We live in an Ethereum (& Bitcoin) world today
Overwhelmingly, the two public blockchains with the greatest degree of gainful use today are Ethereum and Bitcoin, and frankly it’s not even close.
Ethereum is the world’s second most valuable blockchain by market capitalization, and it is the leading public blockchain for programmable, decentralized applications by a very wide margin. It has demonstrated product-market fit for novel use cases such as Decentralized Finance (DeFi) and Non-Fungible Token art & collectibles (NFTs). Most new use cases in cryptocurrency now emerge first on Ethereum, with some activity selectively propagating to other chains from there.
Bitcoin is the world’s most valuable blockchain by market capitalization. It has existed for the longest period of time as the world’s first blockchain, and has demonstrated product-market fit as a “digital gold.”
Both of these blockchains provide value to their users, to the point where users are willing to pay significant fees to use them. The table below (based on data pulled from cryptofees.info on April 4, 2021) summarizes the daily fees paid by users to use each of these respective blockchains:
From this table, we can observe a a couple of interesting points:
Users are willing to pay an overwhelming amount to use Ethereum (more than 5x the daily fees generated on Bitcoin, and more than 1000x the fees of Binance Chain)
The vast majority of blockchains have very little paid use
You may be asking yourself, “Well, aren’t fees a bad thing? Shouldn’t everyone be able to use these chains for cheap or free?” The reality is that block space (i.e., where transaction data are submitted for inclusion in the blockchain) is a limited commodity on any blockchain. No blockchain can scale to infinite, free transactions without introducing critical tradeoffs in the form of dramatically reduced decentralization and security.
Fees are necessary because they naturally meter use for public blockchains. Without them, blockchains which provide economic value (like Ethereum and Bitcoin) would be overwhelmed with transactions. We can actually consider the fees generated by public blockchains as a proxy to estimate the floor economic value they create for their users. If users were not generating at least that much value from transacting on the network, they would not pay the fees to do so.
Inherently, this does not mean that other blockchains do not provide value to their users, but it does mean that they likely have substantially under-used capacity relative to Ethereum and Bitcoin. But if fees are so high on Ethereum and Bitcoin, why are other chains not absorbing more activity? To evaluate this, we must consider the value proposition other chains provide, and how that compares to Ethereum and Bitcoin.
On the value proposition of public blockchains
I’ll define “value proposition” as the unique value a blockchain creates for its users which cannot be found elsewhere. Both Ethereum and Bitcoin have relatively clear value propositions.
The value proposition for Ethereum and ETH is:
Maximally censorship-resistant transactions with ETH and Ethereum-based assets
Expressive, smart-contract based interactions with ETH and other Ethereum-based assets; including use in a a robust and composable ecosystem, within an economy where billions of dollars of value are transacted each day
Use of ETH as a “programmable store of value” asset in DeFi, etc.
Use of ETH as a “unit of account” for NFTs and other digital goods and services
Use of ETH as a “medium of exchange” to pay for Ethereum block space (via “gas”), as well as other digital goods and services within the Ethereum economy
And for Bitcoin and BTC, the value proposition is:
Maximally censorship-resistant transactions with BTC
Use of BTC as a “store of value” macroeconomic asset
Use of BTC as a “medium of exchange” to pay for Bitcoin block space
The economic value provided by these chains is substantial. So what value do other blockchains provide- in particular the likes of Binance Chain, Polkadot, Cardano, and others? To be blunt, their value propositions are muddled and are not effectively differentiated from Ethereum, nor from one another.
Many claim increased transaction capacity as a primary selling point; only most of these chains make substantial tradeoffs to decentralization and security to achieve those gains. Developers understand this tradeoff, and many of the most talented app developers focus primarily on Ethereum as a result. Further, if all claim to offer the same degree of additional capacity, then that value is effectively commoditized and is no longer unique. This makes it less likely that any single chain can attract a large degree of economic activity to bootstrap an economic network effect and composable ecosystem.
Others claim that they will enable a robust ecosystem of child chains and apps as a hub. Personally, I always thought the idea that a chain could simply assert itself as a “hub chain” or an “internet of blockchains” was naïve. That’s because when hubs rely on agglomerations of organic economic activity, they cannot be declared in advance; they must naturally accrue use and value over time. Attempting to engineer this value in advance is unlikely to work. Ironically, we actually see Ethereum emerging as a natural hub, with nearly every other blockchain keen to build their own bridges into it.
Still others cite their on-chain governance as being better than Ethereum’s consensus-driven development model. The problem is the market has not yet expressed that this is desirable in public blockchains. Many level criticisms of these models as inherently leading to oligarchic behavior or censorship in the future. Time will tell, but it is possible this value proposition is not sufficiently differentiated from centralized or government-administered systems.
But probably the two best potential value propositions I can identify for other blockchains comes down to 1) the emergence of social communities around other chains, and 2) the development of specific niche use cases (ultimately accepting status as an Ethereum side chain).
On the emergence of social communities, I do think there is something to be said about like-minded people coming together to develop and execute on a common vision. They perhaps want to do it their own way, by their own rules, localized for their own philosophy and beliefs. I do believe we could see this sort of segmentation with some activity, leading to a rise of other chains; either for a time, or indefinitely. It’s possible that entire economic ecosystems establish within those networks, only loosely bridged back to Ethereum.
