When predicting how the cryptocurrency economic system will evolve, many individuals have appeared to the beginning of the web itself. They think about sure requirements or protocols turning into dominant, with worth accruing within the utility layers.
However cryptocurrencies are completely different.
Amos Meiri is an angel investor within the crypto area, the Co-Founding father of the Coloured Cash protocol (2012), Colu.com, a board member at Horizen and a strategic adviser to the Algorand basis.
Associated: First Mover – Mar 2, 2021
Worth is captured inside a coin’s economic system quite than simply its code and the way in which an utility is monetized. As well as, worth (measured by value and market cap) retains shifting from Layer one (L1), like Bitcoin and Ethereum, to Layer two (L2) and utility protocols which can be being constructed on prime of L1, like Cosmos, Hiro and Uniswap.
With full interoperability, and with blockchain agnostic protocols corresponding to The Graph, L1 blockchains might turn into simply rails with charges connected. Most worth will transfer into agnostic protocols and use-specific blockchains.
To grasp the place worth is being captured and on what layer it’s being created, it’s helpful to evaluate the evolution of L1 and L2 over the past decade.
One coin to rule all of them (2011–2015)
That was the method of Bitcoiners within the early days, myself amongst them. There was one blockchain and one platform to energy all digital asset use circumstances and functions.
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When folks began to consider the expertise beyond Bitcoin as a currency, the primary applied sciences to market had been protocols developed on prime of Bitcoin, corresponding to Coloured Cash, Counterparty and Mastercoin (Omni), then known as “Bitcoin 2.0.”
In 2012, after I began engaged on Coloured Cash with a gaggle of early Bitcoiners (Vitalik Buterin amongst them), not many had been pondering past constructing on prime of Bitcoin. To me no less than, it was 100% clear that Bitcoin could be the one important platform, and that through the use of L2, it will create digital asset use circumstances resulting in the decentralization of finance.
Others, such because the founders of Ethereum, Ripple and extra, had been assured {that a} second wave of innovation may evolve with out constructing it on prime of Bitcoin, given its limitations and governance ideas. They had been satisfied that a greater platform may very well be constructed to go well with all types of use circumstances.
Builders spent years attempting to ‘clear up’ Bitcoin issues. However possibly folks lastly realized there is no such thing as a downside to unravel. Bitcoin is what it’s.
Builders spent years attempting to “clear up” Bitcoin issues. However possibly folks lastly realized there is no such thing as a downside to unravel. Bitcoin is what it’s.
This part of evolution envisioned a blockchain as a protocol customary, just like the “TCP IP customary,” as a layer on prime of Bitcoin.
The “sandbox interval” and ERC20s (2015–2019)
With the Bitcoin blockchain not capable of fulfill the innovation wants of the use circumstances that had been constructed on Coloured Cash and different Bitcoin 2.0 layers, and with the acceleration of Ethereum-based innovation, all of the cool kids started to build on top of Ethereum. It was a a lot better platform for testing, scaling and creating way more advanced use circumstances in one of many largest monetary sandboxes on this planet.
The ICO interval of 2017–2018 noticed funding for a lot of completely different use circumstances, together with a rising neighborhood of builders and a crucial mass utilizing Metamask. It turned clear that Ethereum was taking the lead, turning into the go-to place to construct your blockchain dream use circumstances. The ERC-20 customary gained.
The Ethereum neighborhood invented DeFi and made it the killer real-life use case. With Bancor being one of many first, a full trade began to kind, together with options for loans, flash loans, yield farming and extra. It shortly turned the go-to for constructing functions, whereas Bitcoin was left behind as a platform, turning into possibly what it was “solely” alleged to be — new and higher gold. On the similar time, new generic sandbox platforms began to emerge, together with Polkadot and Cardano created by ex-Ethereum founders.
Use-specific blockchain interoperability (2019–2025)
It’s near inconceivable to develop a blockchain that completely matches all use circumstances. For instance, utilizing blockchain for micropayments is completely different from utilizing it for NFTs. You may nonetheless develop NFT functions and use them on prime of Ethereum. However wouldn’t you favor a blockchain and an ecosystem of instruments tailor-made in your particular use case?
On the again of the painful gasoline charges connected to utilizing Ethereum (that additionally proves an unbelievable market match for DeFi) there are proficient groups, like Cardano and Polkadot, attempting to construct different sandbox blockchain approaches like ETH, including higher scale, interoperability and different options.
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As we’re nonetheless in an rising expertise part, and something and every thing can occur. However the query that’s most fascinating to traders is the place a lot of the worth will likely be captured when it comes to layers?
The reply, I imagine, depends upon the use case.
I imagine that in some use circumstances, worth will likely be captured on L1 and with some use circumstances, worth will likely be captured on L2.
L1 and L2 worth seize
Extra blockchains are selecting a distinct segment market, understanding they can’t win within the race of a “blockchain for every thing,” and deciding to be the go-to blockchain for a selected market. That is the place we’ll see worth being captured on L1 being the “go to“ blockchain for a selected use case. I envision this pattern will maintain accelerating.
Take the USDC stablecoin. Will you ship your {dollars} on an costly and sluggish blockchain, corresponding to Bitcoin or Ethereum? Or will you utilize a quick and low fees- primarily based community, corresponding to Algorand, that’s focusing its sources on constructing the monetary rails?
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FLOW was constructed for the NFT market and developed by the main group that had skilled the disadvantages of utilizing Ethereum with CryptoKitties. In my view, FLOW is likely one of the most enjoyable consumer-based blockchains, working with the NBA and different huge gamers.
We used to suppose that L1 ought to at all times be extra priceless than L2 as all L2 protocols are being constructed on the muse of an L1. It’s sort of just like pondering of an app (L2) being constructed solely on prime of IOS (L1) and being value greater than the Apple inventory. Whereas hardly ever doable within the centralized world with Apple proudly owning the app retailer, that is simply doable within the crypto decentralized world.
For instance, The Graph is likely one of the tasks that makes you query that assumption. Its agnostic method creates worth on prime of various L1 chains in addition to for customers seeking to index the completely different chains.
In the long run, I foresee every blockchain L1 will likely be “tagged” with a selected market, turning into the “blockchain for….” These with no particular id, which can be attempting to be a bit “higher,” may “lose” their worth to L2 whereas being measured solely by their charges, identical to banks right now.
