Assessing how different layers are competing AND complementing Bitcoin, Ethereum

Decentralized chains predominantly need two things – Security and scalability. Those are requirements that are almost industry clichés now. But, they are also aspects that have accelerated growth in the crypto-ecosystem after the birth of the first-born cryptocurrency – Bitcoin.

Owing to limitations like congestion on Layer 1 chains, Layers 2 and 3 functionalities quickly populated the crypto-verse. But, where are Bitcoin and other chains headed from here? AMBCrypto spoke to Muneeb Ali, Co-founder of the Stacks project, to understand this better. He argued,

“Bitcoin is the most decentralized, most secure, largest network with the largest market cap. But even if we end up with a multichain world, which it looks like we are heading towards, then you’ll still have a big Bitcoin economy.”

Expanding crypto-verse

As of November 2021, there are over 7000 cryptocurrencies in existence. Now, many might agree that at this stage, the market is only expanding and is far from saturation. But, even when it gets crowded, I would argue that Layer 1 solutions like Bitcoin and Ethereum can be called the lifeblood of the crypto-ecosystem.

Apart from different use cases, they have garnered investor interest as a currency, property, digital gold, or as stocks. Their Sybil resistance mechanisms like PoS and PoW have provided decentralized security. In fact, according to Ali,

“Layer 1s are sovereign systems — Bitcoin and Ethereum, for instance, can exist by themselves. An L2, like Lightning, cannot exist without Bitcoin, and Arbitrum cannot exist without Ethereum. Stacks cannot exist without Bitcoin.”

On the other hand, macroeconomics and crypto-commentator Natasha Che is betting that proof of stake chains will be a foundational future in the crypto-space. While the survival of POS is a fair argument considering its sustainability benefits, it leaves Bitcoin out.

While competition is fierce & many layer 1s will die, it’s clear that multiple PoS layer 1 chains & their scaling layers will coexist in future, and become the collective floorboard of the metaverse.

— Tascha (@RealNatashaChe) October 30, 2021

Survival of the fittest

So, we have strong reasons to believe that Bitcoin can maintain its firm footing in the future as a Layer 1 solution. Apart from that, upcoming Ethereum 2.0, Cardano, Solana, and Algorand, among other Layer 1 POS smart solutions, can also be the ones to see the light at the end of the tunnel.

With that, we cannot forget that the survival of some Layer 2 chains remains contingent on the strength of Layer 1 solutions. For example, what will be Polygon’s value addition after Ethereum 2.0?

Source: Reddit

We know that Ethereum will make protocol changes to its base code as it transitions to Ethereum 2.0. And, as a result, Ethereum 2.0 will become “64 times more scalable than Ethereum.” Despite that, Polygon, which is an L2 scaling solution for Ethereum, is not going anywhere, according to the Polygon co-founder Jayanti Kanani.

In fact, Kanani had previously argued,

“I’m 100% sure ETH 2.0 will get jammed in a few weeks with the demand……the demand is 1,000 X than where we are. You will need L2 scalability.”

Since he is optimistic about his Layer 2 chain’s future value addition, we will have to remember the “underexplored” potential of Layer 1.5.  Stacks’ co-founder added,

“L2s can scale L1s, but it’s harder to add completely new functionality to an L1 via an L2 given they are limited to the underlying L1 programming ability.”

But, Ali explained that Layer 1.5 chains can not only build upon the security of the L1 chains they rely on but can also add additional functionality outside L1 programming. This, in turn, can “potentially open new apps and markets to those L1s.”

Future placement of Layer 1.5

Contingency brings uncertainty. And, that’s what we can say about most second-layer solutions at this point. But, will independent layers end up competing with Layer 1 solutions?  Ali thinks it is only true “in some ways,” adding, 

“Short term, I think it’s less of a competition, because the Bitcoin market is so underexplored. Bitcoin is a trillion dollars in assets that few people are using for anything other than a store of value…”

He concluded by underlining his belief that with the growth of the rest of the market, “there’s tons of room for growth just in the Bitcoin ecosystem.”