The prospects of digital assets in 2022. The Block Research. Layer-1 platforms.

The Hub Forklog team represents the translation of the selected chapters of the report “Prospects for Digital Assets in 2022”, prepared by the analytical publication The Block.

The authors of the report: Lars Hofman, Stephen Zheng and Lucas Dzhevtich

Part 2. The first level decisions L1.

Competition Ethereum and solutions L1. Review of platforms and ecosystems L1 (Avalanche, Fantom, Harmony). The reasons for the growth of Defi -electro -systems on the L1 blockchains, user and developers stimulation programs.

Review of the competitive environment of the Layer-1 platforms

One of https://gagarin.news/news/does-mining-negatively-impact-the-environment/ the main trends of 2021 was the growth of blockchains of level 1 (L1) and their ecosystems, especially in connection with the development of the leading platform of smart contracts Ethereum. As we have already noted in the “Market state” section, in 2021 the protocols of L1 were among the triumphal winners of the total TOP-10 cryptocurrencies, surpassing ETH in terms of growth in the price of native tokens. Among L1, Fantom (FTM), Solana (SOL) and Terra (Luna) were leaded.

The price dynamics of Native Layer-1 Tokens in 2021. Source: Coingecko

In addition to impressive price dynamics, L1 demonstrated the growth of user activity, largely due to the appearance of Defi ecosystems on various L1 platforms. Thanks to the constantly growing list of available Defi Protocols, users deposited the record volume of capital to decentralized applications, such as decentralized exchanges (DEX), credit protocols, income aggregators and exchanges of derivatives.

Only on Ethereum, the total blocked cost (TVL) Defi protocols increased from about $ 16.1 billion in early 2021. up to $ 101.4 billion as of November 30, 2021, which is an increase of approximately 530%. TVL in ecosystems L1 in general grew faster, increasing by more than $ 166 billion from the beginning of the year, with an increase of 974%.

If at the beginning of 2021 Ethereum remained a refuge for almost all of the capital blocked in Defi, by November 30 of the same year its share in TVL decreased to 63%. The appearance of alternative ecosystems L1 was for the period of the continuing growth of cryptorrhniki. Between January and May, the volumes of transactions on Ethereum have repeatedly reached new historical maximums, and users of the largest smart contract platform began to face significant difficulties caused by the insufficient scalability of the network.

TVL in Layer-1 ecosystems in 2021. Source: Debank, The Block Research

The average value of transactional collection on the Ethereum 2017 blockchain is 2021 Source: Debank, The Block Dashboard

In the first half of the year, the average commission for transactions in Ethereum grew to a record high level. Because of this, the activity of users during periods of extreme network loads has repeatedly turned out to be paralyzed by an exorbitant payment for gas and the need to wait for transactions for a long time for a long time.

In a situation of significant load on the network, network demand and rapidly growing prices, the L1 protocols began to occupy a leading position, since users began to look for alternatives for activities that they previously carried out mainly on Ethereum. Especially EVM-compatible blockchains, such as Binance Smart Chain (BSC), got an excellent opportunity to accept a significant part of the new and existing Defi users, offering them the opportunity to experiment in the ecosystem without an input barrier in the form of large investment.

Since February, the BSC ecosystem grew, reaching a peak of $ 34.8 billion in TVL as of May 9, 2021, which amounted to about 26% of the total Defi TVL.

Along with the growth of TVL in BSC, there was a rapid increase in the number of daily users. In addition, in May 2021, a record high average transaction was observed – about 8 million.

The average daily transaction in 2021. Source: BSCSCAN

Against the backdrop of a wide subsidence of the cryptorrhist, which began in mid -May, the BSC use indicators fell sharply, and only on November 14 they updated the former historical maximum.

It is noteworthy that throughout the second quarter the ecosystem has encountered many exploits. This fact emphasizes the risky and vulnerability of the placement of a large number of Defi protocols in the network, which arose as unavelic forks Ethereum.

Nevertheless, the explosive growth of BSC in 2021 formed a kind of scenario for other developing L1: there was an idea that the placement of DEX and credit platforms in the new L1 – extracts may be crucial for attracting active users and developers.

