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Due to persistent problems with high fees and network congestion, layer-one solutions such as Polkadot, Solana, and Cosmos have established themselves as established competitors.
Wise cryptocurrency investors understand that in bull and bear markets, the primary emphasis should be on project survival rather than leaping on any short-term price change. If the cryptocurrency economy grows and new sectors emerge, protocols that have the most benefit to the group have the greatest probability of long-term success and price appreciation.
The aim of this newsletter is to take a more thematic, macro view of niche sub-sectors within the cryptocurrency industry and find projects that show promise in the room.
It’s not about the token price; it’s about the technology, the foundations of the project, and how both of them would contribute to propelling the sector forwards to the next step.
In a recent conversation with Cointelegraph, Élie Le Rest, partner at digital asset management firm ExoAlpha, said: “Sector trends and crypto are big and are here to stay, but idiosyncratic risk must be taken into account while weighing portfolios.”
According to Le Rest, the “crypto market tends to work on comparable principles,” a recurring theme seen throughout its history.
With that said, let’s take a deeper look into the ongoing business cycle rotation occuring in the larger crypto market and get a clearer understanding of where new money and entrants entering the market are starting to concentrate their attention.
Layer-one projects continue to attract users
Layer-one refers to a network’s core underlying blockchain implementation, while layer-two solutions are protocols that run on top of the underlying L1 blockchain and cannot exist without the context that they include.
In terms of valuation, Bitcoin is by far the most dominant L1 solution, while the Ethereum network has been critical in reshaping the crypto business environment over the last few years, due to smart contracts and the emergence of industries such as decentralised finance and nonfungible tokens.
Although Ethereum has attracted the bulk of the coverage in debates regarding smart contract systems, other ventures have recently gained popularity as high fees and a low transaction-per-second count on the Ethereum network have enticed projects to build on emerging networks.
Ethereum’s success has shown the world the strengths of smart contract systems, but its ongoing woes have enabled protocols like Polkadot, Solana, and Cosmos, which provide a similar value proposition as well as solutions to the underlying problems listed, to rise in price and relevance over the past year.
Polkadot, along with Ethereum, has become one of the most well-known and profitable L1 projects in the crypto space in 2021, due in large part to the project’s strategy of interoperability and collaboration, as opposed to the former “Ethereum killer” approach adopted by many.
The Polkadot network, which was founded in part by Gavin Wood, who has played a key role in the development of Ethereum, has taken a more complementary approach as an open-source sharding multichain protocol that allows cross-chain bridges so that projects and developers can select the network that best meets their needs and easily migrate their protocols if desired.
Polkadot’s multi-chain functionality allows for the cross-chain sharing of any data or asset type, assisting in the establishment of a wide variety of interoperability between different blockchain networks.
Polkadot’s ecosystem is one of the largest and most competitive in the space, with a steadily growing list of projects launching on the protocol in the hopes of obtaining one of the small parachain slots in the forthcoming parachain auctions.
The Polkadot ecosystem has quickly grown to include the main sectors of the cryptocurrency ecosystem, such as DeFi networks, nonfungible token protocols, oracles, and decentralised autonomous organisations, as seen in the graphic above.
The network also has a growing list of applications that make it easier to connect with the protocol, such as a variety of wallets that support Polkadot’s DOT and Polkadot-based properties, as well as several network explorers, such as Polkascan.
Popular projects currently running on the Polkadot testnet and vying for a parachain slot include the DeFi ecosystem Acala Network and the Polkaswap decentralised exchange, all of which are now open for testing and can be accessed through the Polkadot-js wallet browser extension.
The network’s launch will be complete until the parachain auctions are completed and the proposals are live on Polkadot. Although no firm date has been set for the start of the parachain auctions, excitement for DOT has grown, resulting in a price increase of more than 800 percent in 2021.
With the possibility of full network capabilities launching within weeks to months and media interest starting to arrive, many investors believe Polkadot is well-positioned to see more price and usage development as a central player in the future of blockchain network interoperability.
