While the best layer 1 crypto projects are quite good at improving the throughput and facilitating stronger communication and collaboration, it is still necessary to address the inefficiencies of the existing larger infrastructure. Just rolling up transactions and encouraging economic activity is not enough to guarantee the future of the industry.
What is a layer 0 blockchain technology?
It is the foundation level of the ecosystem represented by a massive infrastructure that has all the necessary parts to make upper L1s and L2s work efficiently. The “underground basement” is comprised of exclusive hardware, new protocol, and new architecture components that make multiple systems work together without any issues. Thanks to the improvement in throughput metrics, interconnectedness, and overall performance, these underlying solutions are demanded by all users in the larger ecosystem.
The term started appearing around 2018 as the focus of the community shifted to the necessity to increase the metrics across the board. Among notable pioneers, Polkadot and Cosmos look like the most serious guys on the block. The creators and enthusiasts of these projects popularized the term.
The approach of dev teams is quite different from what many DeFi platforms are proposing to focus on. Instead of building upon existing infrastructures, layer 0 scaling solutions are building bridges between different data-handling networks and allow for growth and performance improvements to happen on a much larger scale to address the general inefficiencies of the ecosystem as a whole.
The concept has three distinct features:
1. Focusing on mutual compatibility. By ensuring stable communication between different parts of the interconnected environment, it is possible to streamline information transferring and allow massive transaction to happen seamlessly and without putting any pressure on everything above.
2. Increased rates of potential growth through supporting the existing infrastructure from ground up and providing new ways of handling data to optimize whatever processes in the DeFi ecosystem and decentralized ledgers themselves.
3. The much-needed customization is another huge point of interest for developers and the community. The ability to adjust various parameters is essential when the need for a very specific feature emerges among dev teams.
Improvements made on the basement integrity of the industry affect everything from the way everything is transferred within the larger ecosystem to the outcomes of using advanced tools like AI for trading crypto assets. So, how do these innovative inventions break ground and deliver new technology to the forefront of the industry?
Polkadot’s parallel chains
As one of the most popular crowd favorites out there, Polkadot enjoys the attention from retail investors, tech geeks, and developers. Thanks to its innovative approach to increasing interoperability, the native token managed to reach a massive $7.3 billion market cap and completely change the way we think about processing information using decentralized systems.
Polkadot uses its Relay and Parachains to conduct multiple operations simultaneously to significantly increase the overall throughput and make transaction processing faster. The claimed speed of processing reaches 1000 TPS compared to 7 for Bitcoin and 30 for Ethereum. These are huge numbers and they can be further increased by implementing existing L2 methodologies.
Cosmos is the most versatile foundation
It is one of the most innovative and reliable foundational architectures comprised of the Hub and Zones. The former is responsible for communications between mostly independent decentralized networks. The main way of providing the necessary language for Zones to interact and exchange data is the IBC protocol powering hugely popular systems like Binance and Terra.
Thanks to the novel approach and trustworthy development practices, Cosmos managed to attract significant investments with the native token reaching a respectable $3.5 billion market cap in 2023.
How it all affects the industry?
The optimization of data handling is more than critical for the industry that desperately needs more efficient ways of processing and sharing information between different digital architectures. L0 is an excellent way to address this problem by simply sharding large structures and ensuring that each semi-independent shard is doing unique tasks in parallel with its peers.
Here are ways in which L0s are capable of introducing game-changing innovations or doing it right now:
- Sharding as the most potential to completely change currently existing architectures and inspire the creation of the next generation of decentralized ledgers. The idea of breaking a single entity into several independently operating pieces that all communicate through a hub sounds obvious but it took quite some time for the concept to be conceived, thought through, and implemented.
- Unique consensus mechanisms. For example, Cosmos uses its Ignite consensus to ensure that all new projects deployed using the common SDK are compatible with the IBC protocol and can quickly agree on the addition of a block. The system is designed to be flexible and fully customizable making it easier for developers to take advantage of the tech that has a potential to be incredibly useful.
- Better and denser transferring. The development of Bitcoin and Ethereum revealed the issue of information handling with blocks added sequentially one after another without any ways to speed up the process and process multiple corpora of values simultaneously. This exact problem is solved by the likes of Polkadot and Cosmos as they significantly improve the very method of processing.
- More compatibility and collaboration. L0s are great at making different ledgers “talk to each other” and share information in an efficient manner. By doing so, they encourage developers to build their products with the advantage of the potential interconnectedness in mind. Digital assets and information in general can be moved around quicker and without any losses in performance which is a great way to distribute workload in a way that increases throughput and speed.
