The Current State of Layer 1 Blockchains

The cryptocurrency landscape has evolved significantly since the early days of Bitcoin, with numerous layer 1 blockchains vying for dominance. Alex Thorn, head of firm-wide research at Galaxy Digital, shared his insights on the current state of layer 1 blockchains and their competitors. Thorn's perspective, shaped by years of experience in the crypto industry, offers valuable context for understanding the ongoing competition between blockchain platforms.

Thorn referenced a report titled "Ready Layer One" that he co-authored in December 2021, which examined Ethereum and its smart contract competitors. The thesis of the report was that Ethereum was in a strong position, with the potential to maintain its leadership in the smart contract platform space. Thorn believes this thesis has only strengthened since then, particularly with the rise of layer 2 scaling solutions and the decline of many alternative layer 1 ecosystems during the bear market.

Ethereum's Dominance in the Smart Contract Space

Ethereum's position as the leading smart contract platform has been reinforced by recent developments in the crypto ecosystem. Thorn emphasized that Ethereum's dominance is not necessarily due to technical merits alone, but rather the level of adoption it has achieved. The emergence of layer 2 scaling solutions built on top of Ethereum has further solidified its position, providing additional block space and functionality while leveraging the security of the Ethereum mainnet.

While acknowledging Ethereum's strong position, Thorn also highlighted the unique aspects of other layer 1 blockchains, particularly Solana. He noted that Solana's differentiated technology stack and resilient community have allowed it to maintain relevance even during the current bear market. This stands in contrast to many other alternative layer 1 platforms that have struggled to maintain momentum and user interest.

The Challenge of Finding Product-Market Fit in Crypto

One of the key challenges facing the cryptocurrency industry is the limited product-market fit achieved thus far. Thorn argued that the primary use cases that have gained traction are limited extensions of decentralized finance (DeFi) and what he termed "gamble-fi" - essentially, speculation and gambling-related activities. He expressed skepticism about the immediate potential for other often-touted use cases such as decentralized social media, gaming, and decentralized physical infrastructure (DePIN).

Thorn challenged the notion that these additional use cases are imminent or necessary, stating, "I stand here waiting with arms open for these use cases to present themselves. I've been hearing about these supposed mythical additional use cases for years." He pointed out that many layer 1 blockchains have been promoted based on their potential to enable high-throughput applications, but in practice, these capabilities have not been fully utilized or necessary for the current set of popular use cases.

The Role of Decentralized Finance (DeFi)

Decentralized finance has been one of the most prominent use cases for blockchain technology, particularly on platforms like Ethereum. However, Thorn offered a nuanced perspective on the current state and potential of DeFi. He argued that while DeFi has shown promise, it is not yet posing a significant challenge to traditional finance.

Thorn stated, "DeFi is posing zero challenge to tradFi today. It's almost exclusively exists so that people that own crypto assets can do financial services." He suggested that the primary reason for DeFi's existence is to provide financial services for crypto assets that cannot be easily used in traditional financial systems. This limited scope, according to Thorn, means that DeFi is currently operating as an enclosed community rather than disrupting the broader financial industry.

The Search for Killer Applications in Crypto

The cryptocurrency industry has long been searching for "killer applications" that could drive mainstream adoption. Thorn expressed skepticism about many of the proposed use cases, challenging listeners to identify successful implementations in areas such as gaming, tokenization of real-world assets, and decentralized physical infrastructure.

Regarding blockchain gaming, Thorn stated, "Show me one game that has adoption. There isn't even one. We all get the thesis, you know, digital collectibles and, you know, own truly own and then trade your Fortnite skins. Like, we get that. That makes tons of sense. But there isn't one. There's not even one that people love at scale."

This critical perspective highlights the gap between the theoretical potential of blockchain technology and the practical challenges of creating applications that achieve widespread adoption and use.

The Potential and Challenges of Decentralized Physical Infrastructure (DePIN)

One area of particular contention in the discussion was the potential for decentralized physical infrastructure, or DePIN. Thorn expressed strong skepticism about the necessity and viability of projects in this space, particularly citing the example of Helium, a decentralized wireless network.

Thorn argued, "No one needs to. There's no one on earth that can't get a cell phone. Dude, you can get cell service in the Sahara desert. There is no need for it whatsoever. It is completely a solution in search of a problem." He challenged the notion that decentralized networks could provide significant cost savings or improvements over existing centralized infrastructure.

However, this perspective was contested by others in the discussion, who pointed out potential benefits of decentralized infrastructure such as reduced upfront costs for network buildout and the potential for increased competition leading to lower prices for consumers. This debate highlights the ongoing discussions within the crypto community about the most promising areas for blockchain application and adoption.

