Why are there so many blockchains?

Why are there so many blockchains?

This article provides a comprehensive overview of the blockchain landscape, It delves into the fundamental concepts of blockchain technology, its origins, and its potential applications beyond digital currencies. The article further categorizes blockchains into Layer 1, Layer 2, and Layer 0, explaining their unique features and roles. It also offers guidance on choosing the right blockchain


Introduction

One of the key trends of 2021 was the dramatic rise in the popularity of new blockchains. While Ethereum was having its moment in the spotlight, newer competing chains such as Solana, Avalanche, and Terra exploded in popularity and user adoption, followed by mouth-watering gains of their tokens. Hundreds of new cryptocurrencies are introduced every year. Even though many of these projects are just trying to be the next Bitcoin, a few still have unique angles. Many of these blockchain projects have been left in the dust, but a handful survived and have even begun to gain some traction within the crypto space.

In the cryptocurrency world, there are two major categories that all blockchains fall into public blockchains and private blockchains. Each of these categories has a few different protocols, which can get a little confusing. This confusion is the basis of the popular question from users and non-users worldwide: why are there so many different blockchains? Before we dive in to answer this crucial question and assess different blockchains in existence today, let's quickly examine the definition and origin of blockchains.

Blockchain

What is a blockchain?

The Blockchain is a public ledger that records digital transactions. Simply put, a blockchain is a digital ledger that keeps track of which wallets own what and all transactions conducted. It's called a "blockchain" because the records are grouped in blocks, and each block contains a timestamp and links to the previous block. As an open, distributed database that can record transactions between two parties efficiently and in a verifiable permanent way, it has the potential to be utilized in many new contexts beyond digital currencies. It is a consensus for which transactions can be added to the ledger.

A short story about Blockchain

In the beginning, there was only one Blockchain, the one enabling Bitcoin. Ethereum went live in 2015 and enabled d-apps to be built on top of it. While there can only be one Bitcoin, there can be many smart contract blockchains, and currently, we have dozens of interesting Ethereum competitors.

There are hundreds, if not thousands, of blockchains in operation today. And as digital currencies and blockchain technology get woven tighter into the fabric of the world economy, the numbers may increase exponentially in the coming years.

While there are obvious advantages to this, it also comes with a unique set of disadvantages. For one thing, the proliferation of blockchains might make it difficult for investors to select the right one for them.

Blockchain how it works

Many Different Blockchains

Blockchains can be public or private, linked with a single (or multiple) tokens, or linked with no token at all. Bitcoin, Ethereum, Dogecoin, Horizon, DigiByte, Zcash, Monero, Dash, Decred, Revencoin, Litecoin, etc., are popular public projects with their native coins, and therefore, their Blockchain. There are over 100 public blockchains that are active at the moment.

The Open-Source nature of Blockchain technology can be advanced as a possible reason for the multiplicity of blockchains since it makes it possible for projects to be copied and rebranded. .CryptoKitties congested the Blockchain.

Blockchain Trilemma

While different teams claimed to have solved this trilemma of scalability, security, and decentralization, it is evident that most of these platforms still have limits to the number of transactions they can process.

Network effects

Network effects mean that a network becomes more valuable with each new user. Each new Google user made the search engine better; each new Amazon seller added more products, and buyers increased the market, and each new Facebook friend meant more familiar content.

More than any other thing, network effects are the key to the success of any blockchain ecosystem . They are usually a complex phenomenon that looks simple on the surface, including bandwagon, tech performance, data, platform, market network, personal utility, protocol, and even more!

Network effects have always been detrimental to the rapid growth and acceptance of different blockchain protocols. Important elements of network effects include:

  • Users
  • Builders
  • Investors
  • Miners / validators
Blockchain Trilemma

Network adoption waves

Blockchains can be likened to modern cities. It is important to note that these cities are not just big and open for business. Each city has a different vision of what a city should be and how it should be governed. Each accepts different trade-offs, adopts unique values, and attracts various industries. Each of these cities is similar to different layers of Blockchain

The ecosystem of building blocks on these methaphorical blockchain cities includes data, trx, exchanges, and liquidity.

Competitors in the crypto space

Many new competitors on the horizon are finding the network-market fit for users, and more are springing up daily to provide better security, scalability, and performance for blockchains. This is one reason that led to the existence of different blockchains, as well as different blockchain “levels” around the world.

