Investor Takeaway: Layer-1 blockchains are central to the expansion of the cryptocurrency and DeFi markets. Whereas there’s been a large increase in investor curiosity (and subsequent growth/bust cycles), the SEC’s latest labeling of some Layer-1s as securities means some warning could be prudent.
The trendy cryptocurrency ecosystem is predicated round Layer-1 blockchains. Scalable blockchains like Ethereum, Solana, and Cardano have performed, and proceed to play, an important position within the improvement of notable DeFi expertise like NFTs. As such, billions of {dollars} from buyers have flowed into the trade within the final 5 years.
There’s all the time some give-and-take, nevertheless. The inherent volatility of native Layer-1 tokens has additionally drawn the eye of regulators within the US and EU. In 2023, the SEC is taking a troublesome stance towards all outstanding Layer-1 blockchains aside from the large two – Ethereum and Bitcoin.
On this sector report, we’ll give attention to the broad traits within the trade round Layer-1 blockchains, together with a more in-depth have a look at the potential affect of the latest SEC choices relating to Layer-1 tokens like Cardano, Solana, and BNB Coin.
Business Overview
Layer-1 (L1) blockchains are the true spine of the nascent cryptocurrency markets. Bitcoin led the way in which with the first-ever viable Layer-1 protocol. Nonetheless, its expertise and structure have since been overtaken by extra progressive and scalable networks like Ethereum.
Though bitcoin remains to be the king of Layer-1 protocols, its utility is basically restricted to being a extremely profitable speculative asset. Different protocols like Ethereum, Solana, and Cardano provide a number of different advantages.
Many specialists suppose blockchain expertise has the potential to revolutionize finance, funds, banking, and different financial spheres. By means of their help for sensible contracts and decentralized apps, the newer Layer-1 protocols are actively contributing to the evolution of the blockchain house.
As of Q2 2023, over $270 billion is invested within the high 9 Layer-1 blockchains beneath bitcoin. The latter dwarfs all of them with a market cap of $500 billion, but it surely has additionally been round for over 12 years.
Other than Ethereum, which launched in 2015, all different Layer-1 blockchains began after 2017. In a comparatively brief time-frame, many of those tasks have managed to draw upwards of $5 billion every in market cap.
The highest gamers within the descending order of magnitude are Ethereum, BNB Chain, Cardano, Tron, Solana, Polkadot, and Avalanche. Ethereum dwarfs all of them with a complete market cap of $209 billion, practically thrice the mixed market cap of all different L1 blockchains (apart from bitcoin).
All these blockchains, together with bitcoin and Ethereum, have suffered heavy losses within the crypto bear market of 2022. The complete blockchain sector suffered a collective lack of $2 trillion in market cap from January 1, 2022 via June 2023.
Regardless of these losses, we imagine the trade nonetheless has an upbeat future, not less than within the case of the 2 foremost blockchains – bitcoin and Ethereum. Each are firmly established, with secure ecosystems and international person bases, and are least prone to endure a catastrophic collapse.
Nonetheless, the destiny of the remaining gamers out there is much less clear, largely as a consequence of components like elevated competitors, inner weaknesses, and above all, rising regulatory strain. This very important level will likely be mentioned in better element in our investor thesis beneath.
High Layer-1 Initiatives
| Undertaking | Market Cap | Annualized Income | Property Staked (market cap) | Complete Each day Transactions | Each day Energetic Addresses |
| Ethereum | $209.2b | $2.51b | $34.4b | $474k | 527.6k |
| BNB Chain | $37.1b | $20.12m | $5.39b | 3.49 | 2.0m |
| Cardano | $9.6b | $0 | $6.47b | 66,791 | 54,977 |
| Solana | $6.0b | $561k | $6.02b | 29m | 143.3k |
| Polkadot | $5.7b | $222.75k | $2.62b | 8.82k | 4.3k |
| Tron | $6.5b | $89.4m | $2.69b | 12m | 2.7m |
| Avalanche | $4.1b | $1.3m | $3.14b | 457.9k | 161k |
Funding Thesis
Blockchain proposes a radically totally different means of dealing with massive volumes of delicate knowledge in a safe but extremely decentralized method. This mannequin has large ramifications for our trendy economic system, the place knowledge is historically saved in centralized databases.
In sectors as numerous as finance, well being care, actual property, enterprise, and logistics, organizations are pressured to spend huge quantities of sources to take care of database safety. This usually comes at the price of effectivity, economic system, and privateness.
Blockchain expertise has the facility to alter all that. And Layer-1 blockchains are the constructing blocks of this decentralized future, notably within the house of funds, finance, and banking. L1s are just like the working system for the blockchain ecosystem. They supply the bottom layer upon which all the pieces else is being constructed.