The Importance of Use Cases and Real-World Demand

Throughout the discussion, Thorn emphasized the importance of focusing on use cases that address real-world demands and problems. He expressed frustration with projects and investors that continue to promote solutions without clear evidence of market need or adoption.

Thorn stated, "We need applications people want to use. We don't need more block space right now." This perspective challenges the notion that simply increasing the technical capabilities of blockchains (such as transaction throughput) is sufficient to drive adoption. Instead, Thorn argues for a greater focus on developing applications that solve real problems and attract users.

The Evolution of Layer 2 Scaling Solutions

The conversation touched on the recent growth of layer 2 scaling solutions, particularly those built on top of Ethereum. Thorn referred to the current period as "L2 season," noting the increased activity and interest in platforms that aim to increase Ethereum's scalability and reduce transaction costs.

While acknowledging the potential benefits of layer 2 solutions, Thorn also raised concerns about the current state of many of these platforms. He noted, "Even though most of these things are, you know, not decentralized and not ultimately not good yet, you know, the market doesn't care that much." This observation highlights the tension between the desire for improved performance and the importance of maintaining decentralization and security.

The Role of Solana in the Blockchain Ecosystem

Despite his generally skeptical stance on many alternative layer 1 blockchains, Thorn expressed respect for Solana's unique position in the ecosystem. He noted that Solana's differentiated technology stack and resilient community have allowed it to maintain relevance even during challenging market conditions.

Thorn stated, "I think even in this bear market that Solana is one of the only other platforms that has an ongoing community." This acknowledgment of Solana's strengths, coming from a researcher with a background in Bitcoin and Ethereum, underscores the platform's potential to play a significant role in the future of blockchain technology.

The Challenge of Interoperability and Composability

As the blockchain ecosystem becomes increasingly complex, with multiple layer 1 platforms and layer 2 scaling solutions, the issues of interoperability and composability have come to the forefront. Thorn expressed concerns about the potential fragmentation of liquidity and user experience across different platforms.

He noted, "A world that's L2's all the way down is like a world where it's hard to do stuff across these L2's. I don't want to add going to Metamask and like add a whatever, like new thing all the time. It's annoying." This observation highlights the need for solutions that can maintain the benefits of scalability while preserving the seamless user experience and interoperability that are crucial for widespread adoption.

The Future of Bitcoin and Ethereum

Despite the emergence of numerous competing platforms, Thorn maintains a positive outlook on the long-term prospects of both Bitcoin and Ethereum. He argues that Bitcoin's role as a non-sovereign, decentralized monetary asset remains unique and valuable, while Ethereum's position as the leading smart contract platform gives it a strong advantage in the race for adoption.

Regarding the potential for Ethereum to overtake Bitcoin in market capitalization (often referred to as "the flippening"), Thorn expressed skepticism about its immediate impact. He stated, "I really do think it's pretty unlikely, at least in the next 10 years that all L1 gas token or primary asset that powers a different blockchain would become more valuable than Bitcoin."

The Role of Regulation in Crypto Adoption

Regulation emerged as a significant theme in the discussion, with Thorn noting its impact on both current adoption and future potential use cases. He expressed frustration with the current regulatory approach in the United States, particularly the Securities and Exchange Commission's (SEC) reliance on enforcement actions rather than clear rulemaking.

Thorn stated, "I was saying one of the things that surprised me about the SEC's approach is that they're just willing to roll the dice in so many court cases when they could undertake comprehensive and formal rulemaking process." This approach, according to Thorn, creates uncertainty in the market and potentially risks curtailing the SEC's power if they lose significant cases.

The Potential for Institutional Adoption

As head of research at Galaxy Digital, Thorn provided insights into the current state of institutional interest in cryptocurrencies. He noted that while there is ongoing interest from institutional investors, the current market lacks clear catalysts for significant movement.

Thorn highlighted the potential impact of regulatory developments, such as the approval of a Bitcoin ETF, as potential drivers of institutional adoption. He stated, "I think a lot of people's quote unquote, a lot of new entrants exposure to crypto in a next bull run will be through a regulated financial product like a Bitcoin ETF."

The Importance of Historical Context in Crypto

Throughout the discussion, Thorn emphasized the value of understanding the historical context of cryptocurrency development. He noted that many ideas currently being promoted as novel have actually been discussed and contemplated within the crypto community for years.

Thorn advised, "If you don't know about the history of Bitcoin, you really don't know about crypto because so much of what is being done now was thought up by Bitcoiners or rejected as something not to do on Bitcoin that resulted in the creation of the altcoin that you random and on just heard about."

This perspective highlights the cyclical nature of many discussions in the crypto space and the importance of learning from past experiences and debates.

