Blockchain networks and non-custodial wallets

Glossary

Blockchain network

• A distributed and immutable ledger that facilitates the process of recording transactions and tracking assets and is shared among many nodes of a computer network
• Each network has its own consensus algorithm and mechanics to solve 3 main problems: speed, security and scalability
• Networks operate are independent from one another

Layer 1 (L1) blockchain

• Layer 1 refers to a base network, such as Bitcoin, BNB Chain, or Ethereum, and its underlying infrastructure
• Layer 1 blockchains can validate and finalize transactions without the need for another network
• Layer 1 blockchains also have their own native token, used to pay for transaction fees

Layer 2 (L2) network

• Layer 2 refers to a secondary framework or protocol that is built on top of an existing blockchain system
• The main goal of these protocols is to solve the transaction speed and scaling difficulties that are being faced by the major cryptocurrency networks

EVM (Ethereum Virtual Machine)

• Ethereum’s computation engine acts like a decentralized computer that has millions of executable projects, handles smart contract deployment/execution, is freely accessible and enables developers to build on the network
• Some networks (BSC, Avalanche, Polygon) are built using Ethereum as the backbone. This allows developers to build for Ethereum and support all EVM-compatible “for free”

EVM-compatible networks

• Networks with code execution environments similar to EVM, allowing developers on Ethereum to deploy smart contracts to these network quickly with minimal effort and without having to write the code from scratch again

ERC-20

• Technical standard for fungible tokens created using the Ethereum blockchain (applicable to all EVM compatible networks)

Gas/Network fees

• Payments users must pay to compensate for the computing energy required to process and validate transactions on the blockchain

Layer 1 Blockchain networks

The market is fragmented with >50 L1 networks which can be ranked in terms of use cases/applications on the network and Total Value Locked (TVL). All L1 networks can be split into EVM-compatible and others (e.g., Solana, Bitcoin).

EVM-compatible chains dominate the market with >80% market share in terms of total value locked and Ethereum being the dominant network with >55% market share.

Overview of largest L1 networks

Layer 2 Blockchain networks

Although EVM compatible networks in general and Ethereum in particular dominate the market, there are 2 main challenges with Ethereum that become more evident with the growth of the network:

• High gas fees
• Low transaction throughput

Layer 2 networks are a solution to scale Ethereum by reducing network/gas fees and increasing transactions' speed to finality.

Layer 2 refers to a secondary framework that is built on top of the Ethereum blockchain and L2 is not a blockchain network on its own. Think of L2 = transacting layer, while L1 = settlement layer (in other words L2 is like intrabank transfer and L1 is SWIFT). Instead of keeping all activity on the L1 network directly, the bulk of user transactions is made ‘off-chain’ on L2 and only the summarised result of these transactions in recorded on L1. Layer 2 strictly follows the security consensus of its L1 chain, and is therefore very secure (compared to side-chains which have their own set of security consensus, like Ronin, an Ethereum side-chain, which was recently hacked for over $600m.)

There are 2 competing L2 technology: optimistic rollups and zk rollups. It is believed that due to direct EVM compatibility optimistic rollups will succeed in the short-term, however in the long-term (once zkEVM is built) zk rollups will dominate the market due to technological superiority (mainly driven by almost immediate finality). See the detailed comparison of optimistic rollups vs zk rollups here.

Overview of largest L2 networks

Total value locked by blockchains