Although Ethereum continues to be the dominant platform, a few venture investors have made huge profits from so-called Ethereum Killers. Blockchain.com’s Peter Smith asks whether this is the best way to invest capital, as many of these investors are now backing the latest Wave 1 players. Blockchain.com CEO Peter Smith, co-founder and CEO of Blockchain.com, stated that backing Layer 1 blockchains has been a very successful bet and will continue to be so.
Aptos, Avalanche, and Near Protocol were the first wave so-called Ethereum killers. Aptos (brand spanking new Layer 1 Blockchains) and Sui, which are based on Move, a programming languages originally created by Facebook engineers, are the second.
Mysten Labs, a Sui developer, is said to be in discussions with investors to raise hundreds of million dollars. Meanwhile, Aptos’ team has already secured $350,000,000 through two raises this past year.
Ethereum is still alive and well as the most popular protocol for conducting decentralized business. It’s currently in the final stages to switch to a proof of-stake model to make it more affordable and energy efficient.
Smith says that despite increasing competition, it is not surprising that investors continue investing in base layer blockchains. This is because they can still be extremely profitable.
He told The Block that although none of the Layer 1 alternatives have been able to beat Ethereum, they have made investors a lot. If you are an early investor in a Layer 1, even if it is small scale, you can reap incredible returns.
“That’s why it’s important to distinguish between ‘is the stuff going to have an enormous and meaningful impact on users, daily lives, and building the future for finance?’ From ‘can you make money? Because they are not always one to one.
Venture capital is a broad world. It’s not common for investors to back multiple startups in the same niche. This is partly because of the potential conflicts of interest between rival companies. Not so in crypto. Venture capitalists have supported multiple projects that aim to bring down Ethereum. Aptos and Solana, for example, count Andreessen Horowitz as backers.
Smith sees the logic behind backing Layer 1 blockchains as clear: they can deliver eye-watering returns in relatively quick time, regardless of whether or not they challenge Ethereum.
He says, “We are seeing a lot more investors move out of successful Layer 1, bets from last cycle — Solana Avalanche and Near — and into new, Facebook-related Layer 1, bets.”
The market capitalization for SOL, Solana’s native token, jumped from less than $100 million up to almost $80 billion between November 2021 and November 2021, according CoinGecko data. Since then, it has fallen to $15 billion. If early backers of this project, who typically acquired tokens rather than equity, had cashed out even a fraction at the top, they’d be in the black.
“I believe there is some capital reflexivity at work where there’s a lot incentive to keep betting upon Layer 1s to bring down Ethereum because you’re already very rich on that strategy. Smith says that, ironically, no Layer 1 has ever been close to taking down Ethereum.”
This thinking is not ostensibly bad. Smith points out that it is a free market. Smith believes it is likely that the majority of the capital used to support the first wave Ethereum challengers was derived from successful bets on Bitcoin and Ethereum — or at the very least, the knowledge among investors of how these bets went down. Smith asks if successive Layer 1 investments are productive capital uses.
Smith says, “The thing I find hard to take seriously when some of these Layer 1s are launched now is: What are you bringing the market that’s that much better than Solana Avalanche or Near, as a back-up to Ethereum?” Each chain would have its answer, but ultimately what users care about most is stability and the cost of transacting. This is where I find it difficult to see the point: Is this the best use of capital, both financial and human?
Incentives schemes were the most popular last year, and a large chunk of the money that has been poured into new wave Layer 1s so far.
Avalanche has set aside nearly half a million dollars in native AVAX tokens in two incentive programs in August 2021, and March 2019, in order to attract developers and projects to its ecosystem. According to Data, the total value locked (TVL), on the blockchain jumped from $160 million in August 2021 to over $12 billion in December. TVL dropped to $10 billion in mid-April, but then plummeted to $2.5 billion.
This is also dependent on the health of the wider cryptocurrency market. Solana, although it has not launched a landmark incentive package has seen a decline of TVL similar to Avalanche’s over the same period.
Smith states that “so far, it’s unclear whether any of these chains really have had staying power.” According to DeFi Llama data, Ethereum’s TVL also fell, although less dramatic — from $160 billion in November 2013 to $84 billion today.
Smith admits, despite his scepticism that Ethereum’s eagerly awaited switch to proof of stake consensus (known as “the merger” among crypto cognoscenti) will cause problems. This will make it “game on” again for rival blockchains. This includes Solana, the first wave, and the new Move-based protocol.
Smith says that the challenge for all those blockchains is that they must hope for failure. “If Ethereum delivers on the merge, and on the sharding roadmap then there won’t be many chains.”