Last Updated: 11/3/2023 | 5 min. read
Examples provided for illustrative purposes. Allocations are subject to change.
Smart Contract blockchains broadened the scope of utility in the crypto ecosystem when Ethereum was created in 2015. These blockchains power decentralized applications (“dApps”) that run on smart contracts, or self-executing agreements between the underlying blockchain and the application to process transactions. These smart contract blockchains are the core piece of infrastructure that host decentralized applications, which vary from financial (e.g. Uniswap) to gaming (e.g. The Sandbox) to third-party services (e.g. Chainlink).
You can think of these blockchains as decentralized versions of Amazon Web Services (“AWS”) or the Apple App Store in that they provide the platform, tooling, and resources for developer activity.
What are the benefits of these platforms versus their centralized counterparts?
Giant tech platforms are able to take advantage of network effects and market dominance, often to the detriment of users and developers. For instance, many recall when Facebook arbitrarily kicked popular gaming developer Zynga off its platform in 2012[1]
Figure 1 and 2 Source: FTSE Russell, Grayscale Investment. Data as of October 24th, 2023. Allocations are subject to change.
There are two main types of smart contract blockchains: Layer 1s and Layer 2s. A Layer 1 blockchain (e.g. Ethereum, Solana, Polygon) operates as the base layer, processing transactions on its network. Some Layer 1s blockchains, like Ethereum, have Layer 2s built on top of them. Layer 2s (e.g. Optimism) rely on network security of the underlying Layer 1 (in this case, Ethereum), designed to enable faster, cheaper, and more scalable transactions.
Currently the sector is dominated by Layer 1s. On the other hand, Layer 2s gained significant momentum in 2023. Ethereum Layer 2 scaling solutions such as Arbitrum and Optimism have outpaced many Layer 1s in fundamental metrics like total value locked[2]
Today, Ethereum stands out as the largest and arguably most trusted Layer 1 for network security. Network security is fundamental to Ethereum as its high fees serve as incentives for validators. Ethereum also benefits from network effects: more users and more liquidity relative to other chains give Ethereum a significant advantage in capturing more Layer 2s and dApps. Solana, on the other hand, is regarded by many as technologically superior as far as speed. Solana’s 65k transactions per second throughput capacity currently dwarfs Layer 1 competitors[3] [4]
Examples provided for illustrative purposes only.
[1] Venture Beat
[2] Defi Llama
[3] Barrons
[4] Cointelegraph
[5] Defi Llam a
