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| "With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future." — Carlos Slim Helu |
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In today's issue: You may not understand what "Layer-0" means, but you'll likely recognize the top names in the space: Polkadot, Cosmos, Avalanche, and Horizen.
Today, we deep dive into the Layer-0 blockchain solutions that can potentially solve the interoperability and scalability challenges faced by the blockchain industry.
For crypto investors, our in-depth research can help you decide which of these Layer-0 blockchain solutions might be worth adding to your long-term portfolio.
To learn more about the leading players in the Layer-0 ecosystem and how they're performing, read on. |
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| | | Must Read Today's most important story for crypto investors. |
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| "Hyperbitcoinization" is a term coined by bitcoin enthusiasts. It refers to a potential future scenario in which bitcoin's adoption grows to unseat the world's fiat currencies and become the global reserve currency. This piece looks at the history behind the idea of hyperbitcoinization and determines if we've reached that goal yet (spoiler: we haven't). |
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A chart on the monetary evolution of bitcoin, via Twitter.
Despite not reaching hyperbitcoinization yet, the author believes we're on the right track to get there. He notes that some countries (El Salvador and the Central African Republic) have already adopted bitcoin to tackle the inherent issues of inflation and volatility seen in fiat currencies.
He goes on to discuss de-dollarization, which has been in the news lately (seethis piece from the American Institute of Economic Research). His hot take is, "Bitcoin's destined to be a key player in the de-dollarization game because, quite simply, it's a better [form of] money." |
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However, he's missing "store of value."
If and when bitcoin ascends to the throne of a global reserve currency, it will obviously have significant impacts on the global financial system and U.S. foreign policy. This could cause a shift in the global balance of power, likely not favorable to the U.S.
However, what if the U.S. were to embrace hyperbitcoinization? Would that help to maintain its global financial dominance? Maybe, but there are several hurdles to overcome first including increased regulation, the potential financialization of bitcoin, and more forks and updates to bitcoin's core.
Investor takeaway: In just 14 years, bitcoin has gone from a niche curiosity to a real impact on the global financial system. Before mass adoption can happen, though, we still need more education and understanding around bitcoin.
That's where you come in. Be the grass roots educators. Spread the word about bitcoin to your family and friends. You could start by sharing this newsletter and a short message about your beliefs on the benefits of bitcoin. |
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| Premium Power-Ups Level up your crypto investing game. |
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New Investor Risk Scorecard: Polkadot (DOT)
Launched in 2020, Polkadot is the largest Layer-0 protocol by market cap.
Polkadot comes from good genes. It's created by former Ethereum co-founder Gavin Wood alongside Robert Habermeier and Peter Czaban. It was meant to be a more efficient version of Ethereum, and Dr. Wood began working on it in mid-2016.
Sure, it has a great history and an all-star team, but is DOT worth your investment in 2023?
Using our industry-leading Blockchain Risk Scorecard, our analysts put Polkadot through the wringer and squeeze out our final risk rating (remember that with risk, lower = better).
Premium members: Download the Scorecard here and see how we rate DOT as an investment. Is it a risky bet, or a relatively safe investment to buy?
Not yet a Premium member? Sign up now for just $10 a month and get instant access to our complete, on-demand library of investor scorecards. |
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| Investor's Guide to Layer-0 Blockchains by Daniel Joel |
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Executive Summary: Scalability and interoperability have been some of the most significant issues in blockchain. Layer-0 (or "cross-chain") blockchains are helping to solve these issues.
Think of Layer-0 blockchains as sitting below Layer-1 blockchains, acting as "universal connectors" between Layer-1 blockchains like Ethereum and Solana and moving data between them.
The Layer-0 industry is growing, with popular projects like Polkadot and Cosmos already connecting multiple Layer-1 chains on their network. However, it may take some time before the vision of Layer-0 projects fully materializes... Or it may never happen at all, with L1 blockchains remaining siloed and separate.