Even at the time of compiling this report, the largest Dex Pancakeswap on BSC constantly processed one of the highest trading volumes among DEX, second only to Uniswap. As the main source of trade activity on the network, it was DEX that became the center L1.

Monthly trade on Uniswap compared to Pancakeswap in 2021. Source: Coingecko

At the same time, one of the most significant challenges that the protocols are still faced is the problem of fragmented liquidity. New ecosystems L1, even EVM-compatible, are forced to fight for existence, since users often need good reasons for moving assets, which may already bring income on other platforms. And here it turns out that one of the best ways to attract liquidity suppliers is to just motivate them.

Incentives and financing

In the second half of 2021, there was a sharp increase in the number of users and activity in EVM-compatible blockchains. Partially, this growth was caused by an increase in financial incentives from the teams of L1 projects.

One of the most outstanding financial incentive programs is Avalanche Rush from Avalanche Foundation, launched on August 18 with the aim of scaling its Defi Ecosystem due to the distribution of 10 million AVAX tokens (worth about $ 180 million at that time) among Avalanche protocol liquidity suppliers.

Since then, at least 8 programs of incentive programs for ~ $ 100 million each announced other L1 funds, including Fantom Foundation, Terraform Labs and the Algorand Foundation. Most of these programs are aimed at promoting the growth of Defi in the corresponding ecosystems, although the programs differ in their goals and scale, as well as by the method of distribution of tokens.

If the Avalanche Rush program is primarily aimed at the remuneration of ecosystem participants for liquidity mining, then other programs, such as the Fantom encouraging program, is more aimed at financing developers. Within the framework of this program, developers, who for a time period of time are responsible for certain criteria for effectiveness, can use the received awards at discretion – including to stimulate liquidity.

The amount of funds under the incentive programs of the Layer-1 platforms. Source: The Block Research

Avalanche, Fantom, Hedera, Algorand and Terra distribute funds in their native tokens, so the amount of funds in dollars used in the framework of their incentive programs may vary. As a rule, funds come from the vaults of teams that are financed by early investors through sowing rounds or the sale of tokens.

In 2021, investment companies increased their rates on specific ecosystems L1. For example, in June, Solana Labs attracted $ 314.15 million in the framework of a private token-store, which was headed by A16Z and PolyChain Capital. In September, Avalanche announced the round of funding for $ 230 million led by Polychain Capital and Three Arrows Capital.

Regardless of the distribution of incentive tokens or methods for attracting financing, the most important factor for each L1 team is the degree in which users and developers prefer to invest time and money in a specific ecosystem. To measure this degree, it is necessary to evaluate how the TVL of a particular ecosystem changes over time, and thus get a general idea of ​​the growth of Defi Protocol. However, often Defi Protokols in a particular ecosystem can have a huge number of Native network tokens (for example, SOL on SOLANA), which enhances the effect of changes in the price of token on the total TVL ecosystem.

From the beginning of the third quarter, just before the wave of growth of incentive programs L1, the TVL indicator in the Avalanche ecosystem has grown more than in any other large L1 ecosystem as a percentage when correlated with the price of token.

Interestingly, the first big jump of TVL Avalanche occurred immediately after the announcement of the Rush program, and the ecosystem managed to maintain a significant part of its TVL over the past few months of 2021.

The total amount of funds blocked in smart contracts in the Avalanche ecosystem, July-November 2021. Source: Defillama

From the beginning of the third quarter to November 2021, TVL Avalanche has increased by more than $ 13.5 billion. Partly, the successful attracting of capital can be attributed to the C-Chain Avalanche EVM compatibility, on which almost all Defi protocols in Avalanche are built in Avalanche. Due to the fact that for interaction with Avalanche, users and developers can use familiar Web3 tools, such as Metamask and Solidity, barriers to enter the ecosystem relatively low, especially for existing Ethereum users.

Avalanche growth in the second half of 2021 was also possible thanks to Avalanche Bridge, which has significantly reduced the cost of transfers from the moment of its update in late August 2021. As of November 2021, Avalanche Bridge continued to offer AVAX airdrops to users of the bridge, providing them with the opportunity to immediately start using the bridge, without the need to purchase AVAX at the beginning separately at the beginning.

