy. The amount of user activity also caused an error in the Avalanche code base, making its main execution layer (C-chain) unusable for a whole day. This series of events shows that the need for a low-cost DEFI environment is very real. Pangolin now has more than $200 million in liquidity and trades about $15 million a day.

Avalanche's Defi ecosystem has grown to include complementary financial products such as Yetiswap (exchange), Snowball (revenue aggregator), Penguin Finance (asset management), and Sushiswap.

The non-essential layer and its tokens in a modular system will also benefit from an improved developer experience and, in some cases, better defensibility (tokens tied to the security model on the chain have a hard time forking). The Cosmos ecosystem is a perfect example of these advantages, as regions (independent chains) can be optimized for specific use cases, find product and market junctions, and innovate rapidly (adding new modules) to take advantage of specific trends.

For example, Terra initially built its stablecoin creation system and generated organic user demand through the Chai application. As demand for Terra's UST stablecoin grew, it added a smart contract module to its infrastructure in December 2020, which allowed Terra to launch the Mirror Protocol for Synthetised Asset and the Money Market Protocol (Anchor) in the following months. UST is the core asset in each agreement, and the emergence of the agreement promotes the casting of UST. The price performance of Luna in the first quarter shows that Terra's DEFI ecosystem is growing rapidly and UST is being widely used. When Terra issues stablecoin, Luna is burned, which is favorable for price action.

Modular networks still face some near-term challenges. Although these systems do not limit intra-chain composability, inter-chain communication will be asynchronous by default. As mentioned earlier, seamless composability is often a prerequisite for rapid innovation. But as Paradigm points out, "synchronous interaction with all other applications is ultimately not sustainable on a large scale." Most chains, even Ethereum, are addressing scalability issues through sharding. Future systems will consist of a mix of synchronous and asynchronous communication paths.

Another drawback of modular networks is that their architecture is relatively new. As a result, their ecosystems are either underfunctional or underdeveloped. But several modular systems are on the verge of major development milestones.

Experienced networks like Cosmos and Polkadot, which have a lot of developer activity, are about to release their defining features. Cosmos Hub rolled out support for IBC connectivity in February and migrated in March to enable cross-chain communication. This is the first in a series of planned upgrades aimed at improving Atom's fundamentals and Cosmos Hub's role in the ecosystem.

Similarly, Kusama and Polkadot plan to launch support for Parachain (individual chains connected to Kusama or Polkadot) at some point in 2021. Once online, KSM and DOT holders will be able to lend their tokens to the program to help them get parallel chain slots in exchange for a replacement coin bonus. Stakers of the two networks will also be charged a pro rata rate for the costs incurred by the network to facilitate cross-chain communication.

So far, KSM and DOT have advocated coinage and voting rights for holders in their isolated networks. The parallel chain converts these tokens into a more powerful capital asset (for a fee), while giving them currency-like properties (issued as collateral for the parallel chain's auction prize). Users are likely to bid on KSM in preparation for a parallel chain auction, which could take place in the next few months, if not sooner.

The success of a modular system will depend on the quality and scale of its sub-chain ecosystem. Cosmos and Polkadot set the precedent and now have more than 200 and 130 projects waiting to be linked to each other, respectively. Greener modular networks like FANTOM and Avalanche have only one primary execution environment. The chains in each case are EVM-compatible, which is a great growth hack, but they all end up competing with other EVM-compatible Layer1 (like BSC) and Layer2 solutions. The diversity of ecosystems in a product suite or marketing strategy will determine whether they are successful or mediocre.

Layer 2 extends the solution

Layer2 extension solutions are definitely part of Ethereum's roadmap. Not only will they help bridge the gap between now and the launch of ETH2, but they can also serve as an accelerator for ETH2's scalability, increasing its processing capacity to a theoretical peak of around 100,000 transactions per second.

Typically, these Layer2 solutions accelerate transactions through off-chain means, which are then packaged as a single transaction and delivered to the base layer. By trading in bulk, Layer1 can significantly increase the number of transactions they process per block, while theoretically providing similar security at settlement time. Off-chain transactions are essentially free and do not drag down the underlying network with redundant data and computing requests.