That is notably true for Ethereum. It’s sensible contracts permit builders to construct all types of attention-grabbing (and doubtlessly worthwhile) dApps on high of the bottom Ethereum layer. Buyers can even use DeFi apps and sensible contracts on Ethereum and different L1 ecosystems to place their crypto property to work in yield farming and crypto lending. You may as well maintain the cash native to the blockchain for speculative trades.
Layer-1 blockchains are standard amongst buyers as a result of they open the doorways to a variety of funding alternatives with various ranges of threat. Nonetheless, due to the very nature of the L1s, that’s to supply the bottom layer for all the pieces, it’s unlikely that they’ll all survive. In an effort to survive, Layer-1 depends on a rising developer group, and the related community results. Which means that sooner or later it’s probably that we are going to see 1 or two dominant L1s and maybe one other 1-2 extra “area of interest” and smaller L1s take over the blockchain ecosystem.
Investor Alert: The Potential Affect of SEC Rules in 2023
Whereas they maintain an immense promise of excessive ROI, investments in Layer-1 blockchains do current dangers. Market volatility is a significant risk within the crypto house. Bear markets and flash crashes routinely wipe out billions of {dollars} in market cap in a matter of days or even weeks.
Nonetheless, most of the Layer-1 blockchains face one other risk from businesses just like the Securities and Trade Fee (SEC) in the US: extra stringent laws. Within the aftermath of the collapse of Terra/LUNA and FTX, regulators are cracking down on the crypto house.
Main the cost, the SEC has categorized the tokens of greater than 12 main blockchains as securities. Beneath present US laws, entities promoting securities to the general public should be registered with the SEC.
It additionally brings stringent compliance guidelines relating to the disclosure of data, and different intensive monetary laws, audits, and oversight. The SEC has additionally filed lawsuits towards the 2 main centralized exchanges – Binance and Coinbase – for promoting Layer-1 tokens and different crypto merchandise within the US.
The SEC has categorized all the foremost Layer-1 tokens, besides Bitcoin and Ethereum, as securities. Buying and selling or promoting these tokens could incur penalties for cryptocurrency exchanges.
For buyers, the Layer-1 blockchain panorama has change into much more sophisticated outdoors of ETH and BTC. The latest SEC laws might additionally damage the worth and liquidity of all L1s.
We strongly advocate all buyers consider carefully earlier than investing in any of the opposite L1 tokens focused by the SEC. It might be some time earlier than we get additional readability on the matter since a number of lawsuits are pending within the courts, and will take years to settle. As well as, it appears Congress is weighing in on the latest SEC actions, and seeking to push again with new regulatory frameworks, which might be a win for the crypto trade.
Who’s Investing: Institutional Backing
The Layer-1 blockchain house has in all probability seen the most important inflow of institutional capital in your complete crypto house. Bitcoin leads as a consequence of its distinctive standing as a excessive ROI speculative asset. Main buyers holding bitcoin price tons of of thousands and thousands of {dollars} embrace corporations like MicroStrategy, Tesla, Galaxy Digital Holdings, Block, Coinbase World, and Riot Blockchain.
As a result of its extremely scalable and environmentally-friendly expertise, Ethereum has additionally attracted appreciable curiosity from corporations like Tesla, Alphabet, Sq., and Paypal. Hedge Funds like Fortress Funding Group, Ark Funding Administration, and Renaissance Applied sciences have additionally wager on Ethereum since 2021.
And all that’s simply an funding into shopping for the native tokens of those blockchains. Some tasks have additionally raised money over time via a number of avenues like preliminary coin choices (ICOs) and subsequent funding rounds.
As an illustration, Solana’s ICO invited curiosity from buyers like Coin Shares, Multicoin Capital, Buck Stash, and the now-defunct Alameda Analysis. Main buyers in Polygon embrace Disney Accelerator, Crown Enterprise Capital, Celsius Community, SoftBank Imaginative and prescient Fund, and Steadview Capital.
High Layer-1 Protocols by Market Cap
Ethereum
Value: $1,738.66
Annualized Revenues: $2.51b
Each day Energetic Customers: 338k
Twitter Followers: 3.08m
Because the second largest blockchain by market cap behind bitcoin, Ethereum requires no introduction. The undertaking was launched in 2015 as a Proof of Work blockchain by a number of builders, together with Vitalik Buterin.
Ethereum is extremely standard as a consequence of its wonderful help for sensible contracts and decentralized apps that may resolve real-world issues. The native asset of the blockchain is Ether (ETH), the second largest cryptocurrency by market cap.
As a result of rising community congestion and excessive transaction charges (gasoline), Ethereum started a swap from Proof of Work to Proof of Stake (PoS) in 2020. The ultimate community replace (the Merge) was accomplished in April 2023.