Competition in growing ecosystems Layer-1

Avalanche compatibility factors with EVM and the relative simplicity of the cost of Ethereum to Avalanche caused intensive competition in a growing ecosystem. For example, for many months, Pangolin Dex has been the largest protocol in terms of TVL on Avalanche, but the launch of Trader Joe in mid -August 2021, with its simple interface and awards for liquidity mining, shook the ecosystem, and by September the new DEX overtook TVL Pangolin according to TVL indicator.

For more than a month, Trader Joe and the Benqi lending protocol were comfortably located on the top of the TVL rating at the Avalanche ecosystem. By the beginning of October 2021, more than $ 1 billion was blocked in both protocols. However, the emergence of new Defi protocols from Ethereum, Aave and Curve in early October laid the foundation for the next stage of competition in the Avalanche ecosystem. Thanks to the new liquidity stimuli provided by Avalanche Rush, TVL Aave on Avalanche grew quickly and first surpassed TVL Benqi and Trader Joe’s just a few days after launch.

A similar situation took shape in the Fantom ecosystem, where on November 9, 2021, TVL reached a peak of $ 6.2 billion.

TVL leading Defi protocols in Fantom, June-November 2021. Source: Defillama

As in the Avalanche ecosystem, Defi players with Ethereum began to go to the Fantom ecosystem. After Curve launched Fantom in June 2021, rewarding CRV liquidity suppliers, by November 30, 2021, Curve became the fourth in terms of TVL in the Fantom ecosystem. On September 1, 2021, the FTM remuneration system was also launched on Curve and further expand the scale of using the Stableswap Protocol protocol was facilitated by the incentive system of Fantom.

On October 18, 2021, a proposal was published to expand the AAVE protocol on the Fantom network.

In 2021, the intense struggle of the DEFI protocols for dominance in the Fantom ecosystem continued: over the course of a year, the leading Fantom Dex Spiritswap and SPOOKYSWAP changed places as leaders in terms of TVL and trade volume.

In 2021, it became obvious that among developing Defi ecosystems, competition is strengthened. In the latest, small L1 ecosystems, such as Harmony, Defi Protokols naturally have the best opportunities to capture a significant market share in the absence of a single-digit leader. The Harmony ecosystem, which, as of November 30, 2021, was $ 542 million, is inferior in terms of trade and users by the more popular EVM-compatible L1.

However, such an environment as Harmony can also contribute to innovations, giving the creators the opportunity to experiment with ideas on a smaller site. A noteworthy example of such innovations is the Defi Kingdoms (DFK) protocol. As of November 30, 2021, it was the largest protocol on Harmony, with TVL in the amount of $ 280 million, which was about 51% of TVL in the Harmony ecosystem.

This Defi-protocol, which includes DEX based on Automated Market Maker (AMM) and NFT marketplace, which underlies a comprehensive DFK game user interface, is one of the most unique combinations of gaming and Defi in modern crypto space.

The fact that DFK leads to Harmony as a TVL means that many trading couples in the DFK ecosystem may offer the highest liquidity source.

TVL in the Harmony Ecosystem – November 2021. Source: Defillama

Despite the fact that users, in order to gain access to DEX and liquidity bullet, are forced to use the role -playing player interface (RPG), DFK was able to accumulate more TVL at Harmony at the time of writing in November 2021 than Sushiswap and Curve taken together.

Comparison of the intraudic volume of trade Sushiswap and Defi Kingdoms August – November 2021. Source: Sushiswap, Defi Kingdoms

DFK intraudal trading volumes regularly exceeded the corresponding Sushiswap indicators on Harmony from August to November, clearly demonstrating that the new Defi Protokols are able to intercept a significant share of user activity in relatively small but growing ecosystems L1.

The most important question is whether DFK will be able to maintain its superiority in front of the more established protocols, such as Sushi.

Ultimately, although it is difficult to predict which protocols will be the greatest success in specific ecosystems L1, one thing is clear: if there is enough space for growth and development, the configuration of these young ecosystems can be completely different in a few weeks.