LAYER 1 PROTOCOLS

ETHEREUM

THE BIGGEST AND MOST WIDELY ADOPTED LAYER ONE PROTOCOL

WHAT IS ETHEREUM?

The largest layer 1 protocol as measured by market value and scale is called Ethereum. This blockchain technology aims to be a decentralized peer to peer network that is designed to allow applications to be built on top of it - think of it as a base layer operating system - kind of like OS which powers all kinds of apps. The most famous type of apps which operate over Ethereum includes NFT’s, DeFi applications and smart contracts. Ethereum was founded in 2014 by a young genius named Vitalik Buterin who sought to improve the Bitcoin network by creating something that could grow and evolve, that has a practical use case other than being a store of value and one that can actually generate money

The Ethereum blockchain could literally be the engine that powers the financial world of the future. Imagine a world where financial products are available on a public decentralized blockchain network making them open for anyone to use vs going through a middleman like a bank. A place where you can take out a loan, lend out your crypto, or trade and convert your crypto over exchanges built over the Ethereum blockchain. When a transaction is facilitated over ETH - a “smart contract” is created between 2 transacting parties. This contract will live on the blockchain forever - and can never be edited or changed - its like a digital engraving of the transaction.

TECHNOLOGIES POWERED BY ETHEREUM

NFT’s

If you listen to the news or CNBC lately - the one theme that people are constantly talking about is the rise in popularity of NFT’s. NFT stands for Non-Fungible Token - The idea behind the NFT is simple. This is an especially amazing invention for artists and collectible creators. An artist can literally create a new piece of art, tokenize and digitize it and literally sell it over the Ethereum blockchain using applications such as Rarible, Known Origin, Open Sea etc. This has become a huge business. The creator can also “write” into his selling contract that he/she would like to receive a certain percentage or commission for each successive re-sale forever. This is a type of smart contract where the artist creates the rules, mints a token backed by his/her art and sells - in some cases for lots and lots of money. An artist by the name of Beeples recently sold one of his pieces in NFT form for $67mm - that’s right 67MM!!! Naturally a lot of other artists have followed - now we can tokenize music, art, sports cards, and basically any type of memorabilia. This industry will only become more popular and grow over time.

DeFi Applications

Decentralized finance or “DeFi” is a blockchain-based form of finance that does not rely on financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial (TRADFI) products.. the most common DeFi apps include exchanges (Uniswap, SushiSwap) lending platforms (Aave, Compound) and smart contracts.

RECENT IMPROVEMENT MECHANISM TO ETHEREUM - EIP 1559

1. Ethereum Improvement Proposal (EIP) 1559

One really important improvement that was implemented in August 2021 is called EIP 1559. EIP-1559 is a change to Ethereum's fee structure. But it's also known as ETH's “burn mechanism." Ethereum fans should be excited by this since burning ETH will increase the asset's scarcity. The technology behind EIP 1559 has caused Ethereum to transition into a “deflationary” asset since it involves burning some of the Ethereum supply. Some people such as Justin Drake, who is a senior researcher at the Ethereum Foundation, refers to Ethereum as “ultrasound money”.

ETHE 2.0 - NEXT MAJOR CATALYST FOR ETHEREUM

ETH 2.0

There is a planned upgrade coming in mid/late 2022 called ETH 2.0 (or “The Merge”) which aims to improve the network’s security and scalability. This upgrade involves Ethereum shifting its current mining model from “Proof of Work” to what is called “Proof of Stake’. Staking is the process of actively participating in transaction validation. On these blockchains, anyone with a minimum-required balance of a specific cryptocurrency can validate transactions and earn staking rewards. ETH staking rewards will be given in accordance with how much ETH is validating and what rewards the network is offering over a time period. When there is very little ETH staked, the protocol rewards increase as an incentive for more ETH to come online. On the other hand, when there’s already a lot of ETH staked, the reward is reduced

OTHE LAYER ONE COMPETITORS TO ETHEREUM

The Layer 1 landscape is constantly growing. The popularity of alternative layer one solutions is being driven in part by some of Ethereum’s inherent weaknesses - the two biggest being transaction speed and gas fees. Currently, it is pretty expensive for the average user to do anything over Ethereum given the high gas fees. This is partly due to the fact that the Ethereum network is still a proof of work based construct which incents “miners” to prioritize transactions that pay the highest fees. After Ethereum goes through some of the intended network enhancements, like ETH 2.0 and the “merge”, some of these issues should go away. In the meantime, there are other layer one protocols or what is known in the industry as “Ethereum Killers” which have done a great job in building blockchains that are highly scalable, fast and cheap. They are slowly taking share away from Ethereum and having some great success at it. The list below are some of the more popular ones with great backers and communities.