Crypto Layers
The notion of assigning “layers” to crypto projects is roughly based on the Open System Interconnection (OSI) model used in computer networking. OSI describes both a seven layer concept and a set of protocols.
Within the OSI network concept, layer one is the physical layer (hardware), where layer seven is the application layer (where data meets the end-user). The layers in-between cover the rest of the steps data traverses in a network and how it does so.
OSI layers and protocols are defined under the International Organisation for Standardisation (ISO). Crypto layers, on the other hand, are not reliably defined anywhere.
Thus, when someone says XYZ crypto project is a “layer 1” or a “layer 2”, it’s more of a marketing term than a technical one. As an investor, that’s important to keep in mind.
Zero the Hero
My best guess says “layer 0” narratives are likely to start ramping up in the coming months. The Axelar mainnet is (theoretically) coming online next month.
Layer Zero already launched Stargate on their mainnet and Constellation’s mainnet 2.0 is due in the next couple weeks. Polkadot’s long delayed parachain auctions finally came to fruition.
Cosmos recently deployed the Inter-Blockchain Communication (IBC) protocol, which also (theoretically) addresses one of the big complaints about ATOM not capturing network value.
In terms of blockchain interconnectivity, Layer Zero and Axelar are the new kids on the block. Polkadot and Cosmos have been around since 2017. Constellation was right behind them, debuting in 2018.
The big question is: are any of them stronger plays than Bitcoin? For most alts the answer is almost always “no”.
L0s might be different though.
Blockchain Interconnectivity
When it comes to blockchain interconnectivity, I’d remind you of Wanchain. Wanchain was going to revolutionize crypto back in 2018 with cross-chain connectivity.
The token price peaked at $10 on the hype. Today it’s a dead chain trading at $0.39. Obviously Polkadot, Cosmos, and Constellation have done better than that.
Image: ImgFlip
Doesn’t mean they’ll continue to thrive though. Axelar and Layer Zero are still unknown variables. Ultimately it’s going to come down to what blockchain developers adopt.
Let’s see what they’re up against.
Polkadot / Cosmos
Completely different chains, but they’re pretty similar in approach. Both rely on developers using their particular core chain for network consensus.
Each new project on the respective ecosystem “lives” on its own sub-chain. For Polkadot, this ends up being a “roll your own” chain design.
With Cosmos, it used to be a “roll your own” security design. Chain development is pretty easy and now IBC enables shared security through the ATOM token.
However, Polkadot still requires bridging to move assets to other chains such as Fantom, Avalanche, or Ethereum. Cosmos’ IBC needs expensive light clients on each chain to do its job. The end result for both is they are not so much “cross-chain” as they are “abandon your chain and come to ours”.
Layer Zero
Layer Zero uses ultra-light endpoints to pass messages between unrelated chains (e.g. Avalanche to Ethereum). Chainlink is the oracle between the endpoints, acting as a transaction security guard.
For devs already built out on an L1 blockchain, getting on board with Layer Zero should be pretty easy. Plugging into an endpoint seems like it will be relatively straightforward and it appears to be a relatively easy technical lift.
Axelar
Axelar runs its own consensus chain that sits “underneath” the L1’s. Axelar provides devs with a software development kit (SDK) and standardised protocols for cross-chain messaging.
As Axelar’s whitepaper explains, their two primary messaging protocols, the Cross-chain Gateway Protocol (CGP) and Cross-chain Transfer Protocol (CTP) are similar to the respective internet Border Gateway Protocol (BGP) and Hyper-text Transfer Protocol (HTTP).
Image: Axelar
For devs unwilling to go the Polkadot/Cosmos route, the question between Axelar and Layer Zero is: do you want to trust a third-party chain (Axelar), or a third-party oracle (Layer Zero)?
Constellation
Constellation is new on my crypto radar. I saw a tweet where someone was bashing Solana for padding their transaction numbers and then they mentioned $DAG. Intrigued, I started poking around.
$DAG is the native token of the Constellation ecosystem. In terms of an L0 project, as best I can tell, it is something like a mix of Axelar and Polkadot/Cosmos.
Constellation is not a chain, but rather a Acyclic Directed Graph (DAG), similar to Fantom. Where Fantom uses a proprietary proof-of-stake consensus mechanism (Lachesis), Constellation uses a proprietary proof-of-reputable observation (PoR) consensus mechanism.
I typically write two to three articles a week. This week I spent all of my time trying to understand Constellation. Probably 15 hours of video and at least a dozen more reading whitepapers and other material.
Constellation is definitely not some rebranded copy/pasta fork project.