The Challenge of Maintaining Enthusiasm in a Maturing Market

As a long-time participant in the cryptocurrency space, Thorn reflected on the challenge of maintaining enthusiasm and avoiding cynicism as the market matures. He acknowledged the difficulty of continually engaging with ideas that may seem repetitive to veterans of the industry.

However, Thorn also emphasized the importance of remaining open to new perspectives and innovations. He stated, "I think if you get into these communities and realize that there is still a lot of excitement about crypto at all levels of career experience in all sectors, like, I mean, every day, I meet new people who are very, very bullish on crypto."

This balanced approach - maintaining a critical perspective informed by experience while remaining open to new ideas and enthusiasm - appears to be key to Thorn's continued engagement with the rapidly evolving cryptocurrency ecosystem.

The Potential for New Applications to Drive Adoption

While expressing skepticism about many currently proposed use cases, Thorn remained open to the possibility of unexpected applications driving the next wave of crypto adoption. He suggested that entirely new categories of applications, potentially in areas not currently associated with blockchain technology, could emerge as significant drivers of growth.

Thorn stated, "I continue to think the biggest black swan dark horse is like a Call of Duty quality game that has crypto in it like that would absolutely just shock rock the entire space and the world. One breakout hit would be a game changer, no pun intended."

This openness to potential "black swan" events highlights the unpredictable nature of innovation in the blockchain space and the importance of remaining vigilant for emerging trends and applications.

The Role of Solana in Future Blockchain Innovation

Despite his generally cautious stance on alternative layer 1 blockchains, Thorn expressed admiration for the Solana community's focus on building practical blockchain applications. He stated, "This is what I really admire about the Solana community. And while I'm, you know, coming out the mega spicy take to Dave's deep in question, like the Solana community is trying to build blockchain use cases and I respect the heck out of that."

This acknowledgment of Solana's strengths in fostering innovation and practical development suggests that the platform may play a significant role in driving future blockchain adoption and use cases. Solana's focus on high performance and developer-friendly tools positions it well to support the creation of novel applications that could attract mainstream users.

The Importance of Realistic Expectations in Crypto Development

Throughout the discussion, Thorn emphasized the importance of maintaining realistic expectations about the pace and nature of blockchain adoption. He cautioned against overhyping potential use cases without clear evidence of demand or feasibility.

This perspective serves as a valuable counterbalance to the often exuberant predictions common in the cryptocurrency space. By focusing on concrete achievements and real-world adoption, the industry can build a more sustainable foundation for long-term growth and impact.

The Future of Blockchain Adoption and Innovation

As the conversation concluded, Thorn offered his thoughts on the potential drivers of future blockchain adoption. While emphasizing the uncertainty inherent in predicting technological trends, he suggested that a combination of factors could contribute to increased adoption in the coming years.

These potential drivers include:

1. Regulatory developments, such as the approval of a Bitcoin ETF, which could facilitate institutional investment.
2. The continued development and maturation of layer 2 scaling solutions, improving the performance and usability of existing blockchain platforms.
3. The potential emergence of unexpected "killer applications" that leverage blockchain technology in novel ways.
4. The ongoing evolution of decentralized finance (DeFi) and its potential to attract users from traditional finance.

Thorn's nuanced perspective, combining cautious skepticism with openness to innovation, provides valuable insights for those seeking to understand the complex and rapidly evolving blockchain ecosystem. As the industry continues to mature, maintaining this balance of critical analysis and forward-looking optimism will be crucial for navigating the challenges and opportunities that lie ahead.

Facts + Figures

• Galaxy Digital published a report titled "Ready Layer One" in December 2021, examining Ethereum and its smart contract competitors.
• The thesis that Ethereum's dominance in the smart contract space has strengthened since the report's publication.
• Solana has maintained a resilient community and ongoing development despite the bear market.
• Many alternative layer 1 blockchains promoted during the bull market have seen significant declines in activity and interest.
• Decentralized Finance (DeFi) currently exists primarily to serve people who already own crypto assets, rather than challenging traditional finance.
• There is currently no widely adopted blockchain-based game that has achieved significant scale.
• The concept of Decentralized Physical Infrastructure (DePIN) was coined relatively recently, around 2023.
• Base, a layer 2 solution, has quickly gained traction and is now processing more transactions than some established platforms like Optimism and Arbitrum.
• The majority of activity on Solana is related to NFTs, rather than utilizing its high throughput capabilities.
• Bitcoin's halving event is scheduled for April 2024, which historically has been a significant event for the cryptocurrency.
• Thorn suggests that a Bitcoin ETF could potentially expose 20% of investors worldwide to Bitcoin.
• The friend.tech platform, which allows users to buy "keys" to influencers' private chats, has gained significant attention as a new social media experiment.
• Thorn estimates that image-based ordinals on Bitcoin number around 1.5 million, out of a total of 25-30 million inscriptions.
• The concept of using blockchains for tokenization of real-world assets has been discussed since at least 2015, with limited practical implementation thus far.
• The DTCC (Depository Trust & Clearing Corporation) published a paper around 2015 discussing how blockchain technology could potentially disintermediate their role in stock certificate management.