Additional updates will deliver different options like sharding to resolve the issue of community congestion. Amongst all of the blockchains on this record, Ethereum undoubtedly has probably the most well-developed Layer-1 ecosystem and – in our opinion – one of the best development prospects.
Because of the promise of extra rewards via staking and different DeFi tasks, demand for ETH stays fairly excessive in 2023. The danger of regulatory sanctions are additionally decrease because the SEC considers ETH to be a commodity, not a safety.
BNB Chain (BNB)
Value: $237.46
Annualized Revenues:
Each day Energetic Customers: 1.2m
Twitter Followers: 10.5m
BNB Chain was initially known as Binance Good Chain. It was launched in 2020 by Binance, the most important cryptocurrency change on this planet. Though Binance is a centralized change, BNB Chain is designed to be a decentralized and permissionless blockchain.
BNB started life as an ERC-20 token on the Ethereum blockchain earlier than it was elevated to a correct cryptocurrency on its native Layer-1 protocol. Consider BNB Chain as a competitor to Ethereum, and BNB as a competitor to ETH.
Like Ethereum, BNB Chain helps DeFi, sensible contracts, and scalable Layer-2 chains. The Layer-1 protocol additionally makes use of a PoS, with validators receiving rewards within the type of Binance Coin for offering liquidity and processing transactions.
BNB Chain enjoys large reputation in key markets outdoors the US as a consequence of its affiliation with the Binance change. Nonetheless, the corporate has been hit laborious by regulatory motion within the US.
A 2023 lawsuit by the SEC has severely affected Binance’s means to serve US prospects. Pending the end result, each the change and the BNB chain might face increased working prices and compliance burdens in the US. Different nations have adopted swimsuit.
Because of the ongoing regulatory uncertainty in a key market just like the US, it’s laborious to touch upon the long-term development prospects and viability of BNB Chain.
Cardano
Value: $0.276
Annualized Revenues: $0
Each day Energetic Customers: 50k
Twitter Followers: 844k
Between 2017 and 2020, a number of new blockchains had been launched with extremely scalable PoS consensus mechanisms. These Layer-1 protocols rose in reputation as options to Ethereum, because the latter was getting slowed down by community congestion and excessive transaction fees.
Cardano was a number one contender amongst these protocols for the title “Ethereum Killer.” It’s named after an Italian genius from the sixteenth century – Gerolamo Cardano. And the native token is known as ADA in honor of Ada Lovelace, a pioneer of laptop programming.
Over time, Cardano added varied progressive options together with help for NFTs and sensible contracts. Nonetheless, regardless of a thriving Layer-1 ecosystem, the blockchain has largely didn’t dwell as much as the title of “Ethereum Killer.”
As an additional blow, Cardano is among the many 13 cryptos labeled as securities by the SEC. In the long run, this has the potential to severely prohibit the commerce of ADA on US exchanges. As of this writing, Cardano’s long-term development potential appears to be like fairly bleak as a result of excessive degree of regulatory uncertainties.
Solana (SOL)
Value: $15.20
Annualized Revenues: $6.83m
Each day Energetic Customers: 150k
Twitter Followers: 2.25m
Solana is a Layer-1 protocol with a heavy give attention to DeFi, sensible contracts, and NFTs. The blockchain has its bases in Geneva and San Francisco and was launched in 2020. In its early years, Solana was touted as a promising Ethereum killer as a consequence of its scalability and velocity.
Nonetheless, the blockchain has endured a surprising fall from grace since 2022. The native SOL token tanked in worth by 94% in a single year. Solana was closely affected by its affiliation with Sam Bankman-Fried, the disgraced founding father of the FTX change.
His funding agency had a significant stake in SOL and he was additionally an early backer of the Solana protocol. There may be even a suspicion amongst some quarters that Bankman-Fried’s involvement could have contributed not less than not directly to SOL’s meteoric rise.
Regardless of its promise of velocity and scalability, Solana has struggled to dwell as much as its billing within the contest with Ethereum. With the latter’s swap to PoS, Solana faces a good steeper climb for future relevance and development.
Most likely the largest setback to the protocol after the FTX debacle is its itemizing by the SEC as a safety. Decrease buying and selling alternatives within the US market might severely have an effect on Solana’s reputation at a time when the token is already going through inner challenges and stiff competitors.
Polkadot (DOT)
Value: $4.63
Annualized Revenues: $222.75k
Each day Energetic Customers: 3.61k
Twitter Followers: 1.4m
Polkadot is technically not a Layer-1 blockchain. Not like most different protocols on this record, it operates at a a lot deeper degree and known as a Layer-0 protocol. Polkadot was launched with the formidable plan to behave as a “blockchain for all blockchains.”