There is a 17-page academic whitepaper that outlines the consensus mechanism. Another 57-page academic whitepaper outlines the generative economics aspect. Way too much for here, but I’ll do a deep-dive (to the best of my ability) in the coming days.
In the meantime, the short version is:
PoR takes bits and pieces from REGRET, Temporal PageRank, and GURU, mashes it all together and creates a horizontally scalable, asynchronous, Byzantine Fault Tolerant, and (theoretically) secure immutable ledger that you can’t fork.
And it’s fast as shit to boot.
$DAG Token
For you degens, this is the part you probably care about. The tokenomics are…weird. The entire project requires you to rethink what a blockchain economy looks like.
Philosophically, Constellation’s economy is based on the concept of Generative Economics. The $DAG token is a speculative asset you can buy. It is also required for network access.
Image: Constellation
You can stake it for $DAG rewards. But the Constellation network charges no fees. Value doesn’t really accrue to the token, so much as the token represents the value of the network.
It’s worth mentioning, there are no “unlocks”. There are about 3.7 billion tokens in circulation, with no future emissions (no inflation).
Like I said, I’ve spent the whole week digging into Constellation and I’m just now starting to wrap my head around what they’re doing. The juicy core of Constellation is the proposition that they are providing consensus as a service.
Like Polkadot or Cosmos, you roll your own “chain”. However, you must be reputable (remember, it’s proof of reputable observation) to stay on the network, or your transactions will get bounced as malicious.
But Constellation also runs the Hyper-Graph Transfer Protocol (HGTP), which is kind of like Axelar. Through HGTP, chain-state messages (called “emissions”) can be passed to and from any chain, so long as the sending and receiving project has integrated HGTP.
Through a novel use of state channels, HGTP (and by holding $DAG), token holders will be able to modify their respective ledgers on any chain. Moreover they can transmit, interchange, and exchange that state data to any other integrated chain with no fee in between.
In essence, the $DAG token is the L1 for the Constellation L0 network. As in, you use $DAG as both the ecosystem “currency” and as the transaction “layer” to interact with HGTP, which then allows you to interact with any other L1.
Put simply, this project makes sequential blockchain projects (BTC, ETH, SOL, etc.) look like children’s toys.
What about the use case for $DAG?
While many speak of “use cases” I think it’s fair to say the vast majority of people don’t “use” crypto for much beyond speculating on price action.
Crypto tech in general is obviously promising. The new Bitcoin payment rails on the Lightning Network that Jack Mallers debuted at Bitcoin 2022 are a clear real-world use for crypto.
At the risk of sounding silly, Constellation appears to be different. You can definitely speculate on $DAG. But the network itself has implications that reach far beyond what we usually associate with crypto.
Image: Space ISAC
Remember, we’re talking about consensus as a service. As in, Constellation allows for the decentralized, permissionless validation and authentication of data in transit with no fees for those “transactions” in real-time.
Data like satellite telemetry, autonomous vehicle information, GPS data, digital advertising data, social media data, and even Multi-Domain Control (MDC) data from the U.S. Military. In fact, Constellation is in a Phase II contract with the U.S. Airforce to do precisely that.
Conclusion
I’m pretty sure L0 narratives are going to be the next “big thing” in crypto this year. Trouble is, not all “layers” are equal.
After spending a week digging into Constellation, I feel like my eyes have been opened up to a different world of possibilities for the crypto space. Of course, it remains to be seen how well Constellation’s mainnet “2.0” roll-out goes.
But it also got me questioning why it is we’re doing the things we do in crypto. While I applaud Solana for trying to get those TPS up to some juicy number, I also question the end game utility.
I am super bullish on projects like Layer Zero and Axelar. But I’m super bullish on them because I’m a crypto dork. I see how cross-chain transactions could be pretty spiffy. But I think the average non-crypto Joe couldn’t care less.
That said, if we stop and think about just how much data is created every year and how much that keeps growing, the question of how to securely transmit that becomes an exponential problem.
And now I feel like I found a company that just might be on the (hyper)edge of fixing that problem. I know $DAG is a “crypto” project, but my Spidey sense says Constellation might end up being more like Google than the next “Ethereum Killer”.
Or, maybe I’m just a sucker for theoretical math, ridiculously high-tech solutions, and big name contracts. But hey, whether it’s an L0 or L100, that’s not a bad narrative either.
And at $0.07 per $DAG token, I’ll degen that narrative.
Remember, these are just my opinions. I’m not a financial advisor, this isn’t financial advice, and always DYOR. Following any of these ideas might cause you to lose all of your money. I am 100% serious about that. I like tinkering with this stuff, but I’m on record acting like a total baboon. Invest accordingly.
Until next time, be safe, be smart and be sure to tie the camel.
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