While crypto narratives are a popular approach to crypto investing, there can be periods where there is no clear prevailing narrative. When this is the case, it may make sense to invest in the areas where the most useful underlying infrastructure technology is being built. Crypto infrastructure can be less dependent on specific narratives, and strong blockchain technology with robust network effects can continue to thrive across market cycles.
With this in mind, this week we turned our attention to Layer 1 (L1) and Layer 2 (L2) infrastructure, two crucial elements that drive the blockchain ecosystem forward.
Layer 1 infrastructure refers to the base protocol of a blockchain network. It is where the core consensus mechanism, security and decentralisation is maintained and is where transactions are processed and stored. Bitcoin, Ethereum, Solana and Cardano are all examples of Layer 1 infrastructure.
Layer 2 infrastructure refers to solutions that augment Layer 1 blockchains to make them more scalable and efficient. If a Layer 1 blockchain is a highway, Layer 2 solutions are like express lanes that allow transactions on the Layer 1 blockchain to process more efficiently. Base, Optimism and Arbitrum are all examples of Layer 2 solutions. Many Web3 projects now build directly on Layer 2 solutions, and Coinbase’s Base is a great example of this.
Using the Themelia builder and filtering by ‘Base Layer’ i.e. the blockchain infrastructure a token is built on, we charted equal weight indexes for tokens built on the four most prominent chains: Ethereum (L1), Cardano (L1), Ethereum (L1) and Base (L2). We excluded stablecoins from our analysis.
The results were surprising. Cardano, a top ten blockchain by market cap, and often lambasted in cryptocurrency circles for being slow to deliver on its promises, criticised for its limited adoption in comparison to other smart contract platforms, and perceived as being overly focused on academic rigour rather than rapid innovation, out-performed other top ten Layer 1 blockchains Ethereum and Solana over the past 90 days, as several index holdings rallied strongly.
Why did the Cardano base layer index outperform its peers? Fewer index holdings. Compared to Ethereum and Solana base layer indexes, which have 739 and 152 tokens respectively, the Cardano base layer index has only 5 holdings. This meant that out-performing tokens on Cardano - Minswap, Iagon and Snek - were able to contribute more to the overall return, with fewer assets able to dilute the performance.
While this chart might make some investors warm to Cardano, only 5 tokens in the index does raise questions. Firstly, Cardano predates Solana and Base, yet both of these newer infrastructure layers have attracted far more Web3 development activity in a much shorter period of time. Secondly, the spectrum of application types for the projects in the Cardano index is narrow - there is only one Memecoin (Snek) and no AI Agents. While investing in technology is not a narrative play, having exposure to a broad cross-section of token use cases can still be valuable over the longer term.
That said, there remains an argument for quality over quantity. The Cardano network and founder Charles Hoskinson have consistently espoused an anti-crypto-hype philosophy, focusing on long-term, sustainable development rather than short-term ‘to-the-moon’ action. For comparison purposes, of the 152 tokens in the Solana base layer index, 98 of them are Memecoins, often considered the ultimate crypto-hype narrative.
So, could these charts be a leading indicator that suggests a Cardano tortoise might just win the race? We’ll leave that to you to decide.
