"CRYPTO THESES 2024" on LAYER-1 Public Chains

Previous sections of the report:

Today, we begin sharing the LAYER-1 public chain section:

Despite Ethereum's significant progress in the long-awaited Shapella upgrade and its thriving "rollup-centric" future vision, we now live in a multi-blockchain world where compatibility and interoperability are more important than any single network or roadmap.

1. Ethereum Network Dominance

Even though Ethereum shows the strongest performance in terms of community size and revenue generation (i.e., fees), most developers will choose to build on the blockchain with the lowest cost and highest performance, and interactions with Ethereum will be achieved through rollups and bridges.

Ethereum has advantages in certain market niches, such as Meme, but its value may fluctuate as developers and applications decentralize from Ethereum. Fundamentals involve supply-side dynamics (inflation and token burn rate) and demand-side indicators: fee generation and expected demand for security.

In Proof-of-Stake (PoS) networks, network fees may not be as important as people think, and more attention should be paid to the security demand model. In the ever-changing field of cryptocurrency, Ethereum's position and influence are facing new challenges and competition.

2. Value Accumulation and Security in a Multi-Chain World

The base layer (Layer-1) secures all smart contract applications and rollups deployed on its network. The base chain can serve as collateral, as a fuel token for rollups, or as a universal currency and transaction fee. Taking Ethereum as an example, more than 33% of the ETH supply is locked in smart contracts. Therefore, we need to focus on the "Expected Demand Security Model" (EDSM), concentrating on the security needs of the largest applications for specific chains.

3. Network decentralization

Although technical centralization remains important, over-reliance on AWS within a crypto community is more acceptable at this stage compared to the entire community's over-reliance on Ethereum. Infrastructure concentration still needs close monitoring to look for signs of centralization risks, especially after Hetzner banned crypto operations in August 2022. However, it is not yet worth overly worrying about.

In the future, we will have fully permissioned banking chains, widely decentralized public chains, and various chains in between. The task for application developers is to determine what network trade-offs they will make for specific use cases. When these concerns arise, economic and geographic concentration are equally important, and may even be more so.

4. The evolution of censorship issues

Two core questions:

Whether some form of centralization will lead to network performance issues, thus exposing applications to the risk of downtime.
Whether centralization will create censorship challenges.

Ethereum decouples the process of block building, relaying, and validation, allowing the issue of censorship to be clearly separated across three distinct layers of Ethereum's transaction processing stack. Each network in the future will have to deal with its own censorship challenges; Ethereum is far ahead of other communities in considering these challenges and quickly proposing solutions.

5. Bullish factors for Ethereum

First-mover advantage: Ethereum leads with its long-established network reliability, liquid ecosystem, and a market capitalization of $300 billion (ten times that of the next largest smart contract network). Ethereum's maturity helps attract rollup and application developers due to the security provided by the network.
Traditional finance (TradFi) will embrace Ethereum’s investment thesis: As a high-growth market leader, Ethereum offers a clearer and more ESG-compliant narrative compared to Bitcoin. This includes the anticipated launch of an Ethereum ETF following Bitcoin spot ETFs, a net deflationary supply, and the generation of approximately $300 million in real fees (not ETH rewards) annually. In an environment of declining interest rates, its 4-5% staking yield will also become more appealing.
Ethereum is the force for good in chaos. If Bitcoin is a bet against bankrupt central banks, then Ethereum is a bet against morally bankrupt investment banks. Looking back at the three spikes in Ethereum network activity during each bout of market turmoil, if we expect 2024 to be geopolitically messier than this year, it can be anticipated that Ethereum will thrive in volatility and chaos.

6. Rollups

Ethereum's upcoming upgrade, Cancun-Deneb (expected in Q1), will reduce rollup transaction costs by 90-99% through the implementation of EIP-4844 or prototype-level "danksharding" technology. This could make rollup transactions as cheap as, or even cheaper than, other first-layer blockchains (alt-L1s). Therefore, the release date of Dencun is one of the most important dates to watch in the ongoing competition for block space. Over the past year, Optimism Superchain, Arbitrum Orbit, zkSync, Starknet, and Polygon have all announced details about their Ethereum-centric rollup ecosystems.

7. Modularity

There are two main approaches to building a decentralized network: "modular" and "integrated." Ethereum has adopted the "modular" approach, implementing a roadmap centered on rollups. Rollups allow developers to separate and optimize the execution environment from the settlement, consensus, and data availability (DA) provided by Ethereum L1. Ethereum L1 is also optimizing its support for rollups through the implementation of the danksharding upgrade.

Celestia and other networks take the concept of modularity a step further by providing networks specifically designed for rollup DA. This offers lower fees and higher throughput for rollups compared to general-purpose L1s.

8. Solana Renaissance and MOVE Ecosystem

Solana is seen as the comeback star of the year in the cryptocurrency space. After the collapse of FTX last year, many industry insiders believed that Solana had fallen out of favor, but it subsequently achieved a strong recovery. The rapid release of new products, the surge in on-chain liquidity, and the widespread availability of developer tools have all been remarkable.

Several key initiatives for 2024:

Performance improvements through Firedancer and Sig.
Developing light clients via Tinydancer.
Deploy the token-22 standard to expand Solana token functionality.

" makes its application possible:

DePIN: Projects like Helium, Hivemapper, Render, and Teleport have migrated to Solana.
Payments: Solana is poised to help drive mainstream payment flows — Visa has extended its USDC settlement pilot to Solana.
Consumer applications: Reducing NFT minting costs via compression technology enables new consumer use cases, such as DRiP and Dialect.
DeFi: Ultra-low fees, fast finality, and protocols like fully on-chain order books create a DeFi user experience not found on other networks.

SVM has become the industry-recognized second largest "operating system." Solana's achievements have not only helped reshape its own narrative but also the general narrative around high-performance, integrated networks.

Other networks such as Aptos and Sui are particularly advantageous, as these Layer 1s were born from Meta’s Diem and Novi projects. One of their many innovations is the Move programming language, each with its own characteristics. Move promises to offer application developers higher security and flexibility compared to Solidity and other Web3 programming languages. Although their ecosystems are young, they are worth paying attention to.

9. FHE and ZK Trends

When smart contract developers need additional computational resources, they can leverage ZK coprocessors, which are akin to GPUs in the cloud. ZK coprocessors allow for complex computations to be performed off-chain, and their zero-knowledge properties enable anyone to verify whether the computation was correctly processed. This allows smart contract developers access to cheap and verifiable computational resources.

ZK coprocessors do not provide privacy protection, which is where Fully Homomorphic Encryption (FHE) comes into play. FHE allows entities to perform computations directly on encrypted data. FHE has been a topic of academic discussion since 1978, but recent practical advancements have made it potentially deployable in real-world scenarios.

In addition to FHE-enabled smart contract platforms, FHE can be used for private payments, trustless gaming, private voting, private machine learning, and the creation of a private data economy. ZK co-processors and FHE are powerful, new cryptographic primitives. They are still in their infancy, but they will become one of the most powerful innovations in cryptography this decade.

10. The Evolution of Bankchains

Purely private blockchains will eventually die out as well. Although banks have the budget and IT teams to manage private blockchains, they cannot maintain their infrastructure as effectively as public, open-source platforms. The only possible exception currently might be JPMorgan's Onyx, which is the only bankchain I currently think is worth paying attention to.