It’s also possible that some chains optimize for selected niche use cases, and basically accept being a single-play blockchain which becomes a de facto sidechain of Ethereum. We perhaps see this today with the Flow Blockchain, for example, which is attempting to establish a blockchain focused on NFTs. While Flow has enjoyed early success from some strategic partnerships and high transaction capacity (due to dramatically reduced decentralization), it struggles in other ways without a dynamic economy beyond curated NFTs or native financial apps. This may change over time, or they may focus more on becoming a bridged sidechain for Ethereum.
My view on a multi-chain world
The biggest elephant in the room for other chains right now is Ethereum Layer 2 technology (L2). I won’t go in-depth here, but there are a variety of technologies being developed today which could scale Ethereum natively via additional layers. The most promising technologies are Optimistic Rollups and ZK-Rollups. If successful, these could scale Ethereum by orders of magnitude, all while relying on Ethereum for their security. These rollups could also natively interact with Ethereum-based assets and inherit trust-minimized operation directly from Ethereum, i.e., Layer 1 (L1). Some of these Rollup solutions are already in operation, but there have been barriers to adoption (like broad EVM-compatibility, exchange bridges, etc.). Over the coming months, it’s expected that many of these barriers will be overcome.
So to me, there is a clear long-term value proposition for:
Ethereum L1, for decentralized economic activity requiring maximum censorship-resistance, composability within the Ethereum L1 ecosystem, and native access to ETH and other native assets
Ethereum L2, for higher throughput activity with Ethereum-native assets, with similar trust assumptions to Ethereum L1, but reduced composability initially
Centralized side chains, administered by financial entities and other institutions who run their own “internal” versions of EVM-compatible apps, but retain full or federated control over their ecosystems
In this world, economic settlement & security become the primary value proposition of Ethereum L1, and L2 and centralized side chains are used as computational layers with those assets. L2s can interact with those L1-based assets without additional trust assumptions, while side chains may require significant additional trust assumptions (which could be acceptable for some situations / use cases).
The real question to me is will other L1 blockchains provide a real value proposition people are willing to pay for in this world? My answer right now is I’m not sure, but I lean towards no. In their current state, many occupy an uncomfortable middle-ground between decentralized Ethereum and centralized side chains. Over time, as these chains prove they have fair, censorship-resistant operation and perhaps develop dynamic economies, they may become more attractive. But so far, based on actual paid & gainful use, the market is saying there is not a unique value proposition for these chains. It is telling that the most utilized chain after Ethereum is Binance Chain, a centralized EVM sidechain effectively controlled by one institution, versus one of the many competing, more decentralized L1s. But that could change if we reach a breaking point with Ethereum L1 fees and L2 cannot sufficiently address additional demand.
In general though, I suspect that Ethereum L2 will address most, if not all, needs over time, and that the future may look something like this Tweet I made a year ago (below). I certainly leave room for being wrong and will keep a close eye on how the ecosystem develops in the coming years, based on real use and fundamentals, not marketing hype (of which there is no shortage for alternative L1s).
Investing for a potentially multi-chain world
My preferred investment style is to focus on the long-term. I’d rather hold a few investments for a period of years, than try to cycle in-and-out, constantly trying to catch the latest wave of hype. For that reason, I’ve avoided long-term investment in Layer 1 protocols presenting themselves as alternatives to Ethereum. Being a “better Ethereum” is not a compelling value proposition at this point, especially when one considers the difficulty of establishing economic network effect, though they may offer potential for short-term investment returns based on narrative & speculative hype.
Further, is very unlikely that other L1s at this point will be able to develop their native tokens into a form of money, thereby earning a monetary premium demand on top of basic utility and speculative demand as BTC and ETH have. Over time, I actually expect monetary premium is where ETH will draw most of its financial value—with growing use as a programmable store of value in DeFi and as staking collateral.
Instead, to gain exposure to a potentially multi-chain world, I look to the app layer where several DeFi apps are exploring opportunities to deploy their apps on other chains. Most of these apps seek to use Ethereum as a sort of “liquidity hub,” pushing-and-pulling that economic energy to-and-from other chains as it is needed as a way to scale their own operations and user/fee bases. So far, there has not been meaningful economic demand on most of these other chains, but that could change if real ecosystems emerge there.
My theory is this: the best apps will naturally diversify in a gainful way to other chains where it proves to be productive. If they are successful, they will grow their own economic value and fee potential, and I do not need to guess which competing L1 may succeed; they will figure it out for me.
That said, I do not prefer it when apps take a shotgun approach to this form of growth. They should be deliberate and look for opportunities to gainfully add to their existing app stack and earn new users based on actual usage patterns and economic activity. Simply “throwing the app against the wall everywhere and seeing where it sticks” won’t be effective for the long-term in my opinion, and is likely to create distracting technical debt, overhead, and risk.
Nonetheless, by having a diversified portfolio in some of those DeFi app assets, I feel that I have sufficient exposure should we find ourselves in a multi-chain world. And if we don’t, I still hold tokens in great apps which will likely continue to do very well on Ethereum alone.