Crypto Isn’t All About Winning, It’s About Layer 1 Protocols

Crypto’s value is based on Layer 1 protocols, and it’s unfortunate that regulators, politicians, and even some investors don’t realise the power of its technology.

Investors, regulators, and politicians alike can be guilty of putting crypto in an umbrella of misunderstandings. In regards to the industry, crypto is seen as a money-making investment machine, for better or for worse.

This misunderstanding, while beneficial to most investors, also unfortunately lends itself to bring regulators and politicians together to target the industry to take it down. While the first quarter of 2023 saw a boost in crypto prices, industry sentiment was perhaps at its all-time low.

In the context of the United States, many politicians have taken the opinion that crypto is a bad thing. The US federal government has taken to crypto crackdowns, and politicising it in a way where the Biden Administration has fostered an image of illegitimacy of the industry.

While crypto can be used to earn profit, crypto is just a form of technology.

Over time, the word “crypto” organically became a shorthand name to refer to Web3, the blockchain industry, digital tokens and assets, and smart contracts. Often thought of as a shorthand for “cryptography”, the very technology that cryptocurrencies and all computer security is based on, crypto became a broad term to reference everything in that sphere.

While people think crypto is quite cryptic, it lends itself to huge misconceptions about the industry and how it works.

Demystifying layer 1

Layer 1 (L1) blockchains are a base blockchain network and the infrastructure it is based on. Through L1 blockchain networks, transactions can be validated and finalised without the need for help from another network.

Transactions on L1 networks take the form of peer-to-peer transactions – where everyone has incentive to participate in order to get returns like digital currencies. Peer-to-peer (P2P) technology makes computing and networking distributed – separating all the little computing work into chunks between peers, or users. Through P2P, the network becomes decentralised as no computational action is done by a singular source.

In the context of Bitcoin – the network’s native token BTC operates as an incentive mechanism for people to work together – through decentralised P2P transactions – to ensure security and accuracy of the data stored on the network. The same goes for any token for any given blockchain.

The meaning of L1s

With L1s, people are able to take traditional, fiat currency to exchange for another asset – a digital asset – without the need for a central bank to intermediate. Regulators are threatened by this aspect of L1s and crypto in general: especially those in the US, as they fear they may lose their power in the world’s economy.

Instead, they favour a centralised system: central bank digital currencies (CBDC), a type of digital currency issued by a central bank. While they are central bank-backed, and central bank-controlled, Blockchain technology is also used for CBDCs. The animosity behind crypto itself becomes a political one, rather than a technical one.

Unfortunately, regulators and lawmakers look past the decentralised technology behind blockchains, particularly with the example of decentralised L1s like Bitcoin. As they seek to stop crypto due to its detrimental effects on financial markets, they completely overlook the inherent benefits which L1 holds.

However, the very decentralised aspect of crypto is what makes it strong, not just market share performance.

L1s also exist in a myriad of forms. Bitcoin operates on a ‘proof-of-work’ (PoW) mechanism, where peers validate transactions through pure computing. Through decentralisation, L1s can be adapted and improved for other qualities like network speed, allowing for more nuance of L1s and blockchains. For example, Ethereum’s solution to improve upon PoW is to operate on ‘proof-of-stake’ (PoS) to address scalability issues.

L1s themselves not only are the foundational building blocks for the crypto industry itself – but also is the blueprint for how technology can be incentivised to grow, develop, scale, and thrive.

Crypto forces people who are focused on just earning to also keep up to date with the technologies required to do so. Meanwhile, those focused on the technological aspect of crypto have to also do work in researching market dynamics. It’s a win-win, positive reinforcement situation that promotes growth in a myriad of sectors.

Thus, L1s and crypto present an inherent model for growth of the financial technology industry. If regulators and politicians alike are not aware that crypto’s inherent decentralised factor may play a crucial role in determining the future of technology, they may as well be preventing the growth and development of not only a nascent industry – but also the very future of technology and finance itself.

In the long run, everyone wins if crypto gets to stay.

For more, follow our Twitter (@runthechain)

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.