Which L1 public chain can surpass Ethereum?

Which L1 public chain beats Ethereum?

Author: Steven Shi, Investment Partner of Amber Labs Ecological Fund; Translator: LianGuaixiaozou

Since the emergence of Ethereum, L1 public chains have always been one of the most popular investment verticals in the field of cryptocurrencies. More than half of the top 20 cryptocurrencies by market capitalization are native tokens of L1 public chains. Indeed, the “alt L1” narrative has been a key theme in the 2017 and 2021 adoption cycles. Driven by the huge demand for Ethereum block space, many investors and users have flocked to emerging L1s with higher performance and lower fees.

However, even after a few years when the alt L1 narrative reached its peak in 2021, Ethereum still remains the dominant L1 public chain, while many other L1s look like ghost towns, plagued by stagnant user growth or even loss of users.

Nevertheless, new L1s are still being launched. The total valuation of Aptos and Sui, two L1s launched last year, has exceeded $12 billion at the time of writing this article. There are also some L1s that are about to be released, some of which have private funding valuations in the nine or ten figures. In addition, several existing L1s have strong community support and are confident in their ability to compete with Ethereum.

The debate about alt L1s is still ongoing. In collaboration with KrASIA, we aim to answer the frequently asked question: Which L1 public chain can surpass Ethereum?

1. L1 Overview

To answer this question, let’s review the history of L1s and the areas where Ethereum has taken a leading position. In this article, we will limit the scope of L1s to general-purpose permissionless smart contract blockchains, also known as “ETH killers”.

It can be said that the rise of L1s originated from the limitations of Bitcoin. The original purpose of Bitcoin was to operate as an effective trustless peer-to-peer electronic cash system. As the asset itself was gradually recognized as a legitimate currency, developers began to focus on decentralized applications, such as creating altcoins based on Bitcoin. However, Bitcoin could not fully support the development of other applications on its platform, mainly due to limitations in its scripting language and the community’s reluctance to add complex features to the network. Previous efforts to create applications on top of Bitcoin were stalled.

Ethereum was launched to fill this gap. It was the first blockchain with a widely recognized Turing-complete programming language, greatly expanding the design space for decentralized blockchains.

Like Bitcoin, Ethereum’s core culture prioritizes decentralization before scalability. Therefore, when Ethereum’s adoption grew (such as the ICO boom in 2017 or the DeFi summer of 2020-2021), the network quickly reached its throughput limit. Network congestion could last for hours, gas fees skyrocketed, and many users abandoned transactions due to high fees. Sometimes, a simple token transfer could cost $150 in transaction fees. Developers were reluctant to increase the throughput limit because they did not want to risk the “centralization creep” of the protocol.

Therefore, when Ethereum encountered scalability issues, alt L1 took off. During the ICO boom, blockchain projects like EOS, Tezos, and Cardano raised hundreds of millions of dollars, promising faster L1 architecture. Many alt L1 whitepapers used for fundraising mentioned Ethereum’s low TPS (transactions per second) and limitations. In 2021, a similar pattern emerged to a lesser extent. As shown in the chart below, the peak of L1 fundraising coincided with strong adoption of cryptocurrencies.

(1) Market Conditions

Despite the emergence of hundreds of L1 competitors since Ethereum, Ethereum is still considered a true L1. Clearly, Ethereum leads in terms of market value. It holds a 55% market share among the top 50 L1 blockchains. But where will Ethereum go next? What is driving Ethereum’s premium valuation?

(2) Users – Cheaper and Faster L1 Wins

Users are often seen as the driving force behind valuation, as network value is believed to grow super-linearly with the number of users (Metcalfe’s Law).

It is difficult to measure which are the truly active crypto users due to the lack of anti-sybil systems and the relative ease of generating new addresses. Nevertheless, active addresses can provide a good approximate indicator for user adoption across different blockchains.

Ethereum is clearly lagging behind in terms of active users. Its premium valuation does not come from the number of users. Lower-cost blockchains like Tron, BNB, and Polygon have more users. Some networks like Polkadot and Cardano have relatively few active users, but higher valuations. So, there are already multiple L1 blockchains that have surpassed Ethereum in terms of user numbers.

(3) Developers

Developers are another metric for measuring network health. Developers not only maintain and optimize the protocol layer but also build use cases on top of L1. They can be a key indicator of future value creation.

According to Electric Capital’s developer report, Ethereum has the most active developers, standing out among all blockchains.

The number of developers in Polkadot, Cosmos, and Solana is impressive, and they each have their own unique programming languages. Considering the recent launch of Aptos and Sui, their high data achievements in various aspects are also remarkable.

