This article will give Web3 product designers an understanding of how to compare Layer 1 blockchains. By the way, stay tuned for future Web3 Design Courses where we discuss other Web3 products that will disrupt the internet as we know it today.
Let’s discuss the framework for comparing Layer 1 Smart Contract Blockchains developed by The BLOCK Research. The research compares Layer 1s across 4-dimensions:
- Technical Design & Performance
- On-Chain and Ecosystem Data
- Tokenomics and Monetary Policy
- Team and Fundraising
Technical design and performance can be broken into network architecture, consensus mechanisms (e.g. PoW vs PoS), and performance metrics like transactions per second and time to finality. Blockchain design is still highly experimental. Of course, founding teams are in search of the design that results in the most favorable performance metrics. Many will fail, some will succeed.
On-chain and ecosystem data is good for assessing the health, and/or growth of a Layer 1 blockchain. For example, we can objectively say that Ethereum is still the most dominant smart contract blockchain because it has the greatest daily transacted value, largest developer network, and most value locked in its DeFi protocols. Number of active wallet addresses is another important metric. Remember, wallet addresses can be used to predict the value of a blockchain’s cryptocurrency.
Each Layer 1 has its own native cryptocurrency, controlled by its own tokenomic model. Some are fixed-supply (like Bitcoin), and others are inflationary, although there is more nuance here. For example, Ethereum is implementing a policy where a portion of ether network fees are burned. Some believe this will actually make ether a deflationary asset. Also, native cryptos have utility value as well. Users can delegate their crypto to earn staking rewards, and often token-voting is used to participate in a Layer 1’s governance process.
Finally, Layer 1s are being built out by teams of people who influence the ethos and design philosophy of the blockchain. And these teams need to be funded. This brings up a controversial point. Blockchain projects will often hold fundraising token sales, which VCs are increasingly participating in. This calls into question decentralization and the idea of fair launches when VCs own a significant portion of a blockchain’s native token.
This brings us to the end of the Blockchain module in Web3 Design Course 2022. There was a lot of mention about native Layer 1 tokens in this article; however, you probably know there are tens of thousands of crypto tokens in existence today, and wonder where they all come from. These other Web3 tokens belong to dApps and secondary protocols that build on top of the blockchain. Indeed, smart contract Layer 1 blockchains give developers the ability to deploy their own tokens with application-specific utility. Also, these bleeds into the topic of crypto art and NFTs, which are a specific type of token on the blockchain.
All this is to say that tokens are an entirely new design material available to Web3 product designers. In the next module, we do a deep-dive into these Web3 tokens – a lot of new mental models to come!