Layer 1 Protocols: A Sensitive Topic (5 of 6)
If you’re new, welcome! Here are links to articles 1, 2, 3, and 4 in this series
Introduction
If you read my series from the beginning you would remember (hopefully) my thoughts on how unproductive tribalism in crypto is.
If you didn’t here is a quick snippet that covers my thoughts:
In an industry where the systemic risk already flirts with the upper bound of most investor’s risk tolerance, this analyst argues that patterns of insular thought are likely not a net benefit. When you go too far down any road, you are likely to develop blind spots…
I bring this up again because, in my opinion, tribalism is at its peak when discussing layer 1 protocols. It is more common than not that legitimate criticisms based on facts and sound logic (from what I could tell) will be met with those raising them, being denounced and even met with ad hominem attacked for ‘Spreading FUD’ (fear, uncertainty, doubt).
Why does this happen?
Well, I can see it stemming from the natural human instinct of wanting to belong to a larger group. Usually, there is safety in numbers, but this type of team-like behaviour/groupthink in crypto may be detrimental to your wallet.
Especially, if you’re unable or unwilling to analyze new information objectively and make rational decisions going forward.
Remember, crypto is not like supporting your favourite sports team.
Rather, as savvy investors, we must approach crypto the same way we do with any other investment vehicle, product, or category — with a level head and sound analysis (to the best of our ability)
Before I get into the exact Layer 1 picks, I want to re-acknowledge just how strong the Bitcoin/Ethereum supremacy is in the Layer 1 (L1) category.
From a protocol revenue generation, total value locked, on-chain volume, development activity, and market standpoint they are leaps and bounds ahead of any other L1 on this list.
But, perhaps counterintuitively, this is precisely why it is important to consider others in 2022. Assuming your bag is already heavily weighted to ETH and BTC you should be asking yourself the same questions I’m asking myself…
Where is the money currently? Where will it go? Why will it go there?
Well, we know the money is in Ethereum so let’s examine the last two questions in more detail by looking at development, technical advantages/stack, incentives, and momentum for each of my selections…
My Layer 1 Picks
Terra (LUNA): I put Terra first in my list because it allows me to quickly touch on something I believe will be very important to the future of the blockchain ecosystem(s).
You see, Terra is not an multichain dApp, but an appchain dApp. This is an independent blockchain used for a specific set of custom-designed applications. Appchain dApp’s are very promising as they seek to make capital deployment as efficient as possible for whatever use case they are solving for.
Perhaps this should have been a top design consideration well before this point, but I think the concept could really come into its own in 2022 (remember this).
There are several top quality dApps on Terra gaining major traction: Anchor protocol and Mirror to name a few. Add to the mix its own algorithmic stablecoin (UST) and that is enough for me to make it one of my top picks…not to mention that it is growing faster than ETH did at same point in its history.
Avalanche (AVAX): Avalanche has a subnet model which, in my opinion, is the clearest path to scaling currently — but take this statement with a couple heaps of salt considering nothing ever goes as planned in this space.
The main value proposition is not that it is basically a mini-version of sharding, but that it allows anyone to build purpose-driven appchains.
Even if AVAX doesn’t massively outperform, I don’t think you’re betting on a losing horse by any means.
It is also a value pick — with one of the most favourable comp ratios in its peer group and the fourth highest revenue on an annualized basis. Like Terra, Avalanche is also growing faster than ETH in the same point in its history (clearly bootstrapping a new ecosystem via Ethereum Virtual Machine (EVM) compatibility can work)
Solana (SOL): Despite some minor setbacks, a DDoS attack, and oh wait, ANOTHER DDoS attack, Solana is still one of my picks for Layer 1’s in 2022.
It demonstrated to the market that little pixelized pictures are actually more important than major technical flaws.
No, but seriously, Solana has really come into its own in 2021 and doesn’t show any signs of slowing down (aside from congestion caused by DDoS attacks lol)
Its ecosystem grew by almost 5x as measured by monthly developers and it capitalized quite well on the NFT wave throughout the past year with the launch of Degenerate Ape Academy in August and many other top collections.
