How We Think About Layer One Blockchains

(This is a six-minute read)

Bitcoin, Ethereum, Solana, Avalanche–these are some of the best known ‘Layer One’ blockchains that exist in the crypto space. But what makes these Layer One protocols (L1s) different from each other?

L1s are base-layer blockchain networks that can validate and/or finalize transactions without needing another cryptographic network. Some are simple cryptographic ledgers, like Bitcoin, while others are base-layer smart contract platforms, the best known of which is Ethereum.

Others, like Solana, Binance Smart Chain, Cardano, Cosmos and Avalanche are primarily seen as competitors to Ethereum, while Bitcoin kind of sits in its own lane. Now some protocols are even launching their own Layer Ones (dYdX is one example, you can read our report on that project here). So do can we divide up and classify these networks to meaningfully understand their differences?

Mental Models for Blockchains

We try to keep our publication relevant to all levels of readers: today, in the midst of a bear market, we’re going to share some mental models that might help you better understand Layer One networks.

The idea is not to perfectly describe each of the below blockchains, but to share some ‘simplifiers’ that let us create quick comparisons between them. It won’t necessarily let us understand these networks in depth, but it will help us understand how these networks work, where they fit in, and under what conditions they might become successful in the wider crypto space.

Why do Mental Models Work for Blockchains?

I think there’s a common misconception around blockchains: lots of people think they’re all trying to do the same thing. People think Solana is trying to kill Ethereum while Ethereum is trying to kill Bitcoin.

The reality is very different. I view each blockchain as trying to accomplish similar things, but with each one making different assumptions on the best way to go about it.

Solana isn’t trying to take down Ethereum–I’m sure they’d like to get bigger than Ethereum, someday, but if you asked Solana what they’re trying to accomplish, ‘kill Ethereum’ is probably the last thing on their list. Solana’s founders simply believe a different fundamental set of truths around how to build a Layer One platform.

A good example of how this manifests itself is around different blockchains’ approach to growth. An ecosystem like Solana believes that bringing developers and users on chain will allow you to win, Ethereum believes that if you have the most secure and decentralized chain, you’ll win, and Bitcoin believes that apocalypse-resistance is what matters.

L1s don’t just try to get to arrive at the same result with different methods. Different L1s believe that the end state of crypto will look different, and they bet that their own approach will be the best one. And that’s why we can use mental models to understand and simplify our concepts of these blockchains.

Bitcoin: The Doomsday-Proof Blockchain

Bitcoin is an apocalypse-proof blockchain. It’s designed to be a project that just works perfectly as intended: a censor-proof, permissionless ledger, nothing more. What are the features that keep it anti-fragile in a world that tends to overcomplicate things?

  • No smart contracts
  • Proof-of-work consensus algorithm
  • Nearly no developer activity
  • No hard forks

Bitcoin’s beauty is, in large part, due to its antifragility. Those who desire for Bitcoin to become greater or different largely seem to miss the point.

Ethereum: The Best-Executing Blockchain (for now)

A healthy view on Ethereum is “the blockchain that’s managed to execute most successfully, so far.” While some see it as the ‘most decentralized’ blockchain, which is probably fair, it hasn’t always been that way thanks to events like the DAO hack. Now, Ethereum maxis would make fun of a similar event on another chain.

Despite a lot of Ethereum users recently becoming outspoken Ethereum ‘maximalists,’ Ethereum has really historically been a moderate blockchain. They’ve never been slow to ship, as the first smart contract platform to come on line, but they’ve simultaneously never damaged their blockchain beyond repair.

More proof of their expert in managing execution is:

  • Their pending transition from proof-of-work to proof-of-stake
  • A strong scaling plan
  • Ability to progressively decentralize over time.
  • Their focus on bridge security before it was widely seen as a problem

Binance Smart Chain: The Centralized Blockchain

While other blockchains talk about decentralization as important, Binance, on purpose, runs a blockchain that is pretty much centralized. Their validator set is hyper-centralized, and Binance does this to create a network that is inexpensive to run and ultra-cheap and quick to transact on.

