Data reveals the new public chain competition: Who can surpass Ethereum?

Original Title: Can Any Layer 1 Blockchain Overtake Ethereum?

Original Author: STEVEN SHI

Translation: Deep Tide TechFlow

Since the advent of Ethereum, Layer 1 ("L1") blockchains have been one of the most popular investment areas in cryptocurrency. More than half of the top 20 cryptocurrencies by market capitalization are native tokens of L1 blockchains. In fact, the concept of "new public chains" (alt L1) was one of the key narratives during the adoption cycles of 2017 and 2021. Due to the enormous demand for Ethereum's block space, many investors and users flocked to new L1s with higher capacity and lower fees.

However, several years after the alt L1 concept peaked in 2021, Ethereum remains the de facto leader among L1 blockchains. Many other L1s resemble ghost towns, with user growth stagnating or declining.

Nevertheless, new L1s continue to emerge. Aptos and Sui are two major L1s launched in the past year, currently valued at over $12 billion in total. Additionally, there are several upcoming projects, some of which have reached nine- or ten-figure valuations in private funding rounds. Furthermore, some existing L1s still have strong communities that believe in their potential to grow and compete with Ethereum.

The debate over alt L1s persists. Therefore, we want to answer a question frequently posed by readers: Is there any Layer 1 blockchain that can surpass Ethereum?

L1 Overview

To address this question, we review the history of L1s and Ethereum's leading position. In this report, we define L1s broadly as permissionless smart contract blockchains, often referred to as "ETH killers."

The rise of L1s can be attributed to the limitations of Bitcoin. Bitcoin was originally designed to serve effectively as a trustless peer-to-peer electronic cash system. As Bitcoin itself gradually gained recognition as legitimate currency, developers began attempting to create decentralized applications such as alternative digital currencies on Bitcoin. However, due to Bitcoin's limited scripting language and the reluctance of the social layer to add complex features to the network, Bitcoin was not suitable for supporting the development of other applications. Previous attempts to create applications on Bitcoin had stalled.

The launch of Ethereum filled this gap. It was the first widely recognized blockchain with a Turing-complete programming language, greatly expanding the design space for decentralized blockchains.

Like Bitcoin, Ethereum's core culture prioritizes decentralization over scalability. Therefore, as Ethereum's adoption grew, such as during the ICO boom of 2017 or the DeFi Summer of 2020-2021, the network quickly reached its throughput limits. The network could become congested within hours, gas fees skyrocketed, and many users could not afford the costs. At times, a simple token transfer could incur a transaction fee of $150. Developers were reluctant to increase throughput limits for fear of "centralization creep" in the protocol.

Thus, when Ethereum faced scalability issues, hype around new public chains emerged. During the ICO boom, blockchains like EOS, Tezos, and Cardano raised hundreds of millions of dollars, promising faster L1 architectures. This pattern also emerged to a lesser extent in 2021. As shown in the figure below, the peak of L1 fundraising coincided with strong adoption of cryptocurrencies.

Market Status

Despite the emergence of hundreds of L1 competitors since Ethereum's launch, Ethereum is still regarded as the de facto L1. Clearly, Ethereum leads in market capitalization. Among the top 50 L1 blockchains, Ethereum's market share exceeds 55%. But in what areas does Ethereum still lead? And what drives Ethereum's premium valuation?

Users - Cheaper, Faster L1s Win

Users are often seen as the driving force behind valuations, as the value of a network is believed to grow superlinearly with the number of users (Metcalfe's Law).

Due to the lack of anti-witch systems and the relative ease of creating new addresses, measuring the true active users in cryptocurrency is challenging. Nevertheless, active addresses can provide a good preliminary approximation of user adoption across each blockchain.

Clearly, Ethereum lags in active users. Its valuation premium does not stem from user numbers. Cheaper blockchains like Tron, Binance Coin (BNB), and Polygon have more users. Some networks, such as Polkadot and Cardano, have relatively high valuations despite having few active users. Therefore, in terms of the title question, multiple L1s have already surpassed Ethereum in user numbers.

Developers

Developers are another key metric for assessing network health. They not only maintain and improve the protocol layer but also build use cases on L1. They can serve as leading indicators for future value creation.

According to Electric Capital's developer report, Ethereum stands out in terms of total active developers.

The number of developers on Polkadot, Cosmos, and Solana is impressive, as they have their own unique programming languages. Given that Aptos and Sui have only recently launched, their developer numbers are also quite notable.

