Build a Layer 1 evaluation framework from five dimensions

The problem of high Ethereum gas fees has always existed, and more and more users have begun to seek other alternatives, such as Avalanche, Solana, Polygon, etc. New users have poured into these alternative networks, and the entire ecosystem has become more prosperous. But the problem is:

  • Which chain will you go to?
  • How to evaluate these Layer 1s?
  • What key metrics and fundamentals should investors focus on?

To this end, we have summed up the 5 most noteworthy questions when evaluating Layer 1:

1. Is Layer 1 safe enough?

2. Is Layer 1 decentralized enough?

3. Does Layer 1 have enough developers?

4. Does Layer 1 have enough use cases?

5. Can Layer 1 be profitable?

Next, let’s answer these questions related to Layer 1 blockchain networks one by one.

1. Security

When evaluating Layer 1, security is always a top priority.

The core value of the blockchain lies in the settlement layer. If the settlement layer is not secure, then it has no value. In other words, when users conduct transactions on the network, they must ensure that each transaction is the final result, and those with bad motives are not allowed to tamper with it.

In fact, according to the underlying consensus mechanism, there are many ways to measure security, but the ultimate goal is only one – to achieve an impeccable settlement guarantee for the blockchain network. With settlement guarantees, the transactions made by traders cannot be tampered with, achieving consistency from start to finish.

When evaluating settlement guarantees, one of the most critical variables is ledger costliness, which can be broken down into the following two questions:

1. How much does it cost to take over the network?

To know the answer, it is necessary to understand the revenue incentives that validators receive when submitting valid, honest blocks.

2. What is the total cost of the network?

The total fee is the amount paid to the validator to ensure that all transactions are final.

Remember, the higher the fee paid to validators, the more secure the network and the higher the settlement guarantee. Because miners and validators will actively submit, verify and maintain legitimate blocks under the incentive of revenue.

But have you ever thought about another problem that arises from this – what if there are only 21 validators on the network and they divide all the fees?

2. Degree of decentralization

The core principle of Web3 is decentralization, and of course security cannot be given up. These are all manifestations of the spirit of blockchain.

Therefore, Layer 1 should also be sufficiently decentralized and not controlled by any participant or entity, and anyone can participate in verification (mining/staking) and maintenance of the ledger (running nodes), while Should not be closed to specific groups of people. If you can’t achieve enough decentralization, fall back and see if these Layer 1s use AWS.

Note: To evaluate the degree of decentralization of Layer 1, it can be quantified by the number of network nodes and validators.

Below is a list of major proof-of-stake protocols:

From five dimensions, establish a Layer 1 evaluation framework

Source: Stakers.Info

It is worth noting that if someone cannot run a node, it must be manipulated, and it does not meet the principle of decentralization. In fact, what’s the point of everything done on Layer 1 once it violates the principle of decentralization?

3. The number of developers

Once Layer 1 achieves its core vision (security and decentralization), it means that developers can reliably build various projects on it. In the meantime, they don’t have to worry about network shutdowns, data rollbacks, or even hacking.

But then we encountered another problem – in the Layer 1 pyramid, are there any developers working on the upper layer? As we all know, without developers, there are no applications; without applications, there are no users; without users, where does value come from?

From this point of view, a strong developer ecosystem is critical to the successful build of Layer 1. The graphic below is Electric Capital’s report on monthly active developers in 2021.

From five dimensions, establish a Layer 1 evaluation framework

Currently, Ethereum is still the main ecosystem for developers. There is also a lot of development activity on the other emerging Ethereum alternative smart contract platforms, all of which have greatly surpassed the Bitcoin network. This is because these smart contracts provide very convenient tools for developers to build almost anything on these platforms; by contrast, it is much more difficult to develop something cool on the Bitcoin network . If you are interested in this area, you can learn more detailed data about the non-Ethereum contract ecosystem from the chart below.

From five dimensions, establish a Layer 1 evaluation framework

4. Use case richness

Now, the Layer 1 evaluation framework has been basically set. If the network is secure, decentralized, and there are developers building applications on it, then the next thing to look at is whether anyone is actually using those applications.

Of course, there is another point that cannot be ignored: Are there users willing to pay for these applications?

The chain’s business model is to “sell” blocks to serve the constant stream of decentralized value transfers on the Internet.

So one of the most basic ways to know if Layer 1 is worthwhile is to know how big the blockspace requirement is. With this clear indicator, we can know if there is a need for value transfer on the network. There are various ways to measure demand, such as network utilization, fees paid to validators/miners, etc. While each approach has its own pros and cons, taken together, it can give you a much clearer picture of whether there is a real need on the web.

At the end of the day, if no one is willing to buy these blocks, then this blockchain ecosystem has no value to exist.

5. Profitability

If it is determined that the network has a demand for blockspace, then only the last question remains to be considered – can the blockchain be profitable?

In simple terms, it is actually figuring out whether the blockchain spends more money than it earns through transactions for its security. And the reality is that no blockchain is profitable today — not even close.

From five dimensions, establish a Layer 1 evaluation framework

Overall, the current blockchain network spends much more than its own income on security costs.

But don’t worry too much, after all, the current ecosystem is still very young, and there are still many unfinished projects waiting to be developed, not to mention that more and more developers are starting to devote themselves to this technology, and everything is going for the better. direction development.

Summarize

Frankly speaking, evaluating any Layer 1 is very difficult, especially for smart contract platforms. At the beginning of Web2’s development, people were not optimistic about Internet startups, but eventually we saw the birth of many “unicorns”. Now, the same thing is happening in the Web3 world.

As the most important Web3 infrastructure, if you want to know how much Layer 1 is worth? Which one has more potential in the future? Perhaps, the above five dimensions can help you build a better evaluation framework.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/build-a-layer-1-evaluation-framework-from-five-dimensions/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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