Consider as well, that it houses one of the top games, Star Atlas, (fully diluted market cap of over $1.9b) and there is a case to be made for forgiving it’s technical shortcomings for now.
Note: My opinion will most certainly change if they show no progress in this front.
Concisely, Solana is a solid growth pick backed up by strong revenue, volumes, great ecosystem incentives, and a slightly oversold price.
Fantom (FTM): Fantom is the kid that gets picked last during recess basketball then promptly proceeds to thrown down a triple double.
It has the best volume-to-market capitalization ratio, a proxy for utilization and liquidity, and very strong metrics across the board as far as revenue and volume are concerned.
The fact that Fantom is where it is from a market cap perspective, tells me that the crypto markets have a ways to go before they reach any semblance of efficiency.
It has a stronger focus on finance, hosts earlier stage projects and has decent incentives for developers. While it is often overlooked compared to its peers, I think it is reasonable to hold in the event that it can scoop up a good chunk of new users and developers. In theory with it’s tech stack and consensus algorithm, there is no reason why it shouldn’t.
Polygon (MATIC): For reasons I cannot articulate I have never been a huge fan of Polygon, but I can’t ignore the fact that it has been and is growing like a weed pulling in the most revenue out of all the other picks I included, less Avalanche.
It more than doubled its monthly developers in 2021 and has more cross-chain developers than primary developers, a big plus for me as I place a ton of value on interoperability. This is because it is compatible with the Ethereum virtual machine (EVM), which to me is a growth feature.
By converting cross-chain devs to primary devs with better incentives and growing organically, Polygon could significantly outperform in 2022.
Near Protocol (NEAR): The bull case for NEAR is pretty clear in my opinion. They have 4xed their monthly developer growth throughout 2021, are adding over 250+ devs/month.
If that wasn’t enough they are also focusing on appchain dApps as evidenced by Octopus network.
Keep an eye on NEAR, 2022 could be a turning point for winning over hundreds of apps and dev teams looking for a cost-effective and secure home for their applications.
Honorable mentions:
Binance Smart Chain (BNB): Pretty straightforward here because we all know BSC. Fast, cheap, great support, tons of products, good comp ratios, and they command a healthy amount of transaction volume. If BSC weren’t centralized and a touch too mature for my taste as a growth pick, it would be on the list without a doubt.
Cardano (ADA): Even the people that hate on Cardano the hardest cannot deny that it pulls in the volume like no other chain (except ETH and BTC, of course). It also has one of the most favourable volume-to-market capitalization ratios. While it may have fallen slightly out of favour throughout 2021, do not count Cardano out in 2022.
Cosmos (ATOM): When I saw Ethan Buchman speak at one of my first crypto conferences he talked extensively about the need for cross-chain solutions. He kept his word and dedicated his work to creating an internet of blockchains.
The first cross-chain DeFi protocol, Gravity DEX has not gotten the recognition it deserves in my opinion, but the market suggests I might be alone in that belief.
It has subpar comp ratios, poor revenue, and lower volumes than its peers. Despite this, I think Cosmos deserves an honourable mention for its growth potential. This could be a sleeper, but I wouldn’t bet on it above the others for 2022.
Oasis (ROSE): Another VC-backed privacy focused chain. Do I think they bring something radically different to the table? No, not necessarily. Do I think it will do quite well anyway? Yes, I do.
Why? Look at their backers: a16z, Accel, Pantera, and Polychain Capital. I’d be willing to bet that they probably know something I don’t.
Polkadot (DOT): One of the largest developer ecosystems and still growing quickly. It would be a clear mistake to not make mention of Polkadot. Add to that, EVM compatibility and parachains as reasons for why Polkadot should stay on your radar in 2022.
Stay tuned for the last article in this series: Metaverse, Gaming, NFTs, and DAOs!
Full Disclaimer: The information provided on this website does not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the website’s content as such. Kiran Malik does not recommend that any cryptocurrency should be bought, sold, or held by you.
