Layer-0 Blockchains: A Comprehensive Guide for Investors

Blockchain technology has long struggled with scalability and interoperability issues, with existing solutions often causing fragmentation between different ecosystems. However, with the emergence of Layer-0 blockchains, there is now a potential solution that offers a way to bridge these gaps.

Layer-0 blockchains are designed to act as “universal connectors,” addressing the blockchain trilemma of security, scalability, and decentralization. By providing a single, primary chain that stores data from various Layer-1 blockchains built on it, developers can avoid learning multiple programming languages and work around the traditional trade-off between speed and security.

Layer-0 blockchains have three main components:
1. The Mainnet: This chain is the primary chain that stores data from the different Layer-1s built on it.
2. Sidechains: This layer includes independent Layer-1 blockchains with their consensus mechanisms and validator nodes.
3. Cross-chain protocol: Used to allow different blockchains to communicate and exchange assets and information in a trustless and secure manner.

Investing in Layer-0 Blockchains

When investing in a Layer-0 project, research its short- and long-term goals. Key metrics to consider are:
1. Daily active users: A measure of protocol usage.
2. Transaction throughput: The number of transactions the blockchain can handle in a given timeframe, affecting scalability.
3. Security: Consider decentralization, audits, and the team’s track record.
4. Tokenomics: Models designed for long-term sustainability.
5. Scalability and interoperability: Projects supporting cross-chain transactions have better potential to gain loyal users.

Three Most Popular Layer-0s

1. Polkadot is a Layer-0 project launched in 2020, has a $7.88 billion market cap, and 4,570 daily active users on average in the last 30 days. Its relay chain connects and enables interaction between multiple blockchain networks (parachains), resulting in sizable TVL growth for its parachains in 2022.

2. Cosmos, founded in 2014, has a market cap of $3.30 billion and an average of 17,640 daily active users. It’s dubbed the “Internet of Blockchains” and includes the Cosmos SDK and the Inter Blockchain Communication (IBC) protocol. With a TVL of over $61 billion, it features 270+ apps and services, including Binance Chain, Terra, and Crypto.org.

3. Avalanche, founded in 2020, is a smart contract platform with a market cap of $5.99 billion and a 30-day average of 257,300 daily active users. It has three key chains, including the “contract chain” for building blockchain apps. The “exchange chain” creates and exchanges assets, while the “platform chain” coordinates validators and subnets. With a TVL of over $850 million, it is second only to Polkadot regarding Layer-0 projects’ market cap.

Conclusion

Layer-0 blockchains offer a scalable and interoperable solution that promotes collaboration and innovation in the industry. Investing in Layer-0 projects can provide exposure to the growth of the blockchain ecosystem. However, if Layer-1s become monopolies, Layer-0s may become insignificant. To gauge potential success, monitor daily active users on top Layer-0s. Steady gains across different Layer-0s indicate a promising investment category.

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