Messari’s “State of Layer 1s Q1 2023”: What can we Learn?

On June 1, crypto research firm Messari released their “State of L1s Q1 2023” report, which details the different metrics associated with blockchain Layer 1s for the first quarter of this year. By analyzing this data, we can gain a greater understanding of the current market dynamics, what could be good investments, and what to avoid.

Messari’s report dives into several metrics by which we can analyze blockchains, including their revenue, inflation, real yield, and staked supply. Interestingly, the Stacks blockchain performed the best in Q1 percentage-wise regarding price change, daily transaction growth, total staked assets, and daily active wallets. This was likely due to the interest in Bitcoin Ordinals and SRC-20 tokens. For those who are unaware, Stacks is a smart contract platform that derives its security from Bitcoin and can be thought of as a Layer 2 with extra functionalities for the Bitcoin blockchain. With the recent hype surrounding programmability on Bitcoin and the expansion of its capabilities, Stacks is well-poised to see continued growth in user and developer interest in the platform. Additionally, many Layer 1s including Polygon, NEAR, Solana, and Cardano have been labeled as securities in the recent lawsuits from the SEC against Coinbase and Binance. Stacks, on the other hand, took regulations extremely seriously and considered itself a security until the release of Stacks 2.0 in 2021, and filed this opinion with the SEC. Even though it is unlikely all of the other Layer 1s are a security, Stacks has put itself in a good position to take advantage of the ensuing confusion and uncertainty. That being said, it has a lot of room to grow and had the lowest average daily transactions and daily active addresses of the analyzed L1s.

Even though Layer 1 smart contract platforms are in a competitive industry, Ethereum is still the dominant leader. Its revenue, the sum of fees collected, was around $450 million, 2.8 times greater than all 13 other L1s combined. While this may be partially due to Ethereum also having fees at a minimum 20 times higher than its competitors, it is notable that users are still willing to pay for the security and decentralization guarantees that Ethereum provides, and in fact may say even more about Etheruem’s market dominance that people are willing to pay this much to use it.

Not everyone can be a winner, though. Harmony, which suffered a $100 million bridge hack in 2022, was dead last in revenue and second to last in daily transactions and daily addresses. Harmony’s value proposition is that it is an EVM-compatible sharded blockchain, meaning it can scale immensely and support Ethereum applications. While this was unique a couple of years ago, introducing Ethereum Layer 2s has reduced the need for another blockchain to provide the same features with less security. Another loser from Q1 was Tezos, a chain released in the 2018 bear market with its unique feature being its flexible and modular governance that allows it to adapt and improve itself consistently. Five years after its mainnet release and it still has yet to find a consistent user base or popular dApp as it slowly fades into obscurity with the likes of EOS and Neo. 

Tron, by some metrics, appears to be incredibly promising, but there is more to this L1 than meets the eye. It boasts the third-highest total value locked in DeFi at $5.4 billion, third-highest average daily transactions at 7.1 million, and the most daily active addresses at 2.3 million, double that of second place. However, most of these metrics seem suspiciously good, and further inspection reveals some issues. First, over 70% of their DeFi activity comes from one protocol, JustLend, and only three wallets. Second, Tron boasts the largest amount of USDT issued on its chain at $46 billion. USDT has been controversial for several years due to its obscure accounting practices and rumors that it does not hold enough assets for 1 USDT to be redeemed for $1. It was also dead last in full-time developer count and last in percent change in developers at -20%. These are extremely conflicting metrics and suggest that something else is going on behind the scenes.

Analyzing on-chain activity can be the best way to get a true understanding of how well a Layer 1 is doing. Diligent research is critical before making any cryptocurrency investment decisions, and research from Messari helps make the process easier. 

By Lincoln Murr

Related Articles