Questions Answered

What is the current state of layer 1 blockchains compared to Ethereum?

Ethereum remains the dominant smart contract platform, with its position strengthened by the rise of layer 2 scaling solutions. Many alternative layer 1 blockchains have seen declining interest and activity during the bear market. However, Solana stands out as one of the few platforms maintaining a resilient community and ongoing development despite market challenges.

How has DeFi impacted traditional finance?

According to Alex Thorn, decentralized finance (DeFi) is not yet posing a significant challenge to traditional finance (TradFi). DeFi currently exists primarily to serve people who already own crypto assets, providing financial services for these digital assets that can't be easily used in traditional systems. It operates largely as an enclosed ecosystem rather than disrupting the broader financial industry.

What are the main challenges for blockchain gaming adoption?

The main challenge for blockchain gaming adoption is the lack of high-quality, widely popular games that effectively integrate blockchain technology. Despite the theoretical benefits of digital ownership and asset trading, there are currently no blockchain games that have achieved significant scale or user love comparable to traditional gaming titles. The industry is still waiting for a "killer app" in the gaming space that can demonstrate the practical advantages of blockchain integration.

How does Alex Thorn view the potential of Decentralized Physical Infrastructure (DePIN)?

Thorn is skeptical about the necessity and viability of Decentralized Physical Infrastructure (DePIN) projects. He argues that existing centralized infrastructure, such as cellular networks, already provides widespread and affordable coverage. Thorn sees DePIN as a solution in search of a problem, questioning whether decentralized networks can offer significant improvements or cost savings over existing systems. However, proponents argue that DePIN could reduce infrastructure costs and increase competition, potentially leading to lower prices for consumers.

What role does Bitcoin play in the current cryptocurrency ecosystem?

Bitcoin maintains a unique position as a non-sovereign, decentralized monetary asset. Thorn believes it's unlikely that any other cryptocurrency will surpass Bitcoin in market value in the next 10 years. Bitcoin's role as "digital gold" and a store of value remains strong, and potential developments like a Bitcoin ETF could further increase its accessibility to traditional investors. The upcoming halving event in April 2024 is also seen as a potentially significant catalyst for Bitcoin.

How does Alex Thorn view the development of layer 2 scaling solutions?

Thorn acknowledges the growing importance of layer 2 scaling solutions, particularly for Ethereum, referring to the current period as "L2 season." These solutions aim to increase scalability and reduce transaction costs. However, he also expresses concerns about the current state of many layer 2 platforms, noting that many are not yet fully decentralized. Thorn also raises questions about the potential fragmentation of liquidity and user experience across multiple layer 2 solutions.

What is the significance of the friend.tech platform?

Friend.tech is seen as an interesting experiment in social media monetization using blockchain technology. The platform, which allows users to buy "keys" to influencers' private chats, has gained significant attention. Thorn views it as emblematic of people's desire for change in social media and the potential for blockchain to enable new forms of creator economy. However, he also notes that much of its current appeal is based on speculation and gambling-like behavior.

How does regulation impact cryptocurrency adoption?

Regulation plays a significant role in shaping cryptocurrency adoption and innovation. Thorn expresses frustration with the current regulatory approach in the United States, particularly the SEC's reliance on enforcement actions rather than clear rulemaking. This creates uncertainty in the market and potentially hinders adoption. However, regulatory developments, such as the potential approval of a Bitcoin ETF, could also serve as catalysts for increased institutional adoption of cryptocurrencies.

What potential catalysts does Alex Thorn see for the next crypto bull run?

Thorn identifies several potential catalysts for the next crypto bull run:

1. Regulatory developments, such as the approval of a Bitcoin ETF
2. The Bitcoin halving event in April 2024
3. The continued development and maturation of layer 2 scaling solutions
4. The potential emergence of unexpected "killer applications" in areas like gaming or social media
5. Broader macroeconomic factors and potential changes in monetary policy He emphasizes that the next wave of adoption could come from traditional investors accessing crypto through regulated financial products, rather than from within the existing crypto community.

How important is understanding the history of cryptocurrency for current developers and investors?

Thorn emphasizes the crucial importance of understanding cryptocurrency history for current developers and investors. Many ideas currently presented as novel have been discussed and contemplated within the crypto community for years. Knowledge of Bitcoin's history and early development is particularly important, as many current blockchain projects and concepts have their roots in ideas first proposed or debated in the Bitcoin community. This historical context helps in critically evaluating new proposals and understanding the cyclical nature of many discussions in the crypto space.