Innovation once more appears to be heating up in the digital asset space as old paradigms are set aside and new horizons become realized, the team at Coin Metrics noted.
Coin Metrics also mentioned that Bitcoin is evolving “from a specialized chain whose primary purpose is to serve as a settlement layer for transactions to a more general-purpose platform that leverages its extraordinary security to serve layer-2 functionalities.”
Similarly, with the recent Dencun upgrade, Ethereum is moving “towards a modular blockchain architecture, with specialized layers to handle its functions.”
According to the report from Coin Metrics, we are also “witnessing the birth of new layer-1 blockchain like Aptos, leveraging different virtual machines, and others like Monad, bringing parallel execution capabilities to the EVM.”
In this issue of Coin Metrics’ State of the Network, Coin Metrics explore “the diverse landscape of layer-1 blockchain networks and understand their implications for the broader crypto ecosystem.”
In the crypto ecosystem, a Layer-1 (or L1) is “the base layer or the foundational blockchain network upon which other layers and applications are built.”
L1 blockchain networks are “standalone, decentralized ledgers that operate independently and establish their own rules for consensus, transaction validation, and data storage.”
These networks serve as “the infrastructure and provide the essential functionalities required for the development and deployment of decentralized applications (dApps) and other blockchain-based solutions.”
Numerous layer-1’s have emerged over the past cycles, “with each gaining varying levels of traction and maturity.”
While all L1 networks share the fundamental characteristics of being decentralized and securing their respective ecosystems, they can “be broadly categorized into two types: specialized networks and general-purpose platforms.”
Specialized Networks: These L1s are designed “primarily to facilitate secure peer-to-peer transactions and serve as robust settlement layers.”
The Coin Metrics report noted that examples “include Bitcoin, Litecoin, and Dogecoin. While they may not directly support complex smart contracts or decentralized applications, their primary purpose is to leverage strong security guarantees and decentralization to provide a reliable and trustless transfer of value, even if additional functionality is added through protocols such as Omni or in the form of L2s or roll-ups built on top.”
General-Purpose Platforms: These L1s are designed to “serve as programmable platforms that can support a wide range of decentralized applications and smart contracts. Examples include Ethereum, Tron, Solana, Avalanche, and others.”
These networks often prioritize features “such as programmability, scalability, and interoperability to enable the development and deployment of various decentralized solutions, including decentralized exchanges, lending and borrowing protocols as part of DeFi, etc.”
Layer-1’s can be further categorized “by their architectural differences or approaches to core blockchain functions, including execution, consensus, and settlement.”
Monolithic: This includes L1’s such as Bitcoin and Solana, which “handle the execution and settlement of transactions as well as the maintenance of consensus within a single layer.”
Modular: This includes L1’s like Avalanche, Cosmos and recently Ethereum, “with its rollup-centric roadmap. Modular blockchains separate these functions into distinct, specialized layers.”
While these categories provide a high-level generalization, “understanding the nuances and trade-offs between these categories of L1 networks is essential for comprehending the broader dynamics and potential of the decentralized ecosystem as it evolves.”
To get a deeper understanding of Layer-1s, Coin Metrics has taken “a data-driven look at how these networks span different approaches and provide innovative solutions to the underlying problems posed by decentralized networks.”
The performance capabilities of L1 blockchains “can be influenced by several technical factors such as their consensus mechanism, block size (amount of data that can fit in a block) and block time (time it takes to add a new block to the blockchain), to name a few.”
The Coin Metrics report explained that these factors “can directly impact the transaction speed and network throughput of the L1 and therefore the user experience of the blockchain.”
Due to the unique design choices and architectural trade-offs of L1’s, these metrics “do not serve as a direct comparison, but as a means to understand their technical differences.”
Shorter average block times, as “exhibited by Solana (approximately 0.4 seconds) and the Avalanche C-Chain (2 seconds), result in a faster execution of incoming transactions.”
The Coin Metrics report further noted this is “particularly beneficial for high-frequency transactions such as financial trading on applications like decentralized exchanges (DEX’s), micro-transactions or gaming related interactions where speed is critical. Furthermore, AVAX-C and Ethereum also feature constant block times, which make for a very tight distribution around the average (with some outliers coming from missed blocks).”
On the other hand, Bitcoin and Litecoin “have larger average block times (around 10 minutes for Bitcoin and 2.5 minutes for Litecoin), which prioritize network security over transaction speed.”
This same relationship can also be understood “as a tradeoff between the ease of participation in the consensus process and the performance of the underlying network.”
This is evident when we “consider the size of the blockchain as a function of the size and rate of creation of new blocks.”
Blockchains that have longer block times and “smaller” blocks, like Bitcoin, “are easier to synchronize with as an independent node operator.”
Compared to Ethereum, the requirements “are greater as the network performance requirements for including blocks on a faster basis add up to a larger download size and require a more performant computer and network infrastructure to maintain comparable oversight over the network as would be afforded.”
The report also noted that 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.”
This is followed by USDC and USDT on Ethereum currently “displaying a transfer value of ~$6B, with median transfers of ~$800 and ~$1000, respectively.”
With the re-emergence of the Solana ecosystem, USDC has also “gained traction on the blockchain, with an adjusted transfer value of $3B. Due to its low fees, the median transfer value of stablecoins on Solana are the lowest—$20 for USDC and $75 for USDT, respectively.”
The report added that the landscape of Layer-1 blockchain networks “has significant implications for the broader crypto ecosystem.”
As we have seen, L1 networks can be “categorized based on their specialization (transaction settlement vs. general-purpose platforms) and their architectural approaches (monolithic vs. modular).”
The report further explained that these differences “lead to variations in network performance, fee structures, and adoption metrics.”
As the crypto ecosystem continues to evolve, understanding “the nuances and trade-offs between different L1 networks will be crucial for comprehending the broader dynamics and potential of the decentralized ecosystem,” the report added.
The Coin Metrics report concluded that the “emergence of new L1s and the evolution of existing networks highlight the ongoing innovation and competition in the space, ultimately benefiting users and driving the growth of the decentralized economy.”