(4) Liquidity

Liquidity on the Ethereum network is measured by metrics such as TVL (Total Value Locked), DEX trading volume, and the number of trading pairs. It is significantly ahead of all other L1 networks. Since the collapse of Terra in the summer of 2022, Ethereum’s TVL market share has remained stable at around 60% compared to other L1 networks.

(5) Ethereum Leading, but not Dominant

To keep the scope of this article from being too broad, we will only focus on some key indicators. There are many factors to consider. However, Ethereum’s valuation lead is clearly not driven by user adoption. When measured by these categories, BNB and Tron have a decisive advantage. However, Ethereum clearly dominates in terms of liquidity and capital flow. It seems that the market values capital above all else.

2. Analyzing Factors of L1

What drives the above indicators? Why do some chains have more users? What drives capital flow between L1 networks? Why do some L1 networks survive and others exit the stage, even after multiple bear market cycles? Below, we will provide some frameworks and models to help answer these questions.

(1) Decentralization

We must first consider the fundamental attribute of blockchain: decentralization. Decentralization has many benefits. Firstly, a higher degree of decentralization can increase resistance to censorship and help the network withstand malicious attacks. It can also enhance resilience and network security, giving users confidence in storing and processing value on L1 networks. We believe that the higher the degree of decentralization, the higher the premium on L1.

Decentralization itself is an abstract concept that is difficult to measure. But it may be something you recognize when you see it. However, we can use some factors to measure the degree of decentralization of a network:

  • Number and distribution of nodes. Nodes actively participate in the network, maintain the blockchain state, and verify and relay transactions in the network according to their type. Therefore, a larger number of nodes generally helps improve the resilience and security of the network. If nodes are distributed more widely across different geographic locations and organizations, the likelihood of a single entity exerting influence on the network is reduced. It is also important whether the nodes run on the same infrastructure (e.g., the same cloud provider) or operate independently with dedicated hardware.

  • Distribution of token holders. The risk of highly concentrated token holders should be obvious. Due to high concentration, a few token holders can determine the development of the entire network, which is not conducive to users conducting transactions on the network.

  • Client diversity. Client diversity refers to the number of software clients available to run nodes. Multiple clients can enhance the network’s resilience against attacks and vulnerabilities. If the network only runs on a single client, a vulnerability in that client could threaten the entire blockchain.

  • Nakamoto Coefficient. The Nakamoto coefficient measures the number of entities or nodes required to reach a majority (usually 51%) in a system. A higher coefficient indicates a higher degree of decentralization, as it requires more entities to compromise or control the system. However, this is a single metric that may overlook many subtle differences. For example, Lido owns a 32% stake of all staked ETH. However, Lido allocates the stake to 30 node operators, who cannot dictate how they use their stake (i.e., they cannot enforce malicious collusion).

  • Governance model. Off-chain governance requires decision-making to take place outside the blockchain through community coordination, while on-chain governance embeds governance directly into the protocol, allowing for token-based automated voting on protocol changes. The impact on decentralization varies. Off-chain governance is less affected by the centralization of token holders but is prone to political centralization and potential barriers to high participation.

  • Culture. Culture is an underestimated aspect of blockchain decentralization. A culture with strong values can help protect the blockchain from centralization risks/threats—for example, Bitcoin’s cultural defense against application development (the 2014 OP_Return dispute) or Ethereum’s collaborative action to increase client diversity.

(2) Network Effects

The network effects in blockchain span across many dimensions.

One of the most obvious network effects is the interaction between users and developers, which is similar to Web 2.0 platforms. User growth attracts developers to the network, often leading to the creation of new applications, more use cases, and the stimulation of more users joining the network, and so on.

Network effects are also manifested in other aspects. For example, programming languages like Solidity can create meaningful network effects. As more developers learn Solidity, the Solidity programmer community is gradually expanding, making it easier to find collaborators, hire developers, and get community support for issues. There are also more developer resources, such as software libraries, tools, and best practices, which make it easier to create reliable smart contracts. It is also easier to find capable security auditors. All of these improvements in the ecosystem, by attracting more developers and accelerating the time to market for applications, enhance the innovation cycle.

Financial applications are a key use case for cryptocurrencies, and capital network effects are also crucial. Liquidity brings liquidity. New financial primitives are most likely to be launched on networks with the largest market size and strongest liquidity. Support from key stakeholders also strengthens these network effects. For example, Coinbase supports deposits/withdrawals, Circle supports native USDC issuance, and Fireblocks supports custody, all of which contribute to improving capital flow.

