Is A World With Multiple Blockchains Really Viable?

Although there are thousands of cryptocurrencies, the two most popular public blockchains today are Ethereum and Bitcoin. Few people know of other cryptocurrencies and, in fact, many do not even know Ethereum.

Bitcoin is the most valuable blockchain in the world by market capitalization. It is the one that has existed for the longest time as the world’s first blockchain, and has demonstrated its product-market suitability as “digital gold”.

Ethereum is the second most valuable blockchain in the world by market capitalization, and it is the leading public blockchain for decentralized and programmable applications by a wide margin.

It has proven its suitability to the market of products for new use cases, such as “Decentralized Finance” (DeFi) and “Non Fungible Tokens” (NFT). Most of the new cryptocurrency use cases now emerge first on Ethereum, with some activity selectively spreading to other blockchains from there.

Both blockchains provide value to their users, to the point where users are willing to pay significant fees to use them. Altogether, Ethereum users pay an average of $25 million per day, while Bitcoin users pay about $5 million per day.

But aren’t commissions a bad thing? Shouldn’t everyone be able to use these chains cheaply or for free? The reality is that block space (that is, where transaction data is sent for inclusion in the blockchain) is a limited commodity on any blockchain. No blockchain can scale to free, infinite transactions without introducing critical trade-offs in the form of drastically reduced decentralization and security.

The fees are necessary because they naturally measure the use of public blockchains. Without them, the blockchains that provide economic value (such as Ethereum and Bitcoin) would be overwhelmed by transactions. In fact, we can consider the fees generated by public blockchains as an approximation to estimate the economic value of the land they create for their users. If users weren’t generating at least that value when transacting on the network, they wouldn’t pay the fees to do so.

Intrinsically, this does not mean that other blockchains do not provide value to their users, but it does mean that they are likely to have substantially underutilized capacity relative to Ethereum and Bitcoin. But if fees are so high on Ethereum and Bitcoin, why aren’t other chains absorbing more activity? To assess this, we must consider the value proposition that other blockchains offer, and how they compare to Ethereum and Bitcoin.

Value of public blockchains

We can define the “value proposition” as the unique value that a blockchain creates for its users and that cannot be found elsewhere. Both Ethereum and Bitcoin have relatively clear value propositions.

The value proposition for Ethereum and ETH are:

• Maximum censorship-resistant transactions with ETH and Ethereum-based assets.
• Smart contract-based interactions with ETH and other Ethereum-based assets; including its use in a robust and composable ecosystem, within an economy in which billions of dollars of value are traded every day.
• Use of ETH as a “programmable store of value” asset in DeFi, etc.
• Use of ETH as a “unit of account” for NFT and other digital goods and services.
• Use of ETH as a “medium of exchange” to pay for Ethereum’s block space (via “gas”), as well as other digital goods and services within the Ethereum economy.

For Bitcoin, the value proposition is:

• Censorship-resistant BTC transactions
• Use of BTC as a macroeconomic asset “store of value”
• Using BTC as a “medium of exchange” to pay for Bitcoin block space

The economic value that these chains provide is substantial. So what value do other blockchains provide, notably Binance Chain, Polkadot, Cardano, and others? To be honest, their value propositions are confusing and do not differ effectively from Ethereum, or from each other.

Many of them claim that their main selling point is the increase in transaction capacity; only that most of these chains make substantial concessions to decentralization and security to achieve those gains. Developers understand this commitment, and many of the most talented app developers focus primarily on Ethereum as a result.

Also, if everyone claims to offer the same degree of additional capacity, that value becomes a commodity and is no longer unique. This makes it less likely that a single chain can attract a large degree of economic activity to kick off an economic network effect and a composable ecosystem.

Others say they will enable a strong ecosystem of networks and children’s apps as a hub. Personally, I’ve always thought that the idea that a chain can assert itself as a “core chain” or “Internet of blockchains” is naive. This is because when hubs are based on agglomerations of organic economic activity, they cannot be declared in advance; they must naturally accumulate use and value over time. Trying to design this value in advance is unlikely to work. Ironically, we see that Ethereum is becoming a natural hub, and almost all other blockchains are willing to build their own bridges to it.

