How to Valuate Layer 1 & 2 Cryptos (Ultimate Guide!) - YouTube

What are the key aspects of layer 1 and  2 blockchain projects we should analyze  

before deciding whether or not to invest in them?  

And what the heck are layer 1 and 2  blockchain projects in the first place?

Hello, I’m Crypto Casey and in this video  we will go through a checklist together  

that will help us determine which layer 1 and  2 blockchain projects are worth investing in.

This video was inspired by a twitter thread posted  by one of my favorite twitter accounts economist  

Natasha Che, so be sure to check her out and give  her a follow for more high-quality crypto content.

Before we get started, let’s first  quickly discuss what layer 1 and  

2 blockchain projects are so we  better understand their use-cases.

Title Screen: What does Layer 1 mean in Crypto?

Layer 1 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.

So layer 1 describes the base  layer of a blockchain network.  

Imagine an example of a layer 1 as the  Apple app store, where developers can  

use Apple’s framework in order to build  and launch apps that people can use.

At the time of this video, the most popular,  

well-known layer 1 blockchain project that  most projects have been built on is Ethereum.

Decentralized exchanges like Uniswap were  built on top of Ethereum’s layer 1 base,  

Axie Infinity is a game that was  built on Ethereum, OpenSea is an  

NFT marketplace that was built on Ethereum,  AAVE is decentralized financial project  

that allows people to lend, borrow,  and stake crypto built on Ethereum.

So you can see how layer 1 just describes projects  with their own unique blockchain-based foundation  

that allows others to build all kinds of  products, services, and software applications on.

Examples of other layer 1 blockchains are Solana,  

Cardano, Avalanche, Algorand,  Elrond, Tron, and many 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, Apple, or Linux.

Nice. Let’s move on to layer 2’s.

Title Screen: 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 the layer 1 blockchain ecosystem scale.

So instead of developers choosing  to build applications directly on  

Ethereum’s layer 1 blockchain-based foundation,  

they can build on layer 2 solutions  to decrease their transaction costs,  

increase transaction speed, and develop an overall  faster, more efficient application for less cost.

Examples of Ethereum-based layer 2  platforms developers can choose to build  

on include Polygon, Arbiturm, and  Optimism. You can consider layer 2  

platforms as secondary networks  built on a base main network.

Awesome. Now that we know what the terms  layer 1 and layer 2 mean in the crypto world,  

let’s explore the best way we can evaluate  them as potential investment opportunities.

So 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 ether  and ada can be used to process transactions  

and pay for network space on their corresponding  layer 1 platform, like ethereum and cardano.

The same goes for cryptocurrencies  that are used to process transactions  

on layer 2 platforms like MATIC  token for the polygon network.

Other use-cases of different cryptocurrencies  include stores of value like bitcoin,  

stablecoins like USDC whose value is  pegged one-to-one to the US dollar,  

voting rights or governance of a project like  UNI tokens for the Uniswap defi exchange,

and eventually there will be cryptocurrencies  that represent ownership of physical  

assets like property, or that represent  identification like passports and similar.

So when evaluating layer 1 and 2 cryptocurrency  projects, instead of thinking of each of them as  

companies, we need to think of them as ecosystems  similar to different countries' economies.

For example, we need to consider  Ethereum, versus Cardano,  

versus Solana each as their own separate  blockchain based countries and nations  

like the United States versus  Germany versus Japan and so forth.

What most people don’t understand is that, at  the end of the day, the fastest layer 1 or 2,  

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 1 or 2 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.

Title Screen: What is GDP?

GDP stands for gross domestic product  and it’s just a fancy economic term  

that refers to the total value of all of  the goods produced and services provided  

within a country during a specific period of time.

For example, if a country’s total output  for the year consisted of selling 10  

pizzas for $10 each and performing  5 car washing services for $20 each,  

the total GDP, or gross domestic  product for that country would be $200.