The following is an overview of the top smart contract platforms on the market. To keep this succinct and short, we've excluded:

  • Blockchains that we can't use
  • Blockchains that have been around for a while without attracting meaningful usage
  • Proof of Work blockchains
Blockchain Competition

Layer 1 blockchains

Layer 1 blockchains form the fundamental base network of a blockchain platform, offering the necessary infrastructure for blockchain networks to operate and interact effectively. They are responsible for executing all on-chain transactions and serve as the source of truth for a public ledger. Importantly, Layer 1 blockchains provide the basic infrastructure and security that Layer 2 blockchains require to function. Designed to address the scalability challenges of blockchain networks, Layer 1 solutions offer a remedy to the constraints of blockchain networks, such as Bitcoin and Ethereum. These constraints often revolve around issues of scalability, usability, and developer control.

Layer 1 blockchains are the foundational layer for a crypto ecosystem and possess their own native coins. They are used to create smart contract platforms and decentralized applications. One of the key features of Layer 1 blockchains is their ability to validate and finalize transactions independently, without the need for another network. However, it's worth noting that they are often slower and more expensive than Layer 2 networks due to their role as the source of truth for transaction settlement. There are several notable examples of Layer 1 blockchains, including Bitcoin, Ethereum and Solana. These blockchains share certain defining features of Layer 1 blockchains, such as block production, individual units of the blockchain, and consensus mechanisms.

Layer 1 blockchains serve as the fundamental base network of a blockchain platform, providing the essential infrastructure for blockchain networks to operate and interact effectively. They execute all on-chain transactions and act as a public ledger's source of truth. Layer 1 blockchains are used to create smart contract platforms and decentralized applications and can validate and finalize transactions without the need for another network. Bitcoin, Ethereum, Solana, Polkadot, and Cardano stand as prominent examples of Layer 1 blockchains.

Layer 1 Blockchain Competition

Layer 2 Blockchains

Layer 2 blockchains, often referred to as off-chain solutions, are innovative technologies built atop existing blockchain systems, also known as layer-1 networks. These solutions are designed to address the inherent limitations of layer-1 networks, particularly in terms of scalability, transaction processing speed, and transaction costs. Layer 2 solutions offer a myriad of benefits, including enhanced scalability and faster transaction processing times, all while significantly reducing fees. Importantly, these improvements do not compromise the security and decentralization that are characteristic of their on-chain counterparts. This makes Layer 2 solutions an attractive option for building a wide array of applications.

There are various forms of Layer 2 solutions, including state channels, plasma, sidechains, and rollups. Each of these solutions brings unique advantages to the table, but they all share the common goal of improving scalability, speeding up transaction processing, and reducing fees. Layer 2 blockchains are specifically designed to tackle the scalability challenges associated with blockchains. They operate as separate blockchains that extend the capabilities of the underlying base layer network. By increasing transaction speed and reducing costs, Layer 2 solutions effectively address the scalability issues of layer-1 networks, especially the problem of high gas fees during periods of network congestion.

Some examples of Layer 2 blockchains include Arbitrum, Optimism and Polygon.Moreover, Layer 2 blockchains can alleviate the bottlenecks of scaling and transaction costs while maintaining the security guarantee of the layer-1 network. They enhance blockchain scalability by reducing the number of nodes or participants needed to validate transactions within the Layer 2 network. This reduction in nodes expedites the consensus process, thereby improving the overall efficiency of the network.

Layer 2 Blockchain

Layer 0's: Blockchain of blockchains

Layer 0 blockchains serve as the foundational layer of blockchain networks, providing the essential infrastructure that enables Layer 1 blockchains to function and interact effectively. Essentially, Layer 0 protocols form the bedrock upon which Layer 1 blockchains are constructed. This foundational layer allows for the creation of multiple Layer 1 blockchains, all of which can utilize the same underlying systems and protocols.

Designed to address the scalability challenges of Layer 1 blockchains, Layer 0 solutions offer a remedy to the constraints of Layer 1 blockchains, such as Bitcoin and Ethereum. These constraints often revolve around issues of scalability, usability, and developer control. Layer 0 blockchains can be leveraged to establish more secure and transparent gaming platforms, thereby ensuring fair play and minimizing the risk of fraud or hacking.