- The basis for future advancements. L0s promise to adjust the paradigm and introduce new toolkits and concepts that will direct up and coming dev teams toward a different path when building their new products and startups. Custom configurations can be created to reduce latency, maximize the throughput, and improve other metrics in very specific use cases.
Some existing networks are already showing the results of their labor. While some L0s failed to deliver on their promises, others are doing quite well and introduce new ways to develop and deploy efficient features. The overall performance of our industry in 2024 is quite impressive regardless of which L0 you want to look at.
Avalanche is all about speed
This one is created with the interests of developers in mind and makes sure that finality can be achieved faster compared to other infrastructures that use more cumbersome consensus mechanisms. The focus of Avalanche is on increased interconnectedness and data transferring between chains. At its core, the Snow Family protocol is a way of customizing consensus while maintaining the intensity of compatibility and interoperability.
AVAX has a $10.8 billion market cap at the time of writing and over $340 million in daily trading volume. These numbers are quite healthy and show that the interest from the community of investors and developers is quite consistent. The token has been one of the best performers throughout the last five years.
Harmony is building a new financial ecosystem
With its strong focus on community engagement and social aspects of financial systems as well as the introduction of artificial intelligence to the crypto industry, Harmony is offering a unique approach to building interconnected, highly efficient digital environments based on the principle of sharding. The jury is still out on the quality of the technology and success of developers using Harmony as their foundation. However, we are already seeing interesting applications like Zero Bridge and SWAP getting traction.
Harmony’s native token $ONE is not doing well at the moment with its market cap barely hovering above $200 million and daily volumes usually failing to reach $5 million. On the bright side, many useful products deployed on this Harmony are doing fine.
NEAR protocol is a where magic happens
NEAR made a lot of noise in 2017 when it was launched. The main thing that separates this particular system from the likes of Ethereum and Solana is the Nightshade Sharding technology that breaks down the one into many. Independently operating shards can communicate with each other effortlessly. NEAR is also in a good position thanks to its connections to Ethereum via the Aurora smart contract.
The $NEAR token is one of the best performers among L0s. At the time of writing, the market cap is above $6.2 billion and daily trading volumes are quite healthy with over $306 million worth of tokens changing hands every 24-hour cycle. NEAR is positioned to become one of the leading technological infrastructures for aspiring developers in the next decade. If you are looking for a good digital asset for grid trading and other ATS, $NEAR should be on your watchlist.
Which is better for retail investors to track?
If you want to purchase some tokens, investing in L0s and L1s is a good idea since these are foundational infrastructures that give life and resources to L2s. Since upper levels are dependent on underlying architecture and do not have any ways to outperform their parents, focusing on many upper DeFi protocols is a good idea only if you have long-term holdings of mainstream L0 and L1 tokens.
Here are some brief descriptions of each “floor”:
1. L0 is the basement of the ecosystem situated in the very bottom of the hierarchy. It is the place where pipes and wires are laid for everything “above” to function and communicate with each other. The main priority of these infrastructures is to optimize data flow and provide the necessary environment for quick scaling. Here, words like “sharding” and “novel consensus mechanism” are thrown around regularly.
2. L1 is the first floor with many old school networks forming its architecture. Bitcoin and Ethereum are most widely known, but there are names like Solana, Cardano, and others that also operate as base chains and provide resources, tools, and space to DeFi projects and decentralized applications of other nature. Here, consensus mechanisms are set in stone and usually adhere to standards like PoW and PoS.
3. L2 is the upper level where deployed apps are designed to improve underlying infrastructures by increasing throughput and scaling up the technology. The most famous L2 platform is the Lightning Network that allows for fast $BTC transactions with speeds up to a million TPS. The vast majority of viable products on this tier are about rolling up transactions and making underlying infrastructures faster as a result.
Investing in layer 0 crypto coins in 2024
A contemporary retail trader has a whole arsenal of useful tools to target any digital asset. However, picking the right coin to work with is important and the process of choosing should be based on your risk style and preferences. For example, if you are planning to run an auto trading crypto bot that utilizes conservative approaches like DCA buying or statistical arbitrage, it is important to focus on established tokens issued by crowd favorites like Polkadot or Cosmos.
On the other hand, L0s with an explosive potential may be the right fit for more adventurous investors. NEAR is a good example of a token that has been all over the place yet somehow managed to stay in a good position for over two years. Banking on untested yet promising projects can be a good strategy for those who are looking for investments to diversify and dilute their overly conservative market positions and strategies.