Ethereum Competitors - What To Look Out For?
With recent Ethereum prices still very high a lot of people are searching for alternatives. There are a lot of news about alternative blockchain Layer 1 projects that are currently getting a lot of funds and making some news. Some of them are very well known, like Polkadot or Avalanche. In my opinion it always important to know some key factors and what to look at in crypto projects, that is why I will try to summarize some of my thoughts in this article. I will talk about some Layer 1 and Layer 2 crypto projects and what to look out for when investing into them. Keep in mind that this is no financial advise but just the thought process that I have build up during my time in the crypto space!
Layer 1 & Layer 2 Blockchains
Lets start of with defining what Laye 1 and Layer 2 blockchains are. Layer 1 is a term that describes a project which has its own blockchain. It is essentially a built in foundation that allows developers to build software. Most popular Layer 1 providers are Ethereum and Solana at the moment. In the case of ETH it has different use cases built on it, like DeFi, P2E games or even markets like OpenSea. It basically allows other services or applications. Other Layer1 would be Cardano or Avalanche and many more. A good analogy for the kind of relationship between the Layer 1 and the software built on it could be something like Apple and IOS or Samsung and Android in the real world.
Now what are Layer 2 solutions? Layer 2 solutions are built on top of the Layer 1 blockchains and therefore creating another layer, hence layer 2. The purpose of those Layer 2 solutions is to increase speed or decrease cost of transactions on the underlying blockchain. It basically helps the L1 ecosystem to scale and develop better and faster transactions. That means that developers can build on these Layer 2 solutions to decrease cost or increase speed within their applications instead of using the normal Layer 1 blockchain. A very popular example for a Layer 2 project is Polygon for the Ethereum blockchain.
How To Evaluate?
Like I mentioned in the beginning, right now there are a lot of projects out there, but how would we try to evaluate them and how do we know which one is the best. At the end, nobody wants to invest into something that is not a good project, right? Well, currently many people consider crypto projects similar to stocks. But this is kind of the wrong way to perceive the crypto space, especially the Layer 1 blockchains. Because these have way more use cases like transaction processes, store of value, voting rights, ownership of property or paying for network space. Therefore, I think that they can be more likely compared to ecosystems or countries. For example: If we look at Ethereum vs Cardano vs Solana: Each of them has their own ecosystem. We can compare it to US vs Germany vs Japan. At the end of the day, the most efficient, most green, most superior, the most decentralized will unfortunately not become the most valuable! At the end of the day, the value of each blockchain will be valued by two factors. The first one would be the Size of productivity which basically means the output of the software apps and the second is the amount of users which includes the future growth of users as well as how many of them will stick in the future. These both factors combined can be compared to a countries GDP if we want to keep the analogies running.
To summarize: the most successful will be the ones who can create and grow an economy on their blockchain. They must create the greatest amount of innovation that basically attracts more users to their platforms and the apps that are built on it.
How To Achieve These Goals?
In order to fulfill the demands of a secure and growing ecosystem the blockchains have to do different things. In general, there are 4 key elements to a great economic state of an ecosystem. The first one is the efficiency for value creation. This means basically, how easy is it to convert your resources into labor, knowledge or value which helps the ecosystem. This key consists of 3 sub attributes that are important to keep in mind. The first one being the human capital. Currently, the crypto market has a shortage of highly qualified developers and projects are trying to get the best ones on board. This means, how much effort does a new developer need to be a good contributor in this environment. This can be again compared to different countries with different languages. In this case: How hard is it to learn the new language to contribute any value? Then there is the financial capital. This is very self-explanatory. Money is always important. It is needed to create new applications. So always look at the investors that are contributing into these projects. And the third one would be the infrastructure. This is the underlying blockchain technology as well as everything that is already built on it.
The second big key is the supporting synergetic industries. This means essentially, developer applications on the blockchain that complement and support each other. We could compare this to the human body. Everybody needs a hearth and a brain. These organs work together to keep our body running. They do the task that they are supposed to be doing in a perfect way but they would suck if they would have to do each others jobs. It is very similar on the blockchain. It is very important to have applications that work together rather than doing everything on their own. This way the ecosystem is more efficient and can thrive better. Examples would be a very diverse set of NFT communities or DeFi applications.
The third key is linked to the second one and this is the direct competition within an ecosystem. What I mean by that is, that it is important to have similar applications who are specialized on similar things. This is very crucial as it creates a competitive environment and competition leads to innovation. Like in the real world, the better your competitor is the harder you would work to overtake him again which leads to amazing innovations and ideas. In the perfect ecosystem the blockchain would have multiple applications for the same task, for example Ethereum would have multiple Uniswaps for the DeFi sector and multiple OpenSeas for the NFT sector. This would lead to better customer service and greater innovations within this sector at some point. At the end it would make the blockchain competitive in itself and in the next step competitive towards other blockchains or ecosystems.
The fourth and final key is a strong user demand. This is one of the most important factors, because if nobody wants to use it its value will stay very low. The more users the blockchain has, the more it is forced to innovate itself. This automatically drags more users to the blockchain which makes the demand higher. This will increase long term success. Something important to notice here is the quality of users that the project has. But this very difficult to research. Sometimes it can be done by looking whether a large portion of the community are bots and or actually using the apps. In general quality beats quantity but it is always good to have both!
Conclusion
All in all I wanted to introduce some factors that are important to look at when you are looking for the next Ethereum or a Layer 1 or Layer 2 project in general. But there is one last point I want to mention. As you all are aware, there are a lot of countries and nation all around the world. This can be seen with the blockchains as well. At the end there will not be only one blockchain to serve us all but a big variety of blockchains. That is why I would like to stress the following: In the future it will be also important to have bridges between all of these different blockchains and that is why projects like Cosmos will become more important in my opinion. Projects like these will try to connect blockchains together and secure an interoperability. With that being said, thank you for reading and I would like to read some of your perspectives on this topic!
Published by ga38jem on LeoFinance|Steemit On 26th December 2021
Posted Using LeoFinance Beta
