Blockchain.com CEO: In addition to making investors profitable, Ethereum "killers" are limited

summary:

- A handful of venture investors have profited handsomely from so-called Ethereum “killers” — even as Ethereum continues to dominate.

- With many investors now backing the latest wave of Layer 1 players, Blockchain.com’s Peter Smith questions whether this is the best use of capital.

Blockchain.com co-founder and CEO Peter Smith said backing Layer 1 blockchains has proven to be a very successful bet in the past and will likely continue to be so — even though they offer no real threat to Ethereum’s dominance.

If Solana, Avalanche, and Near Protocol are the first wave of so-called Ethereum “killers,” then Aptos and Sui (a new Layer 1 blockchain based on Move, a programming language originally developed by Facebook engineers) can be considered the second wave. As the most watched public chain newcomers this year, both are vigorously advancing the financing process.

In July, according to people familiar with the matter, Mysten Labs, a Web3 startup founded by former Meta Platforms employees and Sui's developer, is seeking to raise at least $200 million in Series B financing at a valuation of $2 billion. This round of financing will be led by FTX Ventures, and investors have currently pledged to provide at least $140 million in funds.

It is reported that Mysten Labs had previously completed a US$36 million Series A financing round, led by a16z, with participation from Coinbase Ventures, NFX, Slow Ventures, Scribble Ventures, Samsung NEXT, Lux Capital and others.

In addition, Aptos announced the completion of a $150 million financing in the same month, led by FTX Ventures and Jump Crypto, with other investors including Griffin Gaming Partners, Franklin Templeton, Circle Ventures and Superscrypt. Aptos has raised $350 million so far this year and plans to invest in the development of its secure and scalable layer 1 blockchain.

Earlier in March, Apotos completed a $200 million financing round, with dozens of well-known Web3 investment institutions participating, including a16z, Tiger Global, Katie Haun, Multicoin Capital, Three Arrows Capital, ParaFi Capital, FTX Ventures and Coinbase Ventures.

However, Ethereum is still very much alive and is the dominant protocol for conducting decentralized business. In fact, it is in the final stages of moving to a proof-of-stake model in order to make the network cheaper to use and more energy efficient.

Despite the growing competition, Smith said it’s not surprising that investors continue to invest in base-layer blockchains, as they can still prove to be very profitable.

“None of these alternative Layer 1s have come close to beating Ethereum, but they’ve made investors a lot of money,” he said in an interview with The Block. “If you’re an early investor in a Layer 1, and the project gets a certain scale, even if it’s small, it’s going to bring you huge returns.”

“In this conversation, it’s important to differentiate between ‘Will these projects have a large and meaningful impact on users and everyday life and build the future of finance?’ versus ‘Can we make money?’ Because those two things don’t always go one-to-one.”

In the broader venture capital world, it’s unusual for investors to back multiple startups in the same niche — in part because they run the risk of conflicts of interest between companies that could become competitors. But that’s not the case in crypto. Some venture capitalists have backed multiple projects with a mission to “beat” Ethereum. For example, both Solana and Aptos have received backing from a16z, Multicoin Capital, Jump Crypto, BlockTower Capital, ParaFi Capital, and others.

For Smith, the case for supporting Layer 1 blockchains is clear: they can deliver eye-popping returns in a relatively short period of time, regardless of whether they succeed in challenging Ethereum.

“We are seeing many investors exiting successful Layer 1 bets from the last cycle (Solana, Avalanche, Near) and entering new Facebook-related Layer 1 bets,” he said.

Past performance of mainstream Layer 1 projects

Data from CoinGecko shows that from the beginning of 2021 to November of that year, the market value of Solana's native token SOL soared from less than $100 million to nearly $80 billion. Since then, the figure has fallen back to around $15 billion. Early backers of the project usually buy tokens instead of equity, and if they cash out even a small portion of their holdings at the top, they will also make huge profits.

“I think there’s some capital repatriation at work, there’s a lot of incentive to continue to bet on Layer 1 to beat Ethereum because you’ve already invested a lot of money in the strategy. Despite that, the irony is that no Layer 1 has come close to beating Ethereum,” Smith said.

There’s nothing wrong with this idea on the surface. As Smith points out, it’s a free market. In fact, he argues that the money backing the first wave of Ethereum challengers is likely to come from successful bets on Bitcoin and Ethereum — or at least the knowledge of such bets’ success from the investor’s limited partners. The question Smith raises is whether successive Layer 1 investments are an efficient use of capital.

“One thing I find hard to take seriously about some of the Layer 1s launching right now is: What do you bring to the market as a potential challenger to Ethereum that’s better than Solana, Avalanche, Near?” Smith said. “Each chain has its own answer, but at the end of the day, all users care about is stability and transaction costs. So I think that’s a little complicated for me — is this the best use of human and financial capital at the time?”

So far, a significant portion of the funds injected into the new wave of Layer 1 has gone to incentive programs, which were all the rage at the end of last year.

Avalanche set aside nearly $500 million for its native token AVAX in two incentive programs in August 2021 and March of this year, all in an effort to attract developers and projects into its ecosystem. According to DeFi Llama, the blockchain's total locked value (TVL) soared from about $160 million in early August 2021 to more than $12 billion in December. By mid-April of this year, Avalanche TVL had fallen to around $10 billion, and then to its current $2.5 billion.

The health of the broader crypto market is also a factor. Solana did not launch a milestone incentive program, but experienced a similar TVL decline as Avalanche during the same period.

“So far, it’s unclear whether these chains actually have staying power,” Smith said. Ethereum’s TVL has also fallen, though less dramatically — from $160 billion in November to $84 billion today, according to DeFi Llama.

Despite Smith’s skepticism, he acknowledged that any issues with Ethereum’s much-anticipated “merger” would mean that competing blockchains are “back in the game” again. This includes Solana and the first wave as well as the new Move-based protocol.

“The challenge with all of these blockchains is that you really have to hope that [Ethereum merges] go wrong for them to succeed,” Smith said. “If Ethereum is on track with the merge and sharding roadmap, then there won’t be much reason for these chains to exist.”