The Future of Layer 1 Solutions?
By Kamal Nayan Bandaru | Crescent City Capital Market Analyst Intern
Recently there has been a good amount of hype around scalable Proof-of-Work layer one solutions with high TPS and finality times. To understand why these POW scalable layer 1’s are essential, we need to take a deeper look at POW blockchains, how they operate, and the issues that plague them.
What is Proof of Work
A Proof of Work blockchain utilizes computational power as the resource to validate transactions. You have heard of Bitcoin “Miners” before. All these people do is keep a computer up that runs software to check and ensure all the transactions are correct on the Bitcoin blockchain. They are then rewarded with Bitcoin for their computer’s work for the network. It was the original method of cryptographic proof; however, there are more now, such as proof-of-stake and proof-of-history. Since proof of work requires everyone that is mining to have a computer running software, it provides the highest level of security among all methods of transactions proof.
There are some glaring issues present in proof of work systems, mainly around TPS and gas fees. Due to the high level of computational power needed, many POW solutions can only deal with 15-45 transactions per second, making them extremely slow and inciting gas wars. This creates squeezes in already high gas prices. Layer 2 solutions are attempting to solve the issues of scalability and adoption intrinsic to Layer 1’s; however, many have to create various security assumptions to bypass the limitations of Layer 1’s (ZK Rollups are a layer two solution using the existing security of ETH, and the best current scalability solution in my opinion). The high level of security that POW systems have combined with scalability is desired across the board, and that is exactly what Kadena and Quai have set out to do.
Kadena is a scalable POW system using ten chains roped together. Through the use of a fixed graph system, each chain contains proof from its three peer chains. The proof mechanism continues for each chain, allowing the overall system’s interconnectivity to happen within two jumps. The roped chains that contain multiple references of proof from peer nodes actually increase throughput and security.
This is a depiction of the roped chains (or chainweb as Kadena calls it)
The KDA token has a current circulating supply of around 170,000,000, 17% of the total token supply. The breakdown of token distribution is as follows
- 70% is for miners
- 20% for the platform
- 7% is for investors
- 3% allocated for contributors
What is refreshing to see is that most of the allocation is towards miners, and venture capital firms haven’t taken a huge chunk or share out of the token supply. Kadena’s ecosystem seems to be lacking in terms of applications that have been built upon them, driving people actually to use the chain. They have an updated roadmap for 2022 that seems to be promising for dApp building and driving users, but we will have to see how they actually deliver.
Quai is a direct competitor to Kadena as they are also creating a scalable layer 1 POW solution that utilizes a hierarchical blockchain system. There are currently three levels, each with increasing network speed and lower transactional computing power needed. Because of this, blocks at lower levels are linked together until a coincident block is created (a block that connects all three chains). The process of mining a new prime block (the longest chain) restarts after every coincident block since that is when the chain with the most computing power required generates cryptographic proof. The lower level chains will start out with a lower security level than the higher ones, as the transactions will be much smaller and easier; therefore, not requiring as high a level of security during the mainnet launch. The whole level of security will be eventually built through every chain after launch.
Quai raised 8 million in a seed round from poly chain capital and is still private. Their team is a much younger set of developers when compared to Kadena’s older and more experienced team.
The tokenomics for Quai are as follows
- 25% for adoption incentives
- 20% for mining incentives
- 15% for strategic partners
- 15% for the foundation
- 5% for infrastructure partners
- 5% for founders
- Rest is split up among various other purposes
The tokenonmics model of Quai is very different from Kadena, which has over 70% of the supply reserved for miners. It is interesting to see how this model will play out after the public sale of Quai and if people think that 20% is too little of an incentive for miners. A lot of the model is focused on incentives built in for people helping Quai grow, building code, and contributing in any way possible. This could create a strong community based that has a stake in the growth of Quai as they could be rewarded in tokens for helping out.
Why haven’t these solutions taken off
I honestly do not have an excellent answer for this. I think there is a ton of building happening behind the scene, not currently priced into the token. KDA rallied heavily during the crypto bull run in November 2021. It has been selling off ever since its peak of $27 and is currently trading at $5.54. Market sentiment has and will play a massive part in the price of the token for KDA and QUAI when it releases to the public. Scalable POW systems are targeted to solve the crypto trilemma and make solutions more accessible and secure for everyone. They are long-term plays and are focused on building out diverse ecosystems meant for mass adoption down the line. Crypto is currently a very choppy news-driven market, and these layer 1’s are building in silence for the future, making them true long-term plays.