Evaluating Layer 1 and Layer 2 Networks

9.1 Which chain wins?

Social media was full of arguments about which blockchain would "win." Each side posted transactions per second, number of users, and how cheap their fees were.

"They all claim to be the best," said Mint. "How do I compare blockchains properly?"

"Start with what you learned in Module 3," said Hash. "Every network makes trade-offs. Then add the fundamental questions from this module: who's using it, what are they paying, where does that money go, and what does the token actually do?"

9.2 What a Layer 1 token does

A Layer 1 token usually has several roles at once:

1. Gas: users need it to pay transaction fees (Module 3, Chapter 2).
2. Security: it's staked by validators, or rewarded to miners, to secure the network.
3. Money and collateral: it's held as a store of value and used across DeFi.

Because of these roles, Layer 1 tokens can carry a monetary premium: value from being widely held and used as money within their ecosystem, beyond what fees alone would justify. ETH and BTC, for example, are widely used as collateral throughout crypto.

This makes Layer 1 valuation harder than valuing a single application. You're valuing an economy, not a business.

9.3 Key metrics for Layer 1s

Metric	What it tells you	Watch out for
Transaction fees	How much users pay for block space	Fees can be low because the network is cheap by design, or because nobody uses it
Real economic value (REV)	Fees plus value captured by validators through ordering, such as MEV (Module 3, Chapter 11)	Definitions vary by source
Security budget	Total rewards paid to validators or miners: issuance plus fees	High issuance-funded security dilutes holders
Staking ratio	Share of supply staked	High staking reduces liquid supply but concentrates risk in staking providers
Stablecoins on the network	Dollar value of stablecoins held on the chain	A strong sign of real economic activity
DeFi activity	DEX volume, lending, and fees from applications	Incentive-driven activity can be temporary
Active addresses and transactions	Usage breadth	Easily inflated by bots on cheap chains
Developer activity	Number of active developers building on the network	Public code activity is a rough proxy (Chapter 12)
Decentralisation	Validators, client diversity, governance (Module 3, Chapter 13)	Often overstated in marketing
Uptime	History of outages	Outages damage trust and usability

9.4 The security budget question

Every blockchain must pay for its security. On proof of stake networks, validators are paid through new issuance and fees. On Bitcoin, miners are paid through the block reward and fees.

As issuance falls over time, fees must eventually carry more of the security budget. This is a long-term debate for Bitcoin, as halvings reduce block rewards (Module 1, Chapter 2): will fees be high enough to keep mining secure in the future? Some argue fees and price growth will cover it. Others are concerned.

For any network, ask: is security paid for by real usage, or by printing new tokens? If mostly the latter, holders are funding security through dilution.

Chapter 9 · Who pays for security

Two horizontal bars, each showing a network's security budget as new issuance plus fees, in illustrative shares. Network A's budget is mostly new issuance, marked as a warning because holders pay for it through dilution, with a small slice of fees. Network B's budget is mostly fees paid by people using the chain, with a smaller slice of issuance. A note says that as issuance falls over time, for Bitcoin at every halving, fees have to carry more of the budget.

9.5 Cheap fees: a feature and a challenge

High-throughput chains often have very low fees, which is great for users. But it creates a puzzle for token value: if each transaction pays a fraction of a cent, the network needs an enormous number of valuable transactions to generate meaningful revenue.

	Network X	Network Y
Daily transactions	1,000,000	50,000,000
Average fee	$1.00	$0.002
Daily fees	$1,000,000	$100,000

Network Y processes 50 times as many transactions but earns a tenth of the fees. That doesn't make Network Y worse. Cheap fees can attract more users and applications, and value can come from monetary premium, MEV, and ecosystem growth. But it means "most transactions" doesn't automatically translate into "most valuable token."

9.6 Evaluating Layer 2 networks

Layer 2 networks (Module 3, Chapter 8) have a different business model. Users pay fees to the Layer 2. The Layer 2 pays Ethereum to post its data. The difference is its margin.

Example Layer 2 (annual, illustrative)
Fees collected from users	$40 million
Costs paid to Ethereum for data	$4 million
Gross margin	$36 million

After Ethereum's 2024 blob upgrade reduced data costs, many Layer 2s saw their margins increase substantially. Later upgrades, Pectra in 2025 and Fusaka with PeerDAS at the end of 2025, raised Ethereum's data capacity further (Module 3, Chapter 8), keeping Layer 2 data costs low even as usage grew.

But here's the key question again: who receives that margin? For many Layer 2s, sequencer revenue goes to the operating company or foundation, not to token holders. Many Layer 2 tokens have been governance tokens without direct value accrual (Chapter 6). Some are exploring ways to connect the token to the network, such as using it for sequencer staking or decentralised sequencing, or directing revenue to holders.

Question for a Layer 2 token	Why it matters
Who receives sequencer revenue?	Determines whether the token captures the network's margin
Is the token needed for gas?	Most Layer 2s on Ethereum use ETH for gas, not their own token
Does the token secure anything?	Staking for sequencers or provers could create demand
What does governance control?	Upgrades, treasury, and revenue direction
How much supply is still to unlock?	Many Layer 2 tokens launched with low float (Chapter 5)

"So a Layer 2 can be a great business and its token can still have weak value accrual," said Mint.

"Exactly the same lesson as the DEX in Chapter 6," said Hash. "Always check the bridge between the product and the token."

9.7 Ecosystem strength

Beyond metrics, consider qualitative factors:

Applications. Are there useful applications people actually use, or mostly copies of apps elsewhere?

Stablecoins and liquidity. Deep liquidity attracts traders and applications, creating a self-reinforcing cycle.

Developer tools and compatibility. EVM compatibility makes it easy to bring existing apps, but also makes it easy for apps and users to leave (Chapter 13).

Distribution. Some networks benefit from being connected to large exchanges, wallets, or companies that bring users.

9.8 Try it yourself

Compare two Layer 1 networks using the metrics in section 9.3. Find their annual fees, stablecoin supply on the network, staking ratio, and annual issuance. Which network pays for its security mainly through fees, and which mainly through new issuance?

Then choose a Layer 2 and find its fees collected and costs paid to Ethereum over the last month. Calculate its margin, and find out who receives it.

Key takeaways from this chapter

1. Layer 1 tokens serve as gas, security, and money, and can carry a monetary premium beyond fee value.
2. Key metrics include fees, real economic value, security budget, staking ratio, stablecoins, DeFi activity, developers, decentralisation, and uptime.
3. Ask whether security is paid for by real usage or by issuance that dilutes holders.
4. Cheap fees benefit users but require enormous valuable activity to generate meaningful revenue.
5. Layer 2s earn a margin between user fees and Ethereum data costs.
6. Many Layer 2 tokens don't receive that margin. Check value accrual carefully.
7. Ecosystem strength, liquidity, developer tools, and distribution matter alongside metrics.