Others cite that its on-chain governance is better than Ethereum’s consensus-based development model. The problem is that the market has yet to say that this is desirable on public blockchains. Many criticize these models as inherently leading to oligarchic behavior or censorship in the future. Time will tell, but this value proposition may not differ enough from centralized or government-run systems.

But probably the two best potential value propositions I can identify for other blockchains come down to:

• The emergence of social communities around other chains
• Developing specific niche use cases (ultimately accepting Ethereum’s sidechain status)

As for the emergence of social communities, I think there is something to be said for like-minded people coming together to develop and execute a common vision. They may want to do it their own way, with their own rules, adapted to their own philosophy and beliefs. I think we could see this type of segmentation with some activity, which would lead to an increase in other chains; either for a time or indefinitely. Entire economic ecosystems may be established within those networks, only loosely connected to Ethereum.

It is also possible that some chains are optimized for certain niches of use, and basically agree to be a single game blockchain that becomes a de facto sidechain of Ethereum. Perhaps we will see this today with Blockchain Flow, for example, which is trying to establish a blockchain-focused on NFTs. While Flow has enjoyed early success thanks to some strategic partnerships and high transaction capacity (due to drastically reduced decentralization), it struggles in other respects without a dynamic economy beyond curated NFTs or native financial applications. This may change over time, or it may focus more on becoming a bridging sidechain for Ethereum.

My judgment

The highest bidder in the room for other chains at the moment is Ethereum Layer 2 (L2) technology. I’m not going to go into depth here, but there are a variety of technologies being developed today that could scale Ethereum natively through additional layers.

The most promising technologies are Optimistic Rollups and ZK-Rollups. If successful, they could scale Ethereum by orders of magnitude, all relying on Ethereum for their security. These rollups could also interact natively with Ethereum-based assets and inherit the trust operation directly from Ethereum, that is, Layer 1 (L1). Some of these Rollups solutions are already up and running, but there have been barriers to their adoption (such as wide EVM support, swap bridges, etc.). Many of these barriers are expected to be overcome in the coming months.

So there is a clear long-term value proposition for:

• Ethereum L1 — for decentralized economic activity requiring maximum censorship resistance and native access to ETH and other native assets
• Ethereum L2: for higher performance activity with native Ethereum assets, with trust assumptions similar to Ethereum L1
• Centralized sidechains: managed by financial institutions and other institutions that run their own “internal” versions of EVM-compatible applications, but maintain full or federated control over their ecosystems

In this world, economic liquidity and security become Ethereum L1’s main value proposition, and centralized and L2 sidechains are used as computational layers with those assets. L2s can interact with those L1-based assets without additional trust assumptions, while sidechains may require significant additional trust assumptions (which might be acceptable for some situations/use cases).

The real question for me is whether other L1 blockchains will provide a real value proposition that people are willing to pay for in this world. My answer right now is that I’m not sure, but I lean towards no. In their current state, many occupy an awkward middle ground between decentralized Ethereum and centralized sidechains. Over time, as these networks demonstrate that they operate fairly and resistant to censorship, and perhaps develop dynamic economies, they may become more attractive. But so far, based on actual paid and profitable usage, the market is saying there is no one-size-fits-all value proposition for these chains. It is telling that the most widely used chain after Ethereum is Binance Chain, a centralized EVM sidechain effectively controlled by an institution, versus one of the many, more decentralized, L1 competitors. But that could change if we hit a breaking point with Ethereum L1 fees and L2 cannot sufficiently address the additional demand.

Overall though, I suspect that Ethereum L2 will address most, if not all, needs over time, and that the future may look like this Tweet I made a year ago (below). I certainly leave room for error and will be closely monitoring how the ecosystem develops in the years to come, based on actual use and fundamentals, not the marketing hype (of which there is no shortage of alternative L1s).

Being a ‘better Ethereum’ is not a compelling value proposition at the moment, especially considering the difficulty of establishing an inexpensive network effect, although they can offer the potential for short-term ROI based on the narrative. and the speculative hype.

So… I think it doesn’t matter the capital market, it’s about the projects, the technology, and the solutions are they providing to the world what matters the most to answer if they are viable. And, I think they are.

Source: https://medium.com/geekculture/is-a-world-with-multiple-blockchains-really-viable-dc5e31428364?source=rss——-8—————–cryptocurrency