In this piece, we'll provide an overview of Layer-0 blockchains and their roles in the industry. We'll also examine some of the most prominent Layer-0 blockchain projects and how to approach them as investment opportunities.
What Is a Layer-0 Blockchain?
To use another analogy, think of Layer-0 blockchains as operating systems of your computers and Layer-1 blockchains like Ethereum and Solana as applications that run on those computers.
In the same way an OS manages hardware resources and enables the execution of applications, Layer-0 protocols govern how data is transmitted, validated, and stored across blockchains. Layer-1 protocols, like software applications sitting on top of an OS, provide specific functionalities and use cases.
Layer-0 blockchains are the solutions to the problem of cross-chain interoperability. Presently, to move from the bitcoin to the Ethereum ecosystem, you need to sell your BTC for, say, USDT to get into the ETH ecosystem.
It's even more difficult for developers, who have to deploy their smart contracts on different blockchains (which requires learning each ecosystem’s programming language). This fragments users and liquidity.
Layer-0 blockchains are also solving scalability issues. Blockchains have to handle critical functions like consensus, transaction execution, and data availability while dealing with rising user demand, making it difficult to scale without trading off security and decentralization. This concept coined by Ethereum’s founder Vitalik Buterin is known as the "blockchain trilemma." |
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Image via Crypto News Flash.
A protocol can either be decentralized (increasing its security and censorship, but trading off speed) or more centralized, making it faster but less secure and resistant to censorship.
Layer-0 chains can help projects work around the blockchain trilemma, delegating the primary responsibilities for these three functions to different sidechains on the Layer-0 protocol.
These are some of the problems Layer-0 blockchains are trying to solve, which is only possible due to their structure. Different Layer-0 solutions come with different designs, but generally, they have three main components:
The mainnet: This chain is the primary chain that stores data from the different Layer-1s built on it. Sidechains: This layer includes independent Layer-1 blockchains with their own consensus mechanisms and validator nodes. Cross-chain protocol: Used to allow different blockchains to communicate and exchange assets and information in trustless and secure manners. |
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Investing in Layer-0 Blockchains
Before investing in any Layer-0 project, do your own research to get an idea of what it's already accomplished and what it's trying to achieve in the short and long terms. A great place to start when assessing Layer-0 projects is by looking at these key metrics:
Daily active users: This is one of the most important metrics for any blockchain project as it details how many people are actually using the protocol on a regular basis. Think of it like regular customers of a traditional business. This is one of the key metrics we monitor; see our piece on crypto financial statements. Transaction throughput: How many transactions can the blockchain handle within a given timeframe? Throughput impacts scalability. A blockchain with a low throughput may struggle to meet growing demand, leading to longer confirmation times, higher transaction fees, and possibly a less reliable network. This may make the network less attractive to developers and new users, hindering growth. Security: You can start by looking at the network's level of decentralization, audits, and even the team’s track record. Generally speaking, a well-established network with a large user base and an active development community is more likely to be secure than a newer, untested network. Tokenomics: Tokenomics (or the economics of the token) help to ensure network security, fund development, and create fair distributions of the cryptocurrency, among other things. Successful projects carefully design their tokenomics models with long-term sustainability in mind. Scalability and interoperability: Layer-0 projects that can reliably support large numbers of users and applications while allowing for cross-chain transactions have better shots at growing loyal user bases.
In addition to these metrics, crypto investors can also look at these next factors:
Market Trends
For example, if there's a trend toward crypto tokens being able to work across chains (like the USDC stablecoin does), then Layer-0 projects that provide these features may be in high demand.
However, there may be negative market trends (security, regulatory risks, etc.) that might help you identify potential risks and challenges Layer-0 projects could face. We cover many of these for individual projects in our Blockchain Investor and Blockchain Risk Scorecards.
Team and Development Progress
Do the members have good track records of success in the crypto industry, or are they relatively new? Are they honest and trustworthy? Are they delivering on their promises?
By evaluating development progress, investors can assess a team's ability to execute visions, meet milestones, and build a successful business.