(3) Lindy Effect

Given the short time span of the emergence of digital assets and the lack of historical data, many people often use the Lindy Effect as a relevant psychological model to measure the success of L1. The longer a blockchain exists, the more likely it is to continue to exist. This model may be applicable. L1s that can withstand countless challenges (such as technical issues, hacking attacks, market fluctuations, regulatory scrutiny, competition, etc.) and still have strong user attraction are more likely to thrive in future cycles.

This model suggests that the more mature L1s that are still important have a greater chance of surpassing Ethereum.

(4) Hysteresis

Hysteresis is a concept that describes a system’s state depending on its history. Once a system is set on a path, it tends to stick to that path, and the longer the system stays on its trajectory, the harder it is to deviate. History matters.

Hysteresis plays an important role in our understanding of some L1s. For example, Ethereum initially used PoW before transitioning to PoS, which can be said to have helped with broad participation and token distribution in the early stages. This type of distribution is difficult to replicate for new networks. Another example is that despite FTX having a negative impact on the Solana ecosystem in the past few years, cooperation with FTX in the early stages can be said to have helped Solana enter the mainstream and become a top-tier alt L1 ecosystem.

In this context, Ethereum’s leading position is not the result of technological superiority, but rather its unique historical path, the momentum it has gained over the past decade, and the compound effect of its choices. Like many other examples in the history of technology (such as the frequently cited QWERTY example), Ethereum has been able to maintain its dominant position primarily because it was a pioneer and has a unique history.

(5) Differentiation

L1 blockchains typically differentiate themselves from Ethereum and other L1s by providing superior architecture or catering to specific niche markets, which may include superior scalability, lower transaction costs, unique consensus mechanisms, enhanced privacy features, or dedicated tools for specific industries. For example, Solana’s differentiation lies in its commitment to a monolithic blockchain architecture to maximize composability advantages and liquidity effects. Aptos and Sui introduce Move as a more secure and intuitive programming language, reducing the likelihood of unexpected code errors.

(6) Monetary Policy

Monetary policy is the cornerstone of blockchain success, especially for L1 protocols. Monetary policy determines the issuance, distribution, and destruction of native cryptocurrencies on a blockchain, thereby affecting their scarcity and value proposition. A clear, consistent, and transparent monetary policy can facilitate trust-building among participants, attract long-term investors, and stabilize the economic environment of the network. Additionally, it directly influences incentives for validators or miners to ensure the security and functionality of the blockchain. If all factors are well balanced, monetary policy can promote sustained growth, adoption, and stability, enabling L1 blockchains to stand out in a fiercely competitive market and ensure their long-term viability.

3. L2

Alt L1 is no longer the only viable scaling solution. In October 2020, rollups became part of Ethereum’s scaling roadmap. Since then, they have gradually taken market share from other alt L1s. In fact, the active users and TVL (total value locked) of Arbitrum and Optimism (both optimistic rollups) have surpassed most leading L1s. Recently, Coinbase’s optimistic rollup, Base, has also gained rapid attention. In the coming years, ZK rollups are also likely to follow suit.

In a broader context, optimistic rollups, ZK rollups, and application-specific rollups are all part of the Ethereum ecosystem. When these networks are integrated into Ethereum, the barriers to “surpassing Ethereum” become higher.

4. Conclusion

The question of “which L1 might surpass Ethereum” has too much uncertainty. The field of technology, especially emerging areas like cryptocurrency, is constantly evolving and full of uncertainty. This question also implies zero-sum thinking, that is, for one L1 to win, another L1 must lose. As Warren Buffett said, “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

If you are eager for an answer, Ethereum seems likely to maintain its leading position in the L1 field in the foreseeable future. It has a leading advantage in the most important indicators, especially in decentralization. As active participants in the cryptocurrency world, we have also witnessed the most innovative frontier technologies in the Ethereum ecosystem, such as scaling solutions, ZK technology and applications, privacy solutions, MEV mitigation/democratization, and so on.

Among the current alt L1s, we believe Solana is the most promising candidate to surpass Ethereum. Its fast throughput and single-layer architecture form meaningful differences compared to Ethereum’s architecture. It is the only L1 with multiple validator clients among other L1s. Solana has one of the most vibrant and passionate communities. Within this ecosystem, we have seen unique innovations that other chains do not have, such as xNFT, state compression, compressed NFT, Solana Mobile Stack, and so on.

However, the crypto space is still evolving and maturing, and there may be new disruptive technologies. Given this dynamic, narrow predictions are meaningless. Continuously observing, maintaining adaptability, and remaining open-minded to updating our own ideas will be more effective.