Binance Research: Summary of Layer 1 Track Development in 2022 and Future Outlook

Original Title: 《2023 CMC Crypto Playbook: Layer-1 s --- What Has Happened and Where Are We Headed?》

Source: Binance Research

Compiled by: DeFi Path

Considering the levels that should have been reached in 2022 and everything that has happened in the crypto space, Layer 1 ("L1") can still be said to have experienced a very interesting and eventful year. In 2022, many notable events occurred in the L1 space. From Ethereum's transition from PoW to PoS in September to the collapse of the Terra ecosystem in May. New L1 projects also made significant progress, such as Aptos launching its mainnet, while Sui is expected to launch earlier next year. Notably, BNB Chain and Layer 2 ("L2") solution Polygon gained more market share in the market vacuum left by Terra, while Solana had a more challenging year, being one of the L1s most affected by the recent FTX events. This year was filled with significant events that can be said to have impacted the entire cryptocurrency development process.

What Happened?

Figure 1: L1 / L2 Market Capitalization and Daily On-Chain Metrics for 2022

Key Observations

• Of course, there are many reasons for the lower market capitalization, and we do not intend to discuss these reasons specifically. However, we should be very clear that, in terms of daily trading and active addresses, market capitalization does not necessarily correlate with very important on-chain metrics. As we can see, BNB Chain and Solana performed well here, while Ethereum, despite its higher market capitalization, showed significantly lower daily activity.

• Ethereum: The Merge! We do not want to keep repeating what the Merge is, but rather discuss its impact. Data shows that since the transition to PoS was completed in mid-September, the supply growth of $ETH has significantly decreased (from 3.58%/year to 0.005%/year). In fact, combined with its burn mechanism, $ETH was a deflationary asset for most of November and is currently very close to that level.

• BNB Chain: BNB Chain has had a commendable year, with a market cap decline of only about 45% year-to-date, much better than its main competitors Ethereum (-64% YTD) and Solana (-90% YTD). BNB Chain has been one of the main L1s helping developers displaced by the Terra and FTX scandals. Daily activity metrics remain very high, and the launch of BNB liquid staking and zkBNB are notable highlights. Innovations and partnerships in the NFT space are also in full swing, with OpenSea recently announcing support for BNB Chain NFTs on its platform.

• Solana / Avalanche: 2022 was challenging for the classic "competitive L1" narrative of 2021. Solana saw some strong traction in its NFT ecosystem, with increases in the variety of collectibles, trading volume, and market. Avalanche saw positive significant news regarding their subnets, which provide scalability for decentralized applications ("dApps"), particularly in the gaming sector. However, both competitive L1s faced tough blows (Solana was impacted by the FTX collapse, while Avalanche was the result of some less favorable news leaked months ago). Solana also continued to suffer from frequent network outages, raising questions about the network's reliability.

• Layer 2: While L2 is technically one step behind L1, any discussion about L1 would be incomplete without at least commenting on the growing scaling market. Polygon is undoubtedly the leader in this regard, with a plethora of comprehensive solutions. This year has been strong for Polygon, as their business development continues to shine (Starbucks NFT, Reddit NFT, Instagram/Meta NFT, etc.). More pure L2s, Arbitrum and Optimism, also performed strongly over the past year and continue to increase activity and capture market share from some smaller competitive L1s. Earlier this year, the launch of the OP token was a notable moment for Optimism, while Arbitrum continued to focus on their core products with the launch of Arbitrum Nitro and Arbitrum Nova.

Expectations for 2023

Now that we have understood the progress of major L1s this year and some of their notable events, what about the coming year? What are our preliminary expectations?

L1s (especially some smaller competitive L1s) will feel the pressure from L2s

• One of the main narratives of this year is the so-called "L222," referring to 2022 as the breakout year for L2. Is that really the case? Total Value Locked ("TVL") in L2 shows a growth of 118% since the beginning of the year (in ETH terms). So, to some extent, yes. 2022 was undoubtedly the most brilliant year for L2 so far. However, in absolute terms, the total TVL locked in L2 is only about US$4.5 billion. When we compare this with the total DeFi TVL in Ethereum (approximately US$25 billion) and the total cryptocurrency market capitalization approaching US$900 billion, we can see how far L2 still has to climb.

• Also to consider is the fact that, as shown in Figure 1, in terms of daily on-chain activity, both Arbitrum and Optimism surpassed Avalanche. Additionally, the deployment of competitive L1 dApps on L2s is increasing, such as Avalanche's Trader Joe recently announcing their deployment on Arbitrum. It will be interesting to monitor what happens with some smaller competitive L1s. Many in the crypto space are discussing the idea that major L1s will simply become settlement layers, while execution and activity occur on L2s. While we have already seen some instances of this, 2023 is likely to be the year we see this happen on a larger scale.

If new L1s really bring something new, they can survive

• Consider the most notable new entrants in the L1 space, Aptos (launching mainnet in Q4 this year) and Sui (expected to launch in early 2023). Both of these L1s bring various new innovations, including the Move programming language. Given the background of this language and everything it promises, along with the potential increase in transaction speeds for both L1s, there is a possibility for some real innovation. It will be important to closely watch whether one or both of these L1s can leverage their new technologies to achieve a step-change in the crypto market.