POST 5: FINAL TOP LAYER-1 BLOCKCHAINS ANALYSIS WRAP UP
A HIGH-LEVEL ANALYSIS OF SELECTED TOP BLOCKCHAINS BY MARKET CAP
This is the final part of a series of posts related to my paper: The Good, The Bad and The value of Layer-1 Networks. This post covers the main takeaways from the analysis.
- Post 1: An introduction to the cryptocurrencies covered in the analysis based on market cap and why such metric is relevant.
- Post 2 Covers the basics of blockchain technology (what is it, how it works, etc.)
- Post 3: Covers some (though it is non-exhaustive list), of the good and bad characteristics surrounding Bitcoin, Litecoin, Ripple, Dogecoin and Ethereum.
- Post 4: Covers some (though it is non-exhaustive list), of the good and bad characteristics surrounding Cardano, BNB, Terra-Luna, Solana, Polkadot and Avalanche.
- You can access the full PDF report here.
Disclaimer: This is not a financial advice. My views are my personal opinion. All investments carry risk in loss of capital.
KEY TAKEAWAYS
- Proof of Work (PoW) cryptocurrencies: Can’t really scale on their own and face additional environmental regulation risk (see image below for Bitcoin electricity consumption example).
- Proof of Stake (PoS) cryptocurrencies: In addition to solving the scalability issue, PoS cryptoassets have an interesting fixed income payment like structure (i.e., you can earn yield).
- Unlimited supply coins: Inflationary cryptocurrencies seem counterintuitive from a long-term, buy and hold, perspective as they should dilute in value.
- Bitcoin: It’s all about Bitcoin’s “brand” mainstream recognition that leads primarily to retail investors and its tribe of maximalists. The not-so-bright side of Bitcoin and all crypto assets in general is the constant high levels of volatility. Is difficult to rule in favor for Bitcoin as a medium of exchange or inflationary hedge when we are currently experiencing high levels of inflation in the U.S and abroad while Bitcoin is down more than 30% in the year.
- Litecoin: On one end, Litecoin has been able to ride the wave of being the silver alternative to Bitcoin gold. On the other end, it’s difficult to be constructive in the long-term due to its loss of market share and overall coin relevance as new options enter the market.
- Ripple: While a top-notch list of clients has established Ripple as a solid blockchain platform for financial institutions, the SEC lawsuit could taint Ripple’s image and future market adoption.
- Dogecoin: A community validation, a-la Elon Musk, vs. a saturated meme coin sector. And isn’t it ironic, DOGE’s all time high coincides with Elon Musk SNL Tweet, don’t you think?
- Ethereum: In addition to being a well-established and leading ecosystem for building smart contract projects, Ethereum 2.0 should add diamonds to the crown. The bad: facing stiff competition on the back of current Ethereum’s high gas fees.
- Cardano: Similar to applying value investing in stocks, it can be argued that Cardano’s long-term value lies on the successful execution of its roadmap. The launch of Genius X and upcoming Vasil hard fork are supportive of ADA’s roadmap execution and its long-term future.
- BNB: I am long-term constructive on BNB. It’s fast growth and strong positioning in all blockchain related uses cases, mainly DeFi, makes BNB a strong candidate to dethrone Ethereum. In the short-term, BNB’s main risks are more skewed to the regulatory side than from market adoption.
- Terra: Terra’s algorithmic stablecoin model is reminiscent to the day George Soros broke the Bank of England or to Argentina’s early 2000’s 1:1 USD de-pegging currency crisis. Undercollateralized propositions for stablecoins have proven to be risky propositions that can drag the rest of the crypto market down (just look at Avalanche decline post Luna crash).
- Solana: A fast, cheap and scalable network, in 2021 Solana stormed the crypto community with an astonishing 11,177% return. Solana needs to solve its network instability issues if it intends to keep up with the saturated and demanding smart contracts platforms.
- Polkadot: Polkadot’s ecosystem while small is diverse. One possible future constraint for Polkadot is the limited number of parachains, around 100, its relay chain can handle.
- Avalanche: Interoperability (EVM instance), relatively stable DeFi TVL market share and its near-instant transaction finality makes Avalanche an ideal blockchain for financial services.
BOTTOM LINE
From Bitcoin’s early vision of electronic cash, to the rise and constant evolution of purpose-built smart contract platforms; all blockchains have their own strengths and limitations. Crypto is still in its early stages of development, and is prone to episodes of high volatility that give rise to sharp boom and bust price cycles. Its open-source nature has given rise to thousands of projects and blockchains all claiming to be the next big thing. As we can see, these points raise the following key questions.
For investors, in addition to crypto’s inherent volatility, with so many cryptocurrencies to invest, can diversification be achieved? With so many options to invest, a diversified basket theoretically makes sense; however, unsystematic risk seems more challenging to mitigate. The correlation heatmap below shows the strong positive correlation among the selected blue-chip layer-1 cryptocurrencies.
Additionally, as shown in Figure 26, considering the strong positive 90 day rolling correlation between Bitcoin and the selected crypto assets, any medium or long term diversification benefits will most likely come from avoiding total loss of capital in case the project collapse (like Terra). So having multiple cryptocurrencies reduces having a full blowout risk.
On the other side, this point also strengthens the idea that is probably better to have a small and well understood portfolio of well-established layer-1’s as the crypto rabbit hole is deep.
Will one blockchain eventually rule them all? It doesn’t look like there will be an “Ethereum killer” or the “ONE” to rule them all. Instead, similar to the boom and bust of the dot-com bubble, we will most likely see the capitulation of many projects as well as the survival and coronation of others. As I have covered in this summary, each unique blockchain has its own market niche and value proposition.
In the end we will see different blockchains establish their own a tribe of believers — similar to Bitcoin maximalists — competing for capital and most importantly competing for user’s adoption and the attention of developers. As Packy McCormick mentioned in his Solana Summer post: “the best tech is wasted without a strong community of developers and users.”
OTHER NOTEWORTHY BLOCKCHAINS
Tron, Near Protocol, Cronos, Cosmos, Algorand, Tezos, to name a few, are all interesting blockchains competing to attract capital, developers and user’s adoption. They all deserve further analysis due to their unique value proposition.
Thank you for reading these posts and I hope you enjoy getting into the crypto rabbit hole.
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