Use Cases and Partnerships
A Layer-0 project partnering with other reputable organizations is a good sign, as it expands its real-world use cases and user base. Also, it can help you assess the project's competitive advantage. What's the project's unique value proposition? How is it differentiated from competitors?
Portfolio Risk and Diversification
Investing in Layer-0 projects has risks, and diversifying your portfolio might be a great way to mitigate them. Instead of investing in a single Layer-0 project, you can consider spreading your investment across different projects to minimize the impact of any one asset's price movements on your overall portfolio.
Also, by diversifying your portfolio, you'll gain exposure to different opportunities and market trends.
What Are the Most Popular Layer-0s? |
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Polkadot Daily Active Users (30-day avg): 4,570 Market Cap: $7.88 billion Founding Date: 2020
Polkadotwas launched in 2020 by three experienced developers including Ethereum co-founder Gavin Wood. The network includes a main chain known as a relay chain that allows for multiple parallel blockchain networks (called parachains) to connect and interact with each other. Polkadot has maintained a strong presence as one of the top projects by market cap. It alsoreportedthat towards the end of 2022, its parachains had achieved sizable TVL growth despite launching only earlier that year. |
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Cosmos Daily Active Users (30-day avg): 17,640 Market Cap: $3.30 billion Founding Date: 2014
Cosmos, the so-called “internet of blockchains,” was also created to tackle scalability and interoperability issues in the industry. The project has various components like Cosmos SDK, which allows developers to create application-specific blockchains, and the Inter Blockchain Communication (IBC) protocol, which allows chains to transfer value or data with each other. The project reports over 270 apps and services in its network including Binance Chain, Terra, and Crypto.org, with over $61 billion of digital assets under management. |
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Avalanche Daily Active Users (30-day avg): 257,300 Market Cap: $5.99 billion Founding Date: 2020
Avalanche is a smart contract platform for building and launching blockchain applications. This happens on one of the three key chains in the network (known as the "contract chain"). The other two chains are the "exchange chain," which facilitates the creation and exchange of assets, and the "platform chain," which coordinates validators and enables the creation of subnets (allowing users to create and run their own blockchain networks). Avalanche follows Polkadot in terms of Layer-0 projects’ market cap and has a TVL of over $850 million. |
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Horizen Daily Active Users (30-day avg): N/A Market Cap: $226.5 million Founding Date: 2017
Horizen is a privacy-focused blockchain network launched as a fork of Zcash. The project carries on the zero-knowledge privacy technology from Zcash. It incorporates the sidechain and mainchain architecture to build a “zero-knowledge enabled network of blockchains.” The team has been rolling out multiple upgrades, including the launch of an EVM-compatible sidechain earlier this year, but the project is behind Polkadot in terms of market cap with just over $140 million.
Investor Takeaway
Layer-0 blockchains provide alternative ways to scale blockchains without compromising on the industry’s key principles. They're also trying to bridge the gaps between different ecosystems, making them interoperable. Plus, they promote collaboration and innovation within the industry instead of siloing off projects from each other.
If this is the direction the industry evolves, Layer-0 blockchains will likely play huge roles. In this scenario, investing in Layer-0 blockchains can potentially provide exposure to the growth of the blockchain ecosystem.
However, Layer-1s may evolve into a "winner-takes-all" monopoly scenario (like Google in search) or a "winner-takes-most" duopoly (like iPhone and Android in mobile operating systems). If this is the way the industry evolves, Layer-0s will be interesting (but ultimately insignificant) curiosities.
The key metric to watch is daily active users on the top Layer-0s. If this number continues to show steady gains across different Layer-0s, we've probably got a winning investment category. |
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| | | ICYMI In Case You Missed It |
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| Layer-0s are the connectors for Layer-1s. They may (or may not) be necessary. |
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Bitcoin Market Journal is a daily newsletter that makes you a better crypto investor. It's created by John Hargrave, Nick Marinoff, Steve Walters, Anatol Antonovici, Matthew Du, Daniel Joel, and Preetam Kaushik.
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