CZ of Binance Stirs Discussion: Should AI Projects Choose Layer 1 or Layer 2 Blockchains?

Binance’s founder and former CEO, Changpeng Zhao (CZ), has ignited a captivating debate within the cryptocurrency community. He has posed a significant question: should blockchain projects focused on artificial intelligence (AI) be developed on Layer 1 (L1) or Layer 2 (L2) networks?

This discussion is timely, reflecting ongoing trends in the industry where the intersection of AI and blockchain technology is becoming increasingly relevant for both developers and investors.

Where Should AI Homes Be? CZ Initiates the L1 vs. L2 Debate

In a recent tweet on X (formerly Twitter), CZ mentioned that the primary goal of such projects isn't necessarily to create a more advanced blockchain, but rather to harness blockchain technology to drive AI's economic landscape.

He acknowledged that while L1 networks offer enhanced sovereignty and decentralization, they require substantial effort in managing nodes and validators. On the other hand, L2 networks provide a more user-friendly option by tapping into existing ecosystems, such as Ethereum, which includes decentralized exchanges (DEXs) and perpetual contracts, thereby minimizing value loss to the base layer.

“L1 vs L2…Does it matter if a new AI project is an L1 or an L2?… Is L1 cooler than L2 or the reverse? Old topic, but wondering if sentiment has changed or not,” CZ asked, encouraging public discourse.

Crypto analyst Hitesh Malviya contends that the L1 blockchain stands as the more advantageous option. He champions this model for projects aiming to devise their own consensus mechanisms, boost performance, and lower validator expenses.

Nonetheless, he cautions that many L1 projects, despite successful fundraising and user acquisition attempts, often encounter user retention declines of 70-90% following their token generation events (TGE).

“…even if you retain users, you would only see one category or niche capturing the maximum traction onchain. So if the destination is already known—retention drop, higher user acquisition costs, and niche-specific demand capture—then why not build an app chain using an L2 stack,” Hitesh suggested.

Considering these hurdles, he proposes that establishing an AI-oriented blockchain as an L2 app chain presents a more viable strategy, enabling quicker development, marketing, and scalability.

Meanwhile, Walter from the BNB Chain Business Development team expresses support for L2, emphasizing its ease of access to existing tools and infrastructure. His comments also hint at speculation around CZ’s potential attendance at an upcoming Crypto Summit at the White House.

The Layer 1, Layer 2, and Layer 3 Discussion: AI & Blockchain

Investor and blockchain advisor Anndy Lian contributes another perspective to this discourse. He suggests that AI is optimally deployed at Layer 3 (L3). He elaborates that while L1 theoretically supports AI deployment, practical challenges related to security and resource management render it unfeasible.

“AI can be implemented on blockchain Layers 1, 2, or 3… In practice, Layer 3 is where AI is most effectively and frequently utilized, leveraging the blockchain’s strengths while accommodating AI’s computational needs,” Lian explained.

On L2, the blockchain advisor remarked that while AI can enhance scalability, it frequently finds its best use within L3, which fosters a wider array of AI-centric applications while capitalizing on the advantages of blockchain.

As CZ deliberates over AI's position within the blockchain paradigm, industry interest in AI-integrated L2 networks continues to intensify. Notably, in June 2024, Binance Labs (rebranded as YZI Labs) made an investment in Zircuit, an AI-enabled L2 network utilizing zero-knowledge rollups to enhance security.

This investment signifies Binance’s strategic focus on the integration of AI and blockchain, which could explain CZ’s recent inquiry.

Vitalik Buterin, co-founder of Ethereum, has also been actively weighing in on discussions surrounding L1 and L2 scalability solutions. Last month, he outlined a roadmap for scaling Ethereum's L1 and L2 protocols by 2025. However, he has also cautioned that certain L2 networks may falter due to unsound economic models and poor execution.

These insights further galvanize the ongoing debate regarding whether AI initiatives ought to develop their independent chains or align with pre-existing ecosystems.

In light of CZ's timely query, one might speculate he is assessing the market's sentiment toward a prospective AI blockchain project. With Binance’s investment in AI-driven L2 solutions and the mounting interest in modular blockchain architectures, he could be laying the groundwork for imminent ventures.

The balance between sovereignty, scalability, and accessibility is poised to dictate the future of AI and blockchain integration, making it crucial for developers and investors to evaluate their decisions judiciously.