Simple enough right? So, even though a  lot of the debates we are having about  

tech specs of each blockchain platform,  transaction speed, efficiency, and security  

should play a smaller part in  analyzing the future value potential.

The layer 1 and layer 2 projects that become  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 platforms.

Sweet. So what conditions do layer 1 and  2 blockchain networks need to be met in  

order to foster, secure, maintain, and  grow an economic ecosystem successfully?

Let’s explore four variables that are  key to a thriving economic ecosystem.

One, Title Screen: 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 1 and 2 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. So 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, there’s  raw materials for building infrastructure,  

access to education for people that  become engineers that design technology  

or doctors that provide health care, etcetera.

So let’s explore how efficiency in value  creation applies to layer 1 and 2 blockchain  

networks. Right now there is a massive shortage  of qualified engineers in the blockchain space.

People and projects are literally throwing  money at people to get applications built.  

So if you would like to join the cause, learn  more about the advanced technical concepts of  

blockchain and become a developer in the  space, check out Ivan on Tech’s academy.

Using the link below, you can access  the academy at a discounted price,  

so scroll down to check it out.

Back to the shortage of developers and  how it is affecting the efficiency in  

value-creation on the blockchain.  When evaluating how layer 1 or 2  

projects are doing with regard to efficiency in  value-creation for their respective economies,

We need to consider how much effort the Ethereum  community versus the Solana community, versus  

the Avalanche community is 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++,  

java, etcetera to convert  to blockchain developers.  

In fact Solana’s language rust  was created based on C++ and java,  

so software developers that have coded in those  languages can easily learn rust in 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 the United States, Europe and similar, or  ones with less resources like India, or Venezuela.

So that covers the human capital aspect of  efficiency in value-creation in an economy.  

Another important aspect is how much financial  capital the layer 1 or 2 project can secure  

to support the network and increase  productivity and 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.

So acceptance of venture capital and other funding  sources will be crucial for whichever layer 1 and  

2 projects survive and ultimately succeed  long term. So if you’re analyzing potential  

layer 1 and 2 project investments, if they aren’t  backed by a legion of reputable venture capital,  

that is not an ideal long term bet.

Because building an entire country from scratch,  which is what these layer 1’s in particular  

are doing, takes a massive, massive, massive  amount of money, support, and continued funding  

and support to get to a healthy, sustainable  size and ideally keep growing into the future.

Cool. So we’ve got human capital and financial  

capital as important aspects  for efficient value-creation.  

The next important aspect is infrastructure.  Countries that have better infrastructure  

like roads, power grids, and telecommunication  networks have more efficient value-creation.

In blockchain, infrastructure consists of  the actual underlying blockchain technology,  

as well as everything built on top of it to  support the network like developer tools,  

connections to wallets, browser extensions,  

all of these play a crucial role in fostering  an economy with efficient value-creation.

So looking at things like where the  layer 1 or 2 is currently at from a  

developmental standpoint and where it plans  to go in the future based on their roadmaps  

is another key aspect to  consider before investing.

Nice. So just to recap, the three  essential aspects for an economy  

that fosters efficient value creation are human  capital, financial capital, and infrastructure.

Let’s explore the second variable that  is key to a thriving economic ecosystem.

Title Screen: On-Chain Direct Competition

On-chain direct competition refers to multiple  apps with the same exact use-case competing  

with other apps on the same blockchain. This is  important because competition fosters innovation.

So sure, Uniswap is the most popular decentralized  exchange on Ethereum, and sure it competes with  

other decentralized exchanges on other layer  1’s like PancakeSwap on Binance smartchain,  

or there’s QuickSwap decentralized exchange  built on the layer 2 polygon blockchain.

But what is indicative of  a thriving economic system,  

in terms of blockchain platforms, is  multiple decentralized applications  

competing directly with each other on  the same blockchain in the same industry.

So when evaluating a potential layer 1 or  2 you want to invest in for the long term,  

look for platforms that have multiple  Uniswap’s of sorts providing decentralized  

exchange services on Ethereum, or multiple NFT  marketplaces on the same platform, etcetera.

