Binance Research: Review of Layer1 in 2022 and Outlook for Crypto Development in 2023

Binance Research

2022-12-24 14:00

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Original title: "2023 CMC Crypto Playbook: Layer-1s—What Has Happened and Where Are We Headed?",

Original source: Binance Research

Original translation: DeFi Road

Considering the level that 2022 should reach and everything that happened in the crypto space, Layer1 ("L1") can still be said to have experienced a very interesting and eventful year. In 2022, many noteworthy events occurred in the L1 space. From Ethereum's transition from PoW to PoS in September to the collapse of the Terra ecosystem in May. New L1 projects have also made significant progress, such as Aptos launching its mainnet, and Sui is expected to launch early next year. Notably, BNB Chain and Layer2 (“L2”) solution Polygon have gained market share in the market vacuum left by Terra, while Solana has had a more challenging year, being one of the L1s more affected by the recent FTX incident. The year was filled with arguably the most significant events that have impacted the entire cryptocurrency landscape.

What Happened?

Binance Research：2022 年的 Layer1 发展一览及 2023 年的期望

Figure 1: L1/L2 Market Cap and Daily On-Chain Metrics in 2022

Key Observations

• Of course, there are many reasons for the lower market cap, which we are not going to discuss specifically. However, we should be very clear that market cap does not necessarily correlate with the very important on-chain metrics in terms of daily transactions and active addresses. As we can see, BNB Chain and Solana are outperforming here, while Ethereum, despite having a higher market cap, is significantly lower in terms of daily activity.

• Ethereum: The Merger! Rather than keep repeating what the merger was, we want to talk about its impact. Data shows that $ETH supply growth has dropped significantly since the transition to PoS was completed in mid-September (from 3.58%/yr to 0.005%/yr). In fact, combined with its burn mechanism, $ETH has been a deflationary asset for most of November and is very close to that level now.

• BNB Chain: BNB Chain has had a commendable year, with market cap down only ~45% YTD, much better than key competitors Ethereum (-64% YTD) and Solana (-90% YTD). BNB Chain is one of the main L1s helping developers displaced by the Terra and FTX scandals. Daily activity metrics remain very high, with the launch of BNB liquidity staking and zkBNB being notable highlights. Innovation and partnerships in the NFT space are also in full swing, with OpenSea recently announcing support for BNB Chain NFTs on its platform. • Solana/Avalanche: 2022 has been challenging for the classic “competitive L1” trade of 2021. Solana has seen some strong traction in its NFT ecosystem, with growth in collectibles, volumes, and markets. Avalanche has seen significant positive news on the part of their subnet, which provides scalability for decentralized applications (“dApps”), particularly in the gaming space. However, both competing L1s have had a bad run (Solana was affected by the FTX debacle, and for Avalanche, it was the product of some less-than-flattering leaks a few months ago). Solana also continues to suffer from frequent network outages, calling into question the reliability of the network.

• Layer 2: While L2s are technically one step short of L1s, any discussion of L1s would be incomplete without at least commenting on the growing scaling market. Polygon is the undisputed leader in this regard, with a plethora of comprehensive solutions. This has been a strong year for Polygon, and their business developments continue to shine (Starbucks NFTs, Reddit NFTs, Instagram/Meta NFTs, etc.). More pure L2s, Arbitrum and Optimism have also had strong performances over the past year and continue to increase activity/take market share from some of the smaller competing L1s. The launch of the OP token earlier this year was a notable moment for Optimism, while Arbitrum continues to focus on their core products with the launch of Arbitrum Nitro and Arbitrum Nova.

Expectations for 2023

Now that we have an idea of how the major L1s progressed during the year and some of their notable events, what about the coming year? What are our initial expectations?

L1s (especially some of the smaller competitive L1s) will feel pressure from L2s

• One of the main narratives of the year has been the so-called “L222”, referring to 2022 being the breakout year for L2. Is this really the case? L2 Total Value Locked (“TVL”) data shows an increase of 118% since the beginning of the year (in ETH terms). So, in a way, yes. 2022 is undoubtedly the biggest year for L2 to date. However, in absolute terms, the total TVL locked in L2 is only around US$4.5 billion. When we compare this to the total DeFi TVL in Ethereum (~US$25 billion) and the total cryptocurrency market cap of nearly US$900 billion, we can see how far L2 still has to climb.

• Consider also the fact that, as shown in Figure 1, both Arbitrum and Optimism surpass Avalanche in terms of daily on-chain activity. Add to that the growing deployment of competing L1s dApps on L2s, such as Avalanche’s Trader Joe’s which recently announced their deployment on Arbitrum, and it will be interesting to monitor what happens with some of the smaller competing L1s. Many in the crypto space have discussed the idea that the major L1s will simply become settlement layers, with execution and activity happening on L2s. While we’ve already seen some of this, 2023 is likely to be the year we see this happen on a larger scale.

New L1s can survive if they truly bring something new

• Consider the most notable new entrants into the L1 space, Aptos (live mainnet in Q4 this year) and Sui (expected to launch in early 2023). Both L1s bring a variety of new innovations to the table, including the Move programming language. Given the background of this language and all that it promises, as well as the potential increase in transaction speeds on both L1s, there is potential for some real innovation. It should be closely watched to see if one or both of these L1s are able to leverage their new technology to achieve a step-change in the crypto markets.