Find Opportunity in Blockchains Rebuilt from the Base Up
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| By Bruce Ng |
Three major themes dominate the crypto market at the moment. And right at the top of that list is a new wave of Layer-1s.
A Layer-1 blockchain is a distributed ledger that verifies, records and executes transactions.
Ethereum (ETH, “B+”) was the first Layer-1 blockchain to run smart contracts. But from the earliest days, developers had to balance three contradictory goals that fought each other like the hand game “rock, paper, scissors.”
They needed decentralization to make sure the blockchain was not controlled by any one person, institution or group.
But they also needed security to protect against hacks by the masses.
They needed scalability to grow, but that could not be easily achieved without proper management and some central control.
Indeed, to achieve any two of these benefits requires effectively sacrificing the third.
It’s often like the proverbial sign in the mom-and-pop grocery store: “Good, fast and cheap. Pick two.”
Bitcoin (BTC, “A-”) and Ethereum put security and decentralization first, and both paid the price. Bitcoin can only process about 7 transactions per second (tps). Ethereum, after numerous upgrades, can only reach a still lethargic 15 tps or so.
By contrast, the Visa network can do 45,000 tps.
That shows how far crypto technology still has to go before it can compete with the big boys.
So, what are crypto developers to do?
One solution to this has been the advent of Layer-2 solutions — sidechains that roll up transactions into bundles and settle them in batches on the base layer.
Polygon (MATIC, “B”), for example, is a Layer-2 for Ethereum. Transactions on Polygon are assumed valid when processed. At a set time, they get sent to the Ethereum chain for validation and that’s where one can be challenged if something is wrong.
That can be a lot faster, and the fees can be a lot lower.
And indeed, Layer-2 solutions are incredibly popular in the current climate. The sector has weathered the latest bear market and can offer notable investment opportunities.
Trouble is, with transactions moved off-chain, these Layer-2s are exposed to additional security risks.
Again, it’s a trade-off. But hopefully not for long.
Not willing to rest on their laurels and accept this, crypto’s best and brightest developers are racing to reinvent Layer-1 blockchains in a way that escapes — or at least compensates for— the rock-paper-scissors battle.
Result: Not only have some development teams made some excellent progress … they’ve also soared on the recent price action.
Take Solana (SOL, “C”) for example. It performed well in the last bull cycle but was brought low by the bear market and its association with failed crypto exchange FTX.
But strong fundamentals and a development team that wouldn’t quit meant SOL was just waiting for its chance. And sure enough, when Bitcoin began switching gears for the next bull run, SOL was ready.
It’s up 173% from the middle of October when Bitcoin began its recent rally and is up an astounding 650% from its bear market low of $8.
And SOL is far from the only name in this sector. It is one of the largest and most established of these new Layer-1 blockchains. That makes it less exposed to crazy volatility … but also caps potential growth.
If you’re interested in exploring more opportunities, I encourage you to use our Crypto Ratings page to sort through and find the highest-rated Layer-1 projects. You can also sort by market cap to find those projects that have even greater growth potential.
Best,
Dr. Bruce
