Binance Research: Overview of L1 Development in 2022 and Outlook for 2023
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Binance Research: Overview of L1 Development in 2022 and Outlook for 2023
2022 was filled with major events that impacted the entire cryptocurrency development process.
Navigating Web3 tides with focused insightsAuthor: Binance Research
Translation: DeFi之道
Given where things should have been in 2022 and everything that has happened in the crypto space, Layer 1s ("L1s") could arguably be said to have experienced a very interesting and eventful year.
The L1 landscape witnessed numerous notable developments in 2022. From Ethereum’s transition from PoW to PoS in September, to the collapse of the Terra ecosystem in May. New L1 projects also made significant progress—Aptos launched its mainnet, while Sui is expected to go live early next year.
Notably, BNB Chain and the Layer 2 ("L2") solution Polygon gained additional market share amid the vacuum left by Terra, while Solana faced a more challenging year, being one of the L1s most affected by the recent FTX incident.
The year was filled with events that were arguably pivotal in shaping the trajectory of the entire cryptocurrency industry.
What Happened?
Figure 1: Market capitalization of L1/L2 and daily on-chain metrics in 2022
Key Observations
• There are, of course, many reasons for lower market capitalizations, which we do not intend to discuss specifically here. However, it's crucial to emphasize that market cap does not necessarily correlate directly with highly important on-chain metrics such as daily transactions and active addresses. As seen, BNB Chain and Solana stand out strongly here, whereas Ethereum, despite its higher market cap, shows significantly lower activity levels in terms of daily usage.
• Ethereum: The Merge! We don't want to reiterate what the Merge was, but rather focus on its impact. Data indicates that since the completion of the transition to PoS in mid-September, the supply growth rate of $ETH has dropped dramatically—from 3.58% per year to just 0.005% per year. In fact, combined with its burn mechanism, $ETH became a deflationary asset for much of November and remains very close to that level.
• BNB Chain: BNB Chain had a commendable year, with its market cap declining only about 45% year-to-date, far outperforming major competitors like Ethereum (-64% YTD) and Solana (-90% YTD). It emerged as one of the primary L1s supporting developers displaced by the Terra and FTX scandals. Daily activity metrics remain high, with highlights including the launch of BNB liquid staking and zkBNB. Innovation and partnerships in the NFT space are also expanding rapidly—OpenSea recently announced support for BNB Chain NFTs on its platform.
• Solana / Avalanche: 2022 proved challenging for the classic "competitive L1s" of 2021. Solana saw strong traction within its NFT ecosystem, with growth in collection diversity, trading volume, and marketplace development. Avalanche received positive momentum around its subnet offerings, providing scalability for decentralized applications ("dApps"), particularly in gaming. However, both competitive L1s suffered setbacks—Solana due to fallout from the FTX collapse, and Avalanche partly due to some unfavorable news leaked several months ago. Additionally, Solana continues to face frequent network outages, raising concerns about network reliability.
• Layer 2 (L2): While technically one step behind L1s, no discussion on L1s would be complete without at least commenting on the growing scaling landscape. Polygon remains the undisputed leader in this space, offering a broad suite of comprehensive solutions. It was a strong year for Polygon, with continued business development successes (Starbucks NFT, Reddit NFT, Instagram/Meta NFT, etc.). More pure-play L2s—Arbitrum and Optimism—also performed robustly over the past year, increasing activity and capturing market share from some smaller competing L1s. The launch of the OP token was a notable milestone for Optimism earlier this year, while Arbitrum focused on product development through the rollouts of Arbitrum Nitro and Arbitrum Nova.
Expectations for 2023
Now that we’ve reviewed how major L1s fared throughout the year and highlighted some key events, what about next year? What are our initial expectations?
L1s (especially smaller competing L1s) will feel pressure from L2s
• One of the major narratives of the year was the so-called “L222,” referring to 2022 as the breakout year for L2s. Was that really the case? Total Value Locked (“TVL”) data for L2s shows an increase of 118% since the beginning of the year (measured in ETH). So, to some extent, yes—2022 was undoubtedly the best year yet for L2s. However, in absolute terms, total TVL locked in L2s is only around US$4.5 billion. When compared against total DeFi TVL on Ethereum (approximately US$25 billion) and the overall crypto market cap nearing US$900 billion, it becomes clear how far L2s still have to go.
• Also consider the fact, as shown in Figure 1, that in terms of daily on-chain activity, both Arbitrum and Optimism surpassed Avalanche. Beyond that, there's a growing trend of competitive L1 dApps deploying on L2s—for instance, Avalanche’s Trader Joe recently announced its deployment on Arbitrum. It will be interesting to monitor what happens to smaller competing L1s. Many in the crypto space are discussing the idea that major L1s may simply become settlement layers, with execution and user activity shifting to L2s. While we've already seen glimpses of this, 2023 could very well be the year when this shift occurs on a much larger scale.
New L1s can survive if they truly bring something new
• Consider the two most prominent new entrants in the L1 space—Aptos (launched its mainnet in Q4 this year) and Sui (expected to launch in early 2023). Both L1s introduce various innovations, including the Move programming language. Given the background of this language and the promises it brings—alongside potential improvements in transaction speeds—there is real potential for meaningful innovation. Close attention should be paid to whether one or both of these L1s can leverage their new technologies to drive step-change advancements in the crypto market.
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