Top L1 Chains Evaluated Based On Active Users

Today we’re studying some models provided by InvestAnswers which compare where the top L1s stand in the current bear market, by appraising the smart contract platforms based on active daily users.

The goal is to see how the L1 relative values compare to each other, which could be a good tool when looking for investments for the next bull run, however none of this is to be taken as financial advice.

(For this comparison we are also including Polygon/MATIC which is technically a L2 chain.)

So what is an L1 chain?

Layer 1 refers to a base network blockchain, such as Bitcoin, BNB Chain, or Ethereum, and its underlying infrastructure. Layer-1 blockchains can validate and finalise transactions without the need for another network. Making improvements to the scalability of layer-1 networks is difficult, as we’ve seen with Bitcoin.

As a solution, developers create layer-2 protocols that rely on the layer-1 network for security and consensus. Bitcoin’s Lightning Network is one example of a layer-2 protocol. It allows users to make transactions freely before recording them into the main chain.

Adoption is critical

Daily active users are one of key metrics to appraising a blockchain.

We can think of blockchain adoption like a shopping mall. The success of shopping malls depends on having multiple popular stores which is akin to dApps (decentralised applications that can operate autonomously) on a blockchain.

The success of both examples require infrastructure, security, the ability to transact, and attract customers who spend a lot of money.

Ghost chains on the other hand are like ghost malls, they’ve got no dApps and no customers. Unfortunately there are a lot of these out there, so we really want to avoid investing in these which have downward trajectories. We want to invest in the crypto version of the busy shopping malls.

How many people are using layer 1 technology?

Let’s jump in and look at the daily active users of the different L1s today.

Many of these chains have seen a slump in activity since the bear market hit. Cardano for example had 250k+ users back in January.

TRON is the outlier here with a huge 2.68 million daily users. Much of this is from online blockchain gambling dApps which have seen mass adoption in Asia

It’s also with noting that Cosmos, Elrond and Tezos (XZT) have stopped sharing their user data

All chains have been shrinking, with the exception of Flow, TRON and SOL.
Let’s examine the side by side comparison.

It’s very positive to see some chains are still growing, as historically the ones that can survive and thrive in the bear market tend to take off in the next bull run (NFA).

Now let’s look at the market caps relative to Ethereum, as this can sometimes be a good way to spot bargains.

Here are the ratios as a percentage of Ethereum and the multiples – ** Warning theoretical model only **

How does it break down?

As an example here: Algorand has a Market cap 2 Billion, price is 30c, percentage of ETH is 1%, that means that Algorand is 1/94th of Ethereum. Fantom is a 300th of the value of Ethereum.

Solana is 1/18th of Ethereum, handles more transactions and has almost equivalent daily active users.

Visualisation of market cap per Daily active user by chain

(TRON has been capped as it was off the charts)

Cardano is worth 278k per user and ETH is worth 360k, so you could argue that Cardano is better value on a user basis. Although the $ transaction value transferred is very low on Cardano and very high on ETH.

The key to focus is on the cheaper names which are relatively cheap on a market cap/daily active user, so we could look to these as having a big upside as we go forward.

Let’s look at the financial upside going forward

** Warning theoretical model only **

We calculate the daily active users today, and then the market cap / DAU ratio.

Market value per ETH market capitalization, assuming that ETH is correctly valued @ 360k per user and every other chain operates the same way (which is unrealistic).
Theoretically this should show us the chain with the most upside based on the daily active user metric.

So Algorand should (if it was doing the same type of transactions and the same type value of user, ‘should’ do a 4.3x and could be worth $1.30 with a theoretical upside gain of 339%). If Solana was appraised and appreciated as much as Ethereum it would have a 2000% upside.

This is not financial advice and we are not suggesting these numbers will be hit, but this is what the model is suggesting for comparison. Do not take this to the bank, and again to be clear that these are strictly theoretic.

Conclusion

Using James’s model here for analysis it looks like Fantom, Flow and Solana are very attractive, so take that away and do your own analysis if you are interested in these chains. You can also check out our guide to avoid getting rekt in the bear market.