According to Peter Smith, co-founder and CEO of cryptocurrency exchange Blockchain.com, who gave an interview to The Block, backing Layer 1 altcoins has proven to be an incredibly successful investment in the past, and while none of them truly threaten Ethereum's crown. their status as good investments may remain unchanged.
According to Smith, if investor interest in Solana, Avalanche, and Near Protocol represents the first wave to Ethereum killer altcoins, the new Layer 1, like Aptos and Sui, uses Move, a programming language originally developed by Facebook engineers. altcoins second wave. Sui developer Mysten Labs is reportedly in talks to raise hundreds of millions of dollars from investors, while the team behind Aptos raised $350 million in return in this year's funding round.
Yet Ethereum remains the dominant protocol for running very lively and decentralized business. Ethereum is in the final stages of transitioning to a Proof of Stake model to use the network with lower transaction fees and make it more energy efficient. According to Smith, it is not surprising that despite the high competition, investors continue to gravitate towards base-layer blockchain. Because it can still prove to be an incredibly profitable investment. Smith said:
“None of these alternative Layer 1s came close to beating Ethereum, but it did make a lot of money for investors. If you're among the first investors of a Layer 1 that scales, even if it's on a small scale, that's tremendous payoff for you. and will it have a big and meaningful impact on their daily lives and build the future of finance?"
In the broader world of venture capital, it is unusual to see investors backing multiple startups in a niche that serves a single niche industry, in part because there is a risk of conflicts of interest between companies that could become competitors. On the other hand, this is not the case in the cryptocurrency industry. Some venture capitalists support multiple projects whose mission is to overthrow Ethereum. For example, Solana and Aptos projects count Andreessen Horowitz, Multicoin Capital, Jump Crypto, BlockTower Capital, ParaFi Capital and others as their supporters.
For Smith, the rationale for supporting Layer 1 blockchains is clear: Regardless of whether they succeed in challenging Ethereum, they are likely to deliver impressive gains in the relatively short term:
"We've seen many investors move to successful Layer 1 projects like Solana, Avalanche, Near Protocol, and new Facebook-related Layer 1 projects in the last cycle."
According to data from CoinGecko, between the start of 2021 and November of the year, the market cap of Solana's native token SOL rose from $100 million to nearly $80 billion. While its market cap has since dropped to around $15 billion, the original investors of the project, or if they had typically bought tokens instead of stocks, would have made tremendous profits if SOL had even cashed out some of their holdings.
Smith argues that the flow of money to Layer 1 projects will continue.
“I think there is a bit of a capital reflex at play where there are so many positives to keep investing in Layer 1s to bring down Ethereum because you already have a lot of money in this strategy. Ironically no Layer 1 has come close to knocking down Ethereum. That's how it is though."
There is nothing seemingly wrong with such thinking. As Smith points out, it's a free market. Indeed, it is clear that much of the capital needed to support the first wave of Ethereum challengers comes from successful investments in BTC and Ether, or at least from the knowledge of how successful such investors are, among limited partners of investors. The question Smith asks is, instead, whether successive Layer 1 investments are an efficient use of capital:
“What I'm having a hard time taking seriously with some of the Layer 1s being released right now is: What are you bringing to the market as a backup for Ethereum that is much better than Solana, Avalanche, Near Protocol?. And each of these Blockchains has an answer, but At the end of the day, all users care about is stability and transaction cost. And so I think my field of view gets a bit complicated. Is this the best practice of both human and financial capital at the time?"
A sizable portion of the money that has flown into new wave Layer 1s thus far has gone to incentive programs that got so much hype late last year. To attract developers and projects to its ecosystem, Avalanche has allocated close to half a billion dollars in native AVAX tokens in two incentive programs in August 2021 and March this year. According to data from DeFi Llama, the total value locked in blockchain (TVL) has grown from around $160 million in early August 2021 to over $12 billion by December. TVL fell to about $10 billion by mid-April this year, before dropping to its current level of $2.5 billion.
As a whole, the health of the cryptocurrency markets is also a prominent factor here. Solana, which did not offer a landmark stimulus package, experienced a similar decline in TVL during the same period as Avalanche. Smith further stated, “So far, it has not been clarified that any of these blockchains really have lasting power.” says.
According to data from DeFi Llama, Ethereum's TVL has also dropped, albeit to a lesser extent, hovering around $84 billion today, from around $160 billion in November last year.
While Smith doubts its realization, any issue with Ethereum's transition to the long-awaited proof-of-stake consensus known among crypto experts as "The Merge" could be positive for competing blockchains. Such a situation may positively affect both the first wave Layer 1s and the second wave Layer 1s.
Smith also draws attention to the potential danger for Layer 1 projects.
“The biggest challenge for all these blockchains is that for them to be successful, you have to hope something goes wrong. If Ethereum fulfills its roadmap commitments like The Merge, there will be no great reason for most of all these blockchains to exist.”