While other blockchains assume a hostile environment, Binance assumes a ‘benevolent operator’ environment, because they are the operators. The assumption for its users is that the company won’t screw them over. While some see see that logic as flawed, it’s a compromise that seems to work for millions of people and billions of dollars of Total Value Locked. It’s definitely a unique compromise to make.

Solana: The Blockchain that Questions Assumptions

Solana is an interesting blockchain to me because they’ve thrown some of Ethereum’s pragmatic assumptions out the window. They’re the only chain to use the ‘proof-of-history’ consensus mechanism, and their security approach comes down to ‘we just need one copy of the ledger to survive.’ Their scaling goals are much more related to user and developer adoption than to scaling the blockchain itself.

I think this mental model is exemplified with Solana’s recent announcement around their Web3 native phone. This phone has a trustless hardware component that allows users to isolate their wallet private key from the operating system, which Solana sees as a vulnerable attack vector. The fact that Ethereum is worried about bridge security while Solana works on user-level security is a clear example of how these blockchains differ in outright assumptions.

Polygon: The Business Development Blockchain

There’s not a single performance metric that Polygon ‘wins’ at: not throughput, not finality, not security, not user experience. But they are really good at one thing: business development.

Polygon was phenomenally popular for its ability to come to market first, and now it’s been able to secure one business partnership after another: Draft Kings, Adobe, Disney, Meta, and the NFL have all announced collaborations on this Ethereum sidechain.

Polygon posits that this BizDev is more important than tech in the short term, and its speed-to-market has allowed it to acquire several Zero-Knowledge Rollup companies that will come in handy as the market requires better and better tech. Will it work? It seems to be convicing investors, with the chain being the best performer of the L1s mentioned in this newsletter.

Polkadot: A Federalist’s Blockchain

Polkadot uses a relay-chain/parachain model which allows independent blockchains to all communicate together and share a security model.

Polkadot has a unified governance structure that makes me think of it as a blockchain with a governance structure similar to the United States: each state (parachain) has its own sovereignty and rights, but must rely on the central organization for governance and security.

Cosmos: An Out-of-the-Box Blockchain

Cosmos is a project that makes it incredibly easy to set up a new blockchain. They create an open-source set of rules to operate these networks, but ultimately leave the governance of the blockchain up to its creators, leaving validation, voting, and architecture questions up in the air.

Another way to think about the Cosmos ecosystem is as a parallel ‘states rights’ blockchain to Polkadot’s ‘federalist’ architecture–Cosmos gives you the framework to start your own blockchain (Terra Luna, Osmosis, Juno, and Evmos all being examples of this), then lets the chains communicate with each other, while staying out of the way.

This has some drawbacks, but it’s been an incredibly popular platform as it gives well-funded teams a way to simply and quickly roll out their own L1 networks. Lately it’s been touted as a solution for ‘app-chains,’ or applications that can be benefitted by having their own chains: dYdX will be launching shortly on Cosmos.

Cardano: The Castle-in-the-Sky

A lot of people give Cardano a lot of grief, but I don’t know if they entirely understand what Cardano is doing. Take Charles Hoskinson’s YouTube channel, or Cardano’s conference booth at a recent conference:

While Ethereum’s product is their blockchain, is it possible that Cardano’s product is its token, $ADA? I might take some heat for this, but perhaps the endgame for Cardano isn’t necessarily to become the premier smart contract platform, but to provide a product for speculation.

‘Castle-in-the-sky’ investments aren’t new–think about most biotech companies or cash-burning tech startups. They’re use case is more speculative than based on any type of fundamental value, and with Cardano’s (relative) failure to create a successful crypto ecosystem over the last cycle, it’s sure they’ll have another bull run to create persistent memes and ideas around the future potential of the blockchain.

Wrapping Up

We’re not claiming to have the perfect metaphor or analogy for every blockchain, but it is an interesting experiment to try to distill an L1 network down to a single idea or concept. Of course, this lack of nuance has its drawbacks, but remains a worthwhile pursuit nonetheless. Finding this simplicity among such complexity helps us interpret what a specific blockchain is trying to accomplish in the space.