Liquidity

Ethereum's liquidity on the network is significantly ahead of all other L1s, which can be measured by total value locked (TVL), trading volume on decentralized exchanges (DEXs), and the number of trading pairs. Since the summer of 2022, Ethereum's TVL market share among other L1s has remained stable at around 60%, coinciding with the collapse of Terra.

Ethereum Leads, But Not Without Exceptions

To limit the scope of this article, we focused on a few key metrics. There are many other factors to consider. Nevertheless, Ethereum's valuation lead is clearly not derived from user adoption. BNB and Tron win in these categories with a significant advantage. Instead, Ethereum clearly leads in liquidity and capital flow. The market evidently places a considerable premium on capital.

Factors Analyzing L1

What drives the above metrics? Why do certain chains have more users? What drives capital flow between L1s? Why do some L1s remain resilient after multiple bear markets while others are marginalized? Below, we provide some frameworks and models to help answer these questions.

Decentralization

We must first consider the fundamental attribute of blockchains: decentralization. Decentralization has multiple benefits. First, greater decentralization enhances resistance to censorship, helping the network withstand malicious attacks. It also improves the resilience and security of the network, instilling confidence in users to store and transact value on the L1 network. We believe that the higher the degree of decentralization, the greater the premium on L1.

Decentralization itself is an abstract concept that is difficult to measure. It may be something you know when you see it. Nevertheless, we can use several factors to gauge the level of decentralization in a network:

• Number and Distribution of Nodes. Nodes actively participate in the network, maintain the state of the blockchain, and validate and relay transactions based on their type. Therefore, more nodes typically help enhance the resilience and security of the network. If nodes are more geographically and organizationally distributed, it becomes difficult for any single participant to exert influence over the network. Whether nodes operate on the same infrastructure (e.g., the same cloud provider) or independently with dedicated hardware is also important.

• Token Holder Distribution. The risks of a highly concentrated token holder distribution are evident. In a highly concentrated distribution, a few token holders can dictate the development of the entire network, preventing users from transacting on the network.

• Client Diversity. Client diversity refers to the number of software clients that can be used to run nodes. Multiple clients enhance the network's resilience to attacks and errors. If a network runs on only one client, errors in that client could threaten the entire blockchain.

• Satoshi Coefficient. The Satoshi coefficient measures the number of entities or nodes required to achieve a majority (typically 51%) in the system. A higher coefficient indicates better decentralization, as it means more entities are needed to compromise or control the system. However, this is a single metric that may overlook many nuances. For example, Lido controls 32% of all staked Ethereum. However, Lido distributes staking across 30 node operators and cannot control the operators' actions regarding their staking (i.e., cannot force malicious collusion).

• Governance Model. Off-chain governance involves decision-making outside the blockchain through community coordination, while on-chain governance embeds governance directly into the protocol, allowing for token-based automated voting for changes. The impacts on decentralization vary. Off-chain governance is not affected by concentrated token holders but is prone to political centralization and potentially higher participation thresholds.

• Culture. Culture is an undervalued aspect of blockchain decentralization. A culture with strong values can help resist the risks and threats of centralization that blockchains face, such as Bitcoin's cultural defense against application development or Ethereum's unified push for improving client diversity.

Network Effects

Network effects in blockchains encompass many aspects. One of the most apparent network effects is the interaction between users and developers, with many parallels to Web2 platforms. User growth attracts developers to join the network, often leading to the emergence of new applications, further creating use cases and attracting more users to the network, and so on.

Network effects also exist in other areas. For example, programming languages like Solidity can generate meaningful network effects. As more developers learn Solidity, the Solidity programmer community expands, making it easier to find partners, hire developers, and gain community support for issues. There are also more developer resources, such as software libraries, tools, and best practices, making it easier to create robust smart contracts. It becomes easier to find competent security auditors. All of this improves the innovation cycle within the ecosystem by attracting more developers and accelerating time-to-market for applications.

Since financial applications are a key use case for cryptocurrency, capital network effects are also crucial. Liquidity generates more liquidity. New financial primitives are most likely to launch on networks with the largest market size and highest liquidity. These network effects are also supported by key stakeholders. For example, Coinbase supports deposits/withdrawals, Circle supports native USDC issuance, and Fireblocks supports custody, all of which help improve capital flow.

Lindy Effect

Given the nascent nature of digital assets and the lack of historical data, many often cite the Lindy effect as a suitable psychological model for measuring L1 success. The longer a blockchain exists and maintains relevance, the greater the likelihood it will remain relevant in the future. This model may apply. L1s that have faced various challenges (such as technical issues, hacks, market volatility, regulatory scrutiny, competition, etc.) and still possess strong user appeal are more likely to succeed in future cycles.