Beyond gaming, Layer 0 blockchains can be utilized to create interconnected value chains, providing a more sophisticated and evolved alternative to traditional smart contracts. The potential applications of Layer 0 blockchains are vast and largely depend on the programmer's intentions. They can be used for a variety of purposes, including data validation, the establishment of individual reward structures, digital currency wrapping, and more. Importantly, Layer 0 blockchains can alleviate the bottlenecks of scaling and transaction costs, all while maintaining the security guarantee of the Layer 1 network.

Several notable examples of Layer 0 blockchains include Cosmos, Polkadot, and Avalanche. Both Cosmos and Polkadot exemplify Layer 0 blockchains' ability to facilitate communication between different blockchains and enable seamless interoperability among them. For instance, the Binance Chain was constructed using the Cosmos SDK, a customizable framework developed by Cosmos for building blockchains. Layer 0 blockchains form the foundational layer of blockchain networks, offering the necessary infrastructure for Layer 1 blockchains to operate and interact effectively. They provide solutions to the scalability challenges of Layer 1 blockchains and can be employed to create more secure and transparent platforms, interconnected value chains, and more. Cosmos, Polkadot, and Avalanche stand as prominent examples of Layer 0 blockchains.

Layer 0 Blockchcians

Which One to Choose?

This decision would rely on the unique needs of specific users. In general, however, here are some qualities you need to look out for in a blockchain:

1. Scalability

This refers to the transactions per second (TPS) rate of blockchains. When choosing a blockchain platform, check to confirm that it possesses at least two qualities out of three in the Scalability Trilemma (speed, security, and decentralization).

2. Developer Friendliness

Blockchains that support familiar languages such as Solidity, Simplicity, Java, Python, JavaScript, Ruby, and Rust are preferable because they make it easy for developers to write smart contracts without learning new languages when switching platforms.

3. User Friendliness

Blockchains with a complicated interface will be potentially difficult to work with. It would be best if you considered checking that a blockchain platform is easy and intuitive to navigate before settling for it.

4. Ecosystem

It may be worthwhile to verify that your preferred Blockchain ecosystem supports integration with other participants that share similar processes and business objectives as yours.

5. TVL

It's also important to verify a blockchain's total value locked (TVL) as it's a good indicator of the value of deposits in a project.

Layer 0 Blockchains

Closing thoughts

At the core, a blockchain is a public ledger that records digital transactions. It's a digital ledger that keeps track of ownership and transactions. The term "blockchain" comes from the way records are grouped in blocks, each containing a timestamp and links to the previous block. This technology has the potential to be utilized in many contexts beyond digital currencies due to its open, distributed nature that allows for efficient and verifiable permanent recording of transactions. The existence of different blockchains and blockchain "levels" is due to the open-source nature of blockchain technology, which allows projects to be copied and rebranded. However, most platforms still have limits to the number of transactions they can process due to the blockchain trilemma of scalability, security, and decentralization.

Network effects, where a network becomes more valuable with each new user, are key to the success of any blockchain ecosystem. These effects can be seen in users, builders, investors, and miners/validators. Blockchains can be likened to modern cities, each with a different vision of governance and attracting various industries. Layer 1 blockchains form the fundamental base network of a blockchain platform, executing all on-chain transactions and serving as a public ledger's source of truth. Layer 2 blockchains, or off-chain solutions, are built atop existing blockchain systems to address scalability, transaction processing speed, and transaction costs. Layer 0 blockchains serve as the foundational layer of blockchain networks, providing the essential infrastructure that enables Layer 1 blockchains to function and interact effectively.Choosing the right blockchain depends on the unique needs of specific users. Factors to consider include scalability, developer friendliness, user friendliness, ecosystem, and total value locked (TVL).

As with the rise of Google, Amazon, and Facebook in their respective industries, it may take years before a clear winner emerges in the blockchain space. Currently, Ethereum is the clear market leader in terms of smart contract blockchains, boasting strong network effects among builders, investors, users, and applications. However, the future remains open, and the landscape is ripe for innovation and growth.

Disclaimer: Nothing on this site should be construed as a financial investment recommendation. It’s important to understand that investing is a high-risk activity. Investments expose money to potential loss.

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