The Layer2 solution is good news for a network that saw average transaction fees increase by more than 600% at the beginning of the year. Ethereum users have become increasingly attracted to these solutions suddenly.

After the sluggish start to 2020, the total value locked up in Layer2 increased 606% to $273.4 million by the end of the first quarter. This rate of return does not include the value in Ethereum Plasma solutions such as Polygon (which is more like a side chain than a true Layer2 network), Validium-based applications such as Deversifi, or the new addition of ZkSwap. At the end of the quarter, Ethereum users deposited $745.5 million worth of assets in Layer2, up from less than $100 million just four months ago.

Layer2's decentralized exchange has also seen a surge in user activity. Total daily trading volumes for all Layer 2 Dex increased by nearly 3,000% in the first quarter, driven by Loopring's launch of the LiquidMining Program in January and Polygon's launch of QuickSwap in February.

While these numbers are nowhere near the Layer1 DEX, the trend is clear: projects are growing, and users are catching up.

Venture capital firms have also recognized the increasing demand and adoption of Layer2 solutions. As A16Z points out, "there is no doubt that expanding Ethereum is necessary to support the rapid growth of the network". This demand is why venture capital firms invested more than $100 million in Layer2 solutions in the first quarter, most notably A $25 million Series A investment by Optimistic and A stunning $75 million Series B investment by StarkWare.

The only hurdle Layer2 hit in Q1 was Optimism's decision to delay its release from April to July (or later). This delay should only be a minor obstacle, as this is going to be a big year for scaling up solutions. The public release of Optimism and the integration of Uniswap are two of several major Layer2 milestones expected in 2021. Other developments include the main launch of Arbitrum's Optimistic Rollup, Matter Labs' ZKSync 2.0 support for Solidity smart contract development, And application support for StarkWare's STARK-driven ZK Rollup.

While Layer 2 extension solutions are essential to the next phase of Ethereum's evolution, there are lingering questions about their impact on the network and the user experience.

Layer 2 Parasitism: Will layer-2 compromise Ethereum security and value capture for ETH? Because they shift activity and miner/verifier costs away from the base layer.

Broken composability: For the foreseeable future, Layer2 will be the isolated center of composable activity, and activity across Layer2 will only occur on an asynchronous basis. How will protocols that rely on Ethereum's current composability standards respond when their underlying connectivity points (and liquidity) move to different solutions?

Cross-Layer2 communication: Currently, communicating across L2 requires multiple expensive transactions because they must be routed through Ethereum. Users may face a long waiting period when they want to move assets back to the base tier. If Ethereum's DeFi is on a different Layer 2, how can these transactions be handled to make them more user-friendly? Connext's Spacefold trading track and the use of L1 liquidity for L2 applications are potential solutions, but the scope for L1-L2 and L2-L2 trading is wide open.

Recurring congestion problems: What happens if almost all protocols move to the same Layer 2 and cause the same congestion problems that Ethereum experiences during peak times?

Not every question has a perfect answer. Most solutions may turn out to be compromises on thorny problems. But the need for scalability is real. Where there is demand, there is opportunity, and so far, cryptocurrency developers have been quite creative in their ability to solve problems within cryptography and blockchain.

The future of multi-chains

The insatiable thirst for revenue-generating protocols and assets makes it clear that the crypto industry is actually big enough to accommodate multiple blockchains. Layer 2S and Eth2 will alleviate Ethereum's scale dilemma, but current scalability issues will also include bridging Layer- 1S.

People who label themselves "X-chained" because they refuse to accept data. Ethereum could become the center of the crypto economy, and Bitcoin is the frontrunner for the role of cryptocurrency reserve assets. But now Layer 1 can provide better or even complementary services in specific areas, such as Flow positioning itself as a haven for NFT and Thorchain connecting traditional blockchains. As the cryptocurrency industry evolves, more problems (and perhaps opportunities for optimists) will arise, and the technical components needed to solve them may be present at newer Layer 1.

Bitcoin set the wheel of history on fire. Ethereum expands the possibilities by adding functionality. Their latecomers have expanded the user base from the crypto native niche to the mainstream. While some web communities fail to materialize over time, the number of viable chains will decrease, but the short term future will be a multi-chain future.