Module 11: Sector and Narrative Analysis
Layer 1 Blockchains
Chapter 3 of 13 · about 4 minutes
3.1 The "Ethereum killers"
In every crypto cycle, new blockchains have launched claiming to be faster, cheaper, and better than Ethereum. Social media called them "Ethereum killers." Some rose spectacularly. Many faded. A few became significant ecosystems of their own.
"Why do so many people bet on new Layer 1s?" asked Mint.
"Because a successful Layer 1 can become an entire economy, and its token can capture value from all of it," said Hash. "It's the biggest prize in crypto. That's also why competition is fierce, and why most attempts fail."
3.2 Two kinds of Layer 1
| Type | Main purpose | Value driver | Example |
|---|---|---|---|
| Monetary Layer 1 | Being money or a store of value | Monetary premium, security, scarcity | Bitcoin |
| Smart contract Layer 1 | Hosting applications and economic activity | Demand for block space, staking, monetary premium within its ecosystem | Ethereum and its competitors |
Module 5, Chapter 9 covered how to evaluate Layer 1 networks. This chapter looks at Layer 1s as a sector: what drives them as a group, and how narratives form around them.
3.3 What Layer 1 narratives usually claim
| Common claim | Question to ask |
|---|---|
| "Faster" | What did it trade off for speed? (Module 3, Chapter 7) |
| "Cheaper" | Can it generate enough fees from cheap transactions to fund security? (Module 5, Chapter 9) |
| "Better technology" | Is the technology actually in use, and does it matter to users? |
| "Big ecosystem coming" | Are real applications and users already arriving, or just grants and announcements? |
| "Institutional adoption" | Are institutions using it, or only announcing partnerships? (Module 5, Chapter 12) |
3.4 What drives Layer 1 success
| Driver | Why it matters |
|---|---|
| Users and real economic activity | Fees, stablecoins, and DeFi volume show genuine demand |
| Developers | Applications attract users, who attract more developers (network effects) |
| Liquidity | Deep stablecoin and DEX liquidity attract traders and applications |
| Distribution | Wallets, exchanges, and partners that bring users |
| Security and reliability | Outages and exploits damage trust |
| Unique strengths | Something hard to copy elsewhere (Module 5, Chapter 13) |
| Community and culture | Committed users and builders through bear markets |
The strongest Layer 1s typically win on several of these at once.
3.5 The Layer 1 lifecycle
New Layer 1s often follow a common pattern:
| Phase | What tends to happen |
|---|---|
| Launch | Large venture funding, low float, high fully diluted valuation (Module 5, Chapter 5) |
| Growth incentives | Ecosystem funds, grants, and token incentives to attract developers and users |
| Activity boom | Rising TVL and transactions, partly incentive-driven (Module 9, Chapter 10) |
| Unlocks | Team and investor tokens unlock, adding supply |
| Test | Incentives decline; activity either holds or fades |
Many Layer 1 tokens performed strongly in their first bull market and then declined substantially as unlocks proceeded and incentive-driven activity left. A smaller number built lasting ecosystems.
3.6 Winner-take-most?
Debate continues about whether Layer 1s are a winner-take-most market, dominated by one or two networks, or a multi-chain world with many specialised networks.
| Winner-take-most view | Multi-chain view |
|---|---|
| Network effects and liquidity concentrate on the leaders | Different chains serve different users and use cases |
| Developers and users prefer the deepest ecosystem | Interoperability and bridges connect ecosystems (Module 3, Chapter 10) |
| Security budgets favour the largest networks | Specialised chains can outperform general ones for specific tasks |
Both views have evidence. The answer matters for investors: in a winner-take-most world, owning the leaders matters most; in a multi-chain world, more chains can succeed.
3.7 Relative performance to Bitcoin and Ether
When evaluating a Layer 1 token, compare its performance with Bitcoin and Ether, not just in dollars. Many Layer 1 tokens have risen in dollar terms during bull markets while losing ground to BTC and ETH over full cycles. Chapter 12 covers how to measure this.
"So a Layer 1 doubling isn't great if Bitcoin tripled," said Node.
"Exactly," said Hash. "If you could have held Bitcoin instead, that's the bar."
3.8 Try it yourself
Choose three smart contract Layer 1s, including Ethereum. For each, find: annual fees, stablecoin supply on the network, number of active developers (Module 5, Chapter 12), share of supply still to unlock, and token performance against Bitcoin over the past two years. Which looks strongest on fundamentals? Which performed best? Are they the same?
Key takeaways from this chapter
- Layer 1s include monetary networks, like Bitcoin, and smart contract platforms, like Ethereum and its competitors.
- Common Layer 1 claims, like faster or cheaper, should be tested against trade-offs and real usage.
- Success depends on users, developers, liquidity, distribution, security, unique strengths, and community.
- New Layer 1s often follow a launch, incentives, boom, unlock, and test cycle.
- Debate continues between winner-take-most and multi-chain views.
- Measure Layer 1 performance against Bitcoin and Ether, not just in dollars.