The blockchain industry started with Layer 1 (L1) blockchains like Bitcoin and Ethereum. Over time, it has expanded into a large ecosystem with many other L1 projects. These projects promise innovation, scalability, and decentralization. However, as the market gets crowded, concerns about the real value of these new initiatives are rising.

Layer 2 (L2) solutions are also changing the game. They highlight the potential downsides of overloaded L1 environments while offering fresh solutions to scaling issues.

So, what exactly are Layer 1 blockchains? They are the core protocols that enable decentralized applications (dApps). The rise of well-known L1 blockchains like Ethereum and Bitcoin has opened doors for a variety of L1 solutions. These systems aim to tackle three main challenges: decentralization, security, and scalability. Each new L1 blockchain usually claims to have unique solutions, whether it’s improving transaction speed or lowering costs.

Jack O’Holleran, co-founder of Skale Labs, points out that while the L1 ecosystem has grown, very few projects actually gain traction. Simply launching a new L1 chain isn’t enough to keep people interested. The competition is fierce, and creating a blockchain from scratch is resource-intensive.

With more L1 blockchains popping up, some are wondering if the ecosystem is becoming too complicated. Users and developers may find it hard to navigate a fragmented landscape filled with new tokens and unique user experiences. O’Holleran notes that many new L1 projects struggle to gain momentum and often rely on tactics like airdrops to attract users, which doesn’t lead to sustainable growth.

Too many L1 platforms also complicate interoperability and liquidity. Each new chain can make it harder for assets to move freely across platforms. Some L1 blockchains might unintentionally fragment liquidity, making it tough for users to access the assets they need. Often, users must hop between different chains, using third-party bridges that can pose security risks. This creates a less integrated market.

The competition in the L1 space can stifle innovation. Instead of building on existing platforms, many projects focus on creating the next big thing. This fragmented approach can lead to a cycle where new initiatives attract attention but struggle to stay relevant against established players like Ethereum.

Despite these challenges, some industry insiders believe that developing new L1 blockchains is crucial for innovation. Charles Wayn, co-founder of Galxe and Gravity, argues that new L1 chains are a natural evolution in the blockchain world. They allow developers to address specific issues that older blockchains might face. His firm recently launched Gravity, focusing on cross-chain interactions to solve scalability problems.

Wayn explains that newer L1 blockchains can offer lower costs and higher transaction speeds. Meanwhile, older blockchains may be limited by congestion and high fees. Some new L1 blockchains even incorporate advanced technologies like Zero-Knowledge Proofs to improve security and privacy. These innovations support the need for new, specialized L1 blockchains that cater to specific user needs.

Emerging L1 projects like Gravity aim to fill gaps left by general-purpose blockchains like Ethereum. By focusing on specialized features, developers can create applications tailored to specific market niches. While these specialized blockchains might serve smaller user bases initially, they can better meet niche demands compared to broader L1 platforms.

As the conversation around new L1 blockchains continues, Layer 2 (L2) solutions are gaining popularity as a viable alternative for scalability issues. L2 solutions work on top of existing L1 blockchains, enhancing their capabilities without needing a new chain. Matt Katz, co-founder and CEO of Caldera, advocates for L2 solutions as practical ways to address scaling challenges without complicating the ecosystem with more L1s.

L2 solutions like rollups and state channels help lighten the load on the main chain. They can reduce costs and boost throughput without sacrificing security. Katz’s company offers a “rollup-as-a-service” platform, allowing developers to quickly build Ethereum L2 chains. This approach avoids the complexities of creating a standalone blockchain while providing flexibility and scalability.

Katz also highlights the interoperability benefits of L2 solutions over new L1 chains. Unlike most L1 blockchains, L2 solutions are designed to integrate smoothly with their parent chains. This reduces the risk of liquidity fragmentation, allowing them to benefit from the security and liquidity of their parent chains without needing independent bridges. This compatibility fosters a more unified and user-friendly environment.

Looking ahead, the blockchain industry faces an important decision. Both L1 and L2 solutions have their unique advantages and challenges. On one hand, L1 blockchains provide essential security and decentralization. They form the foundation for decentralized applications and protocols. On the other hand, L2 solutions offer practical ways to improve scalability without the complexities of developing new blockchains.

O’Holleran believes the market will eventually weed out weaker L1 chains, leaving only those that truly add value. This process could reduce fragmentation and simplify the ecosystem. Wayn argues for a flexible development environment, suggesting that innovation shouldn’t be limited by the launch of new L1 blockchains. Meanwhile, Katz thinks the rise of L2 solutions will help streamline the blockchain landscape by decreasing the need for more L1s.