At Algo Capital Millennials Multi Strategy fund one of the four key pillars for investment is Infrastructure Protocols. These protocols form the base layers of the activities and economies that are being built, and as such are called Layer One blockchains.
Bitcoin, Ethereum and Solana are some of the best known Layer Ones that exist in the crypto space, although many more exists and are launched regularly. 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.
With this newsletter we aim to divide up and classify these networks to meaningfully explain their main differences.
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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
Ethereum: The Best-Executing Blockchain (for now)
Proof of their expertise in managing execution and continuous development 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 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 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.
Solana has recent announcement 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 believes 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.
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 it resemble 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.
Cardano: The Castle-in-the-Sky
A lot of people give Cardano a lot of grief, but it is unlikely they entirely understand what Cardano is doing.
While Ethereum’s product is their blockchain, is it still not clear what is the end game for Cardano. It is still possible that Cardano’s product is its token, $ADA. Perhaps the endgame for Cardano isn’t necessarily to become the premier smart contract platform, but to provide a product for trading.
‘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.
The discussion above represents the current state of the technology development. But Digital Assets technologies are in constant (r)evolution; stay tuned to stay updated