According to the project’s website, Solana is a fast, safe, and censorship-resistant blockchain network that “provides the open infrastructure required for global adoption.”
The project’s association with the FTX cryptocurrency exchange and its CEO, Sam Bankman-Fried, who was also involved in the development and management of the Serum decentralised exchange, which runs on the Solana network, has benefited the protocol in terms of financial support and media attention.
Aside from those optimistic comparisons, the Solana network’s underlying infrastructure has piqued the interest of a diverse variety of ventures involved in launching or bridging to its high-speed, low-cost environment.
The rapid growth of the Solana ecosystem over the last year started with an emphasis on decentralised finance and has been bolstered by the success of the Serum, which users can interact with using multiple Solana-compatible wallets, including Sollet, Ledger, and Math Wallet.
While the bulk of the network’s tools and infrastructure have been oriented towards DeFi, recent network additions, such as the open music-sharing and streaming protocol Audius, suggest that the protocol is starting to branch out and draw the attention of other forms of initiatives involved in its functionality.
To maximise the network’s overall scalability, the Solana protocol employs a revolutionary hybrid paradigm that combines a proof-of-history consensus with the blockchain’s underlying proof-of-stake consensus.
Recently, the network has seen the introduction of a variety of new ventures that have used some of the same strategies that fueled interest and interest on the Ethereum network in 2017, such as airdrops and copycat initiatives.
While this could be seen negatively by others, it highlights the increased acceptance and allure of a low-cost world, as well as demonstrating that Solana is a developer-friendly network.
These influences, along with a slew of others, have helped drive up the price of Solana (SOL) by more than 3,200 percent so far in 2021.
Given the fact that DeFi and other hot cryptocurrency sectors are still in their infancy, Solana is well positioned to see its ecosystem grow and token value rise as global cryptocurrency acceptance rises.
Cosmos bills itself as the “internet of blockchains,” with “an ever-expanding ecosystem of interconnected apps and services built for a decentralised future.”
The network emerged from the Tendermint initiative, which is regarded as the “gateway to the Cosmos ecosystem” and was launched in 2017 with a token sale. The protocol employs a Proof-of-Stake consensus algorithm, which encourages token holders to stake their coins to help protect the project’s flagship blockchain Cosmos Hub while also collecting a yield in Cosmos (ATOM) tokens.
The project’s momentum in 2021 was boosted in February by the Stargate upgrade, which included the Inter-Blockchain Communication protocol, an interoperability layer for Cosmos blockchains.
The IBC enables projects developed with the Cosmos software development kit, such as Kava and Band Protocol, to conveniently interoperate and bridge tokens between other blockchains on the Cosmos network, which currently hosts over 240 applications and services.
The IBC’s capabilities will ultimately link with other blockchain networks, such as the Binance Smart Chain, assisting in increasing interoperability in the cryptocurrency ecosystem.
Transacting on the Cosmos network is a welcome experience for users escaping high fees on Ethereum, with a transaction time of 7 seconds and an average charge of $0.01.
The May 10 completion of the Gravity decentralized exchange testnet trading competition shows the protocol is gearing up to offer solutions similar to Uniswap for a fraction of the fees, hinting at a promising future for this growing ecosystem.
Layer-one projects are bullish, but there are a few hurdles to overcome
Growing communities, as well as the expected growth and integration of interoperability functionality, are clear indicators of the long-term viability of layer-one projects in the increasingly expanding cryptocurrency room.
Projects such as Polygon and Fantom, which offer cross-chain bridges to other more capable networks, and L2 solutions that eliminate the scaling problems that threaten the Ethereum network, are potential obstacles to the performance of L1 solutions.
Although these risks are true, each network or protocol will inevitably face its own set of problems that will limit its capability and allow rivals to provide a better solution.
Ethereum brought smart contracts to the world and broadened the reach of what could be achieved on L1 implementations above what was already possible on Bitcoin.
Due to limitations in the Ethereum network’s initial and current architecture, newer L1 solutions such as Polkadot, Solana, and Cosmos have emerged as viable rivals, owing to faster transaction times and an already-established proof-of-stake consensus process.