It serves as a platform the place all different blockchains can exist as interconnected protocols. In different phrases, it’s a “meta protocol.” Layer-0 protocols present the infrastructure that facilitates safe and straightforward interactions between Layer-1 protocols like Ethereum and bitcoin.
Within the extremely fragmented blockchain ecosystem, Layer-1 protocols exist as impartial silos. Launched in 2020, Polkadot has the potential to revolutionize your complete house. Nonetheless, as a consequence of its advanced nature, the blockchain is extra oriented towards builders than retail customers.
The Polkadot system has a central protocol known as the relay chain. Customers can create extra chains in parallel to the relay chain. These “parachains” can join amongst themselves and with different standard blockchains utilizing a connecting layer or bridge.
The native token on the protocol known as DOT. It acts because the governance token and can be used to earn staking rewards. Polkadot had a tough yr in 2022, as lots of its related NFT and DeFi tasks failed to achieve traction as a result of market crash.
One other main setback was the de-pegging of the algorithmic stablecoin Acala. The Acala community was a significant income for the Polkadot platform. The next crash of main CEXs and stablecoins out there has additionally contributed to a steep fall in DOT costs.
Within the ongoing bear market, Polkadot faces an unsure future. Nonetheless, there is no such thing as a doubt that the parachain idea has immense utility in a various crypto market stuffed with a number of Layer-1 protocols. Polkadot’s development prospects are tied to the broader prospects of the crypto/NFT/DeFi markets.
Tron (TRX)
Value: $0.0724
Annualized Revenues: $1.09b
Each day Energetic Customers: 2.03m
Twitter Followers: 1.4m
Tron is a Layer-1 blockchain launched in 2017 with a heavy give attention to content material creation and media consumption. It goals to behave as a platform the place creators – musicians, designers, artists – can take away intermediaries and declare full possession of their creations and deal instantly with their viewers.
The blockchain is extraordinarily standard amongst customers as a result of it doesn’t cost any charges on transactions. This has allowed the protocol to stay viable regardless of an extended sequence of controversies and scandals.
Tron’s founder Justin Solar is among the most outspoken and controversial figures within the cryptocurrency trade. Regardless of (or perhaps due to) this, Tron has retained a major following in Asia. In its early years, the protocol builders centered closely on the Asian crypto markets.
As a result of its absurdly low transaction charges and heavy involvement in DeFi/NFT house, Tron nonetheless has strong development prospects in its abroad markets. Nonetheless, contained in the US, its chances are high a lot bleaker given the regulatory stance.
Tron’s native token TRX was labeled a safety by the SEC in early 2023. In a lawsuit, the regulator charged founder Justin Sun and eight others with a variety of fees together with securities fraud.
Avalanche (AVAX)
Value: $11.81
Annualized Revenues: $15.92m
Each day Energetic Customers: 70k
Twitter Followers: 954k
Like Cardano and Solana, Avalanche is one other Layer-1 blockchain designed to supply a greater person expertise than Ethereum. The protocol was launched in 2019 when Ethereum was going via certainly one of its worst phases of community congestion.
The native token on Avalanche known as AVAX. It may be staked for passive rewards. House owners additionally get governance rights on the protocol. With a circulating market cap of $4 billion, AVAX is nowhere near ETH when it comes to adoption. However amongst L1 protocols, it simply slots into the highest 5 lists.
And through the years, AVAX has remained comparatively freed from main scandals and controversies. The protocol has a singular community structure with three separate chains dealing with totally different features and use instances.
The protocol has steadily cultivated a layer-ecosystem stuffed with DeFi tasks, NFTs, and different decentralized apps. It additionally provides wonderful integration with Ethereum via a bridge that’s below fixed improvement.
AVAX has not been labeled a safety by the SEC as of this writing. If issues maintain, this might be a significant increase for the blockchain towards its direct rivals like Solana, Cardano, and Polygon. The undertaking might be by no means going to overhaul the post-PoS swap Ethereum. However it nonetheless has various endurance in its current situation.
Investor Takeaway
Layer-1 blockchains are central to the expansion of the cryptocurrency and DeFi markets. Over time, the sector has attracted large investor inflows whereas present process frequent growth and bust cycles.
The newest crash in 2022 was notably extreme, wiping out practically two trillion {dollars} in investor funds. That, and the high-profile collapse of main entities like Terra/LUNA and FTX has elevated regulatory scrutiny over your complete house.
Exterior of the highest two blockchains – bitcoin and Ethereum – all different Layer-1 blockchains are on the radar of the SEC in the US. These tokens have all been labeled as securities. Any sale or buying and selling of unregistered securities might entice regulatory penalties.
Many US-based exchanges and platforms have already stopped providing trades or gross sales on the affected layer-1 blockchain tokens. If you’re already an investor, we strongly recommend that you simply consider carefully earlier than investing in different L1s, outdoors of bitcoin and Ethereum.
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