Layer 1 Networks: 2022 Review Part One

The L1 blockchain landscape underwent frequent evolution in 2022, reflecting the constantly shifting demands of the crypto market in a period of extreme economic volatility. Whereas 2021 was marked by relentless consumer optimism and rapid growth of the crypto industry, 2022 will likely be remembered for the sudden and unexpected breakdown in numerous key components of the crypto ecosystem. The implosion of major centralized entities, including FTX & Alameda Research, Celsius, BlockFi, 3AC, and many more, exposed the web of risks that underlies many of the companies providing financial services in crypto today. DeFi protocols also suffered a host of failures arising from critical design or implementation flaws, with the collapse of Terra and UST, as well as numerous large exploits of cross-chain bridges, lending protocols, yield aggregators, and others, highlighting the growing economic interactions between L1 ecosystems. 

The shocking string of calamities that plagued crypto in 2022 forced the industry to confront the existing limitations of L1 networks that underpin the wide range of on-chain financial activities today. These limitations are best understood within the context of the various functions that L1s serve, which grew increasingly complex with the adoption of smart contracts and DeFi applications in recent years. At a basic level, blockchains allow digital money to be securely transferred and stored in an immutable and permissionless manner.