This model suggests that more mature L1s remain relevant and have a better chance of eventually surpassing Ethereum.

Lag Effect

The lag effect describes the concept that a system's state depends on its history. Once a system is set on a certain path, it tends to persist on that path, making deviation increasingly difficult; the longer the system remains on its trajectory, the more entrenched it becomes.

The lag effect plays an important role in understanding several L1s. For example, Ethereum's early use of PoW before transitioning to PoS may have contributed to widespread participation and token distribution in its early years. This distribution is very difficult for new networks to replicate. Another example is that, despite FTX's negative impact on the Solana ecosystem in recent years, FTX's early association may have helped propel Solana into the mainstream and become a top new public chain ecosystem.

In this context, Ethereum's leadership is not a result of technical superiority but rather the outcome of its unique historical path, the momentum it has gained over the past decade, and the compound effects of its choices. Like many other analogies in technological history (such as the often-cited QWERTY example), Ethereum may primarily maintain its dominance through being a pioneer and its unique history.

Differentiation

L1 blockchains often differentiate themselves from Ethereum and other L1 blockchains by offering superior architectures or catering to specific niches. This may involve exceptional scalability, reduced transaction costs, unique consensus mechanisms, enhanced privacy features, or specialized tools for specific industries. For example, Solana's differentiation lies in its commitment to a monolithic blockchain architecture to maximize the benefits of composability and liquidity effects. Aptos and Sui offer a more secure and intuitive programming language, Move, to reduce the likelihood of accidental code errors.

Monetary Policy

The monetary policy of a blockchain is particularly important for its success, especially for Layer 1 (L1) protocols. This policy dictates the issuance, distribution, and potential destruction of the blockchain's native cryptocurrency, affecting its scarcity and value proposition. A clear, consistent, and transparent monetary policy can build trust among participants, attract long-term investors, and stabilize the economic environment of the network. Additionally, it directly impacts the incentives for validators or miners, ensuring the security and functionality of the blockchain. If balanced properly, monetary policy can promote sustained growth, adoption, and stability, allowing L1 blockchains to differentiate themselves in a competitive market and ensure their long-term viability.

Layer 2 (L2)

New public chain solutions are no longer the only viable scaling options. Roll-ups became Ethereum's unofficial official scaling roadmap in October 2020. Since then, they have gradually gained market share from other new public chains. In fact, Arbitrum and Optimism—both Optimistic Roll-ups—have more active users and TVL than most top L1s. Recently, Coinbase's Optimistic Roll-up Base has also rapidly gained attention. In the coming years, ZK Roll-ups are also likely to follow suit.

From a broader perspective, Optimistic Roll-ups, ZK Roll-ups, and application-specific Roll-ups are all part of the Ethereum ecosystem. When these networks are incorporated into Ethereum itself, the barriers to "surpassing Ethereum" become higher. From this angle, Ethereum's leadership is not a technical advantage but rather the result of its unique historical path, the momentum it has gained over the past decade, and the compound effects of its choices.

Conclusion

The technology field, especially in emerging areas like cryptocurrency, is constantly evolving and full of uncertainties. This question also implies a zero-sum mindset, where the victory of one L1 means the failure of another. As Buffett aptly stated, "Predictions can tell you a lot about the predictor but nothing about the future."

If forced to provide an answer, it seems that Ethereum will maintain its leadership in the L1 space for the foreseeable future. It leads in the most critical metrics, especially in decentralization. As active participants in cryptocurrency, we also see that innovation around cutting-edge technologies is most vibrant within the Ethereum ecosystem, such as scaling solutions, ZK technology and applications, privacy solutions, MEV mitigation/democratization, and more.

Among the current new L1s, we believe Solana is the most promising candidate to surpass Ethereum. Its monolithic, high-throughput architecture presents a meaningful architectural differentiation from Ethereum. It is the only L1 with multiple validator clients. The Solana community has experienced severe collapse events in recent years but remains very active and enthusiastic. In this ecosystem, we see unique innovations not seen on other chains, such as xNFTs, state compression, compressed NFTs, Solana mobile stack, and more.

However, the cryptocurrency space is emerging and constantly evolving, and new disruptive technologies may arise. In this dynamic environment, narrow predictions are meaningless. A more productive approach is to continuously observe, remain adaptable, and be willing to change one's perspective.