Ultimate Guide – How to Valuate Layer 1 & 2 Cryptos
Today I will show you how to Valuate Layer 1 & 2 cryptos. What are the key aspects of layer one and two blockchain projects? we should analyze before we decide whether or not to invest in them and what the heck are layer one and two blockchain projects in the first place? In this article, we will go through a checklist together that will help us determine which layer 1 and 2 blockchain projects are worth investing in.
Let’s discuss what layer 1 and 2 blockchain projects are. we better understand their use cases. What does layer one mean in crypto?
LAYER 1
Layer one is a term to describe projects that have built their very own blockchain-based foundation and ecosystem that allows developers to build software applications on top of them. Layer one describes the base layer of a blockchain network imagine an example of layer one as the apple app store where developers can use apple’s framework to build and launch apps that people can use at the time of this article.
the most popular well-known layer one blockchain project that most projects have been built on is ethereum.
decentralized exchanges like uni-swap were built on top of ethereum’s layer one base axia infiniti is a game that was built on ethereum open c is an ft marketplace that was built on ethereum ava is a decentralized financial project that allows people to lend to borrow and state crypto built on ethereum. You can see how layer one just describes projects with their own unique blockchain-based foundation that allows others to build all kinds of products, services, and software applications.
Examples of another layer 1 blockchains are Solana, Cardano avalanche, all grand, lrund tron, and many more so developers can choose which platform they would like to build applications on similar to choosing to build on android versus iPhone or windows versus apple or Linux.
LAYER 2
What does layer 2 mean in crypto layer 2 is a term to describe projects that are built on top of layer 1 blockchains like ethereum that are designed to increase transaction speed, decrease transaction costs like gas fees and help layer 1 blockchain ecosystems scale. Instead of building applications directly on Ethereum’s layer 1 blockchain, developers can build on layer 2 solutions to reduce transaction costs, increase transaction speed, and develop a faster and more efficient application.
Application for fewer cost examples of ethereum based layer 2 platforms developers can choose to build on include polygon arbitram and optimism you can consider layer 2 platforms as Secondary networks built on a base main network are awesome.
THE BEST WAY WE CAN EVALUATE LAYER 1 AND LAYER 2 AS POTENTIAL INVESTMENT OPPORTUNITIES
Currently, most people consider different cryptocurrencies similar to stocks where each crypto represents a company of sorts however unlike stocks cryptocurrencies can have vast and varied types of use cases.
For example, a cryptocurrency like ethereum and ada can be used to process transactions and pay for network space on their corresponding layer one platforms like ethereum and Cardano the same goes for cryptocurrencies that are used to process transactions on layer two platforms like matic token.
For the polygon network, other use cases of different cryptocurrencies include stores of value like bitcoin stable coins like usdc whose value is pegged one to one to the us dollar voting rights or governance of a project like uni tokens for uni swap defy exchange and eventually there will be cryptocurrencies that represent ownership of physical assets like property or that represent identification like passport and similar.
We need to think of layer one and layer two cryptocurrency projects as ecosystems rather than companies when evaluating them. This is because they are similar to the economy of each of the countries in question. For example we need to consider ethereum versus Cardano versus solana each has their own separate blockchain-based countries and nations like the United States, Germany versus Japan and so forth.
What most people don’t understand is that at the end of the day the fastest layer one or two the most efficient the most green the most superior-tech the most decentralized the best all-around blockchain platform from a logical or technological standpoint won’t necessarily become the most valuable.
we can debate all day long about which layer one or two has the best tech but here’s the deal the value of each platform will be based on two simple variables one the size and productivity or output of the software applications built on it and the amount of users growth of new users and stickiness of users within the ecosystem.
This can also be compared to a country’s GDP, which stands for gross domestic product and it’s just a fancy economic term that refers to the total value of all the goods produced and all the services provided within a country during a specific period.
For example if a country’s total output for the year consisted of selling ten pizzas for ten dollars each and performing five car washing services for twenty dollars each the total gdp or gross domestic product for that country would be 200.
Even though we are having a lot of debates about the technical specs of each blockchain platform, When analyzing the future value potential, transaction speed efficiency and security should play a lesser role. The layer one and layer two projects that will become the winners in this space will be the ones that successfully create and grow an economy on their blockchain network.
the ones that cultivate the greatest amount of innovation that secures and maintains traction on their platform sweet so what conditions do layer 1 and 2 blockchain networks need to meet in order to foster secure maintenance and grow an economic ecosystem successfully? Let’s explore four variables that are key to a thriving economic ecosystem
Efficiency in value creation may sound complicated but it’s actually a very simple concept so stick with me here. Economic growth is all about converting production inputs like money, raw materials, labor or expertise into valuable goods and services.
thinking back to our analogy of assessing layer one into projects like countries imagine a country that makes it very easy for people to access capital like through taking out loans and imagine this country makes it very easy for people to go to college and become doctors architects and engineers and imagine this country has a lot of natural resources like trees oil and land that can be converted to building materials fuel or farms for food.
The country in this example has an efficient way for people to convert money, raw materials, labor and expertise into valuable goods and services like starting businesses with loans or raw materials for building infrastructure access to education for people that become engineers that design technology or doctors that provide health care etc.
SHORTAGE OF DEVELOPERS AND HOW IT IS AFFECTING THE EFFICIENCY AND VALUE CREATION ON THE BLOCKCHAIN
when evaluating how layer one or two projects are doing with regard to efficiency and value creation for their respective economies we need to consider how much effort the ethereum community versus the solana community versus the avalanche community they’re making to onboard and retain talent in order to create a strong resilient and innovative armada of developers to foster growth.
Another question to analyze is how easy it is for current software developers that code c plus java etc to convert to blockchain developers in fact solana’s language rust was created based on c plus plus and java so software developers that have coded in those languages can easily learn rust in probably about a month and with avalanche there are multiple languages developers can code in.
Another thing to consider with respect to growing their developer community is whether or not the layer 1 or 2 project is gaining traction with onboarding developers from countries with more resources versus less for example is the project attracting talent from developed countries with tons of resources like united states europe and similar or ones with less resources like India or venezuela.
That covers the human capital aspect of efficiency and value creation in an economy another important aspect is how much financial capital the layer one or two project can secure to support the network and increase productivity in value creation securing funds from retail investors from token sales is great but it’s not nearly enough capital to grow the thousands of decentralized applications that need to be built on the blockchain in order to foster a successful economy.