Because in the end, that competition will  absolutely cultivate incredible innovation,  

fairly quickly. And on-chain direct competition,  will ultimately make the blockchain platform more  

globally cross-chain competitive. But it starts  on-chain first to make the economy more robust.

Cool. Let’s explore the third variable that  is key to a thriving economic ecosystem.

Title Screen: Supporting Synergetic Industries

Supporting synergetic industries is just a  fancy term that refers to a collection of  

different types of applications built  on the blockchain that compliment and  

support each other, hence the term  supporting synergetic industries.

For example, within a blockchain ecosystem, an  industry could be defi, or decentralized finance.  

And if you don’t know what defi is,  you can check out my beginners’ guide  

all about what defi is and its implications  for the future by clicking on the link above.

DeFi consists of a few different niches  like exchanges where users can swap tokens,  

and borrowing and lending platforms that  allow users to lend and borrow crypto,

there are stablecoins that provide liquidity,  

there are derivative protocols that give  investors price exposure to things -

So you can see that there are a host of niches  that compliment and support each other within  

the scope of defi at large. When evaluating a  potential layer 1 or 2 you want to invest in,

look for signs of supporting synergetic  industries like a defi community,  

strong vibrant NFT support system, or  a diverse gaming scene in the making.

Nice. Let’s explore the fourth and final variable  that is key to a thriving economic ecosystem.

Title Screen: Strong User Demand

If a layer 1 or 2 project has a lot of  demand from their existing user base,  

and they are effectively and consistently  growing that demanding user base,

it will force the blockchain networks and all  

of the decentralized applications being  built on it to grow and innovate faster.

And the faster to market, the more  market share that the project can  

secure, therefore increasing it’s  likelihood of long term success.

For example, tons of users are clamoring all about  getting ethereum gas fees substantially lowered,  

and even though we haven’t achieved it yet, the  demand is certainly shortening the development  

cycle, causing the development community  to iterate and innovate at a faster pace.

The quality of the user  base is also of importance;  

users keen on Shiba Inu making moves  are a lot different than the users  

that have been involved in ethereum’s  development for the past several years.

So the quality and characteristics of a platform's  

user base will dictate the products  and services developed on chain.

User base size doesn’t so  much matter this early on,  

as 10,000 high-quality users are a lot better than  a chain that has millions of users, most of which  

may be bots, or users from under-developed  countries with less resources to contribute.

Sweet. Let’s do a quick re-cap of key variables to  

look out for when assessing which layer  1 or 2 blockchain network to invest in:

One, is the process of creating  value on the chain efficient?  

This includes how easy it is for the project to  acquire and keep human capital like develops,  

acquire and keep financial capital from reputable  investment firms, as well as the strength of its  

technological infrastructure and accessibility  like wallets, browser extensions, and dev tools.

Two, is direct competition on-chain occuring  and being properly fostered to ensure faster,  

more creative innovation? This involves several  software projects on the platform competing  

directly with each other because they are  providing the same product and services to users.

Three, are there clusters of software  applications within the same or similar  

industries that support and help each  other increase their value proposition?

This includes synergy between different  projects that complement each other,  

despite offering different goods and services  to users. Because together, on a macro level,  

they are making the blockchain’s  economy more vibrant and compelling.

And four, is there a strong, high-quality  user base consistently putting pressure  

on development efforts to foster  faster, more efficient innovation.

Awesome.

Well, thank you so much for taking  the time to watch this video.

I hope you found it helpful and will  use it to analyze layer 1 and 2 projects  

you are looking to potentially  invest in for the short or long term.

If you enjoyed what we explored together,  

please make sure to like this video and  subscribe to my channel for crypto content.

So what do you think about comparing layer 1 and  2 blockchain networks to countries’ economies?

Did you find the analogy helpful?

Which layer 1 and 2 projects are  you thinking about investing in?

Let me know in the comments below.

Be safe out there.