Analyze public chain trends from the value propositions of Bitcoin and Ethereum: Will we see a multi-chain world?

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Compared to Ethereum and Bitcoin, other blockchains may have a large amount of underutilized capacity.

Original title: “Will we see a multi-chain world?” 》
Written by: Aftab Hossain
Editor: South Wind

It is undeniable that the two most profitable public blockchain networks are Ethereum and Bitcoin , and frankly speaking, there is even a long way to go between them.

Ethereum is the world’s second most valuable blockchain, and it is also the leading public chain in the field of programmable and Dapps (decentralized applications). It has proven the fit of the product and the market for innovative applications such as DeFi (Decentralized Finance) and NFT (Non-Homogeneous Tokens). Now, most of the new use cases in the cryptocurrency field first appear on Ethereum, and then some activities are selectively spread from Ethereum to other chains.

Bitcoin is the world’s most valuable blockchain. As the world’s first blockchain network, it has existed for the longest time, and as a “digital gold” demonstrated its product market fit.

Both of these two major blockchain networks provide value to their users, so that users are willing to pay considerable fees to use them . The data in the following table is based on the data provided by cryptofees.info on April 4, 2021. The table summarizes the transaction fees and 7-day average transaction fees of each blockchain network on the day:

Analyze public chain trends from the value propositions of Bitcoin and Ethereum: Will we see a multi-chain world?Data source: cryptofees.info

From the above table, we can see several interesting points:

Users are willing to pay huge fees to use Ethereum (more than 5 times the Bitcoin network transaction fee and more than 1,000 times the Binance Chain network transaction fee);

Most other public chain networks only generate minimal transaction fees .

You may ask: “Uh, isn’t charging a bad thing? Shouldn’t everyone be able to use these blockchains for free or cheap?”

But in fact, the block space (that is, the place where transaction data is packaged and submitted to the blockchain) is limited on any blockchain network . No blockchain can expand indefinitely or provide free transactions without incurring decentralization and greatly reducing security .

Transaction fees are necessary because it can reasonably measure the use of public blockchains. If there are no transaction fees, these blockchain networks that provide economic value (such as Ethereum and Bitcoin) will be overwhelmed and overwhelmed by transactions. In fact, we can use the transaction fees generated by public chain networks as an indicator to evaluate the lowest economic value these blockchain networks create for users. If users cannot generate at least this much value from online transactions, they will not pay for the transaction.

In essence, this does not mean that other blockchains do not provide value to their users, but it does mean that, compared to Ethereum and Bitcoin, other blockchains may have a large amount of underutilized capacity . But if the fees of Ethereum and Bitcoin are so high, why don’t other blockchains absorb more users/transaction activities?

To evaluate this, we must consider the value propositions provided by other blockchains and how their value propositions compare to Ethereum and Bitcoin.

The value proposition of the public chain

I will define ” value proposition ” as the unique value created by a certain blockchain network for users, which cannot be found in other blockchain networks. Both Ethereum and Bitcoin have relatively clear value propositions.

The value propositions of Ethereum and ETH are:

  • Use ETH and other Ethereum-based assets for maximum censorship-resistant transactions ;

  • Use ETH and other Ethereum-based assets for clear, smart contract-based interactions ; in this powerful and composable ecosystem, billions of dollars worth of assets are traded every day;

  • Use ETH as a ” programmable store of value ” asset in applications such as DeFi;

  • Use ETH as the ” accounting unit ” for NFTs and other digital products or services;

  • Use ETH as a ” medium of exchange ” (in the form of Gas) to pay for the Ethereum block space and other digital products and services in the Ethereum economy;

The value proposition of Bitcoin and BTC is:

  • Use BTC for maximum anti-censorship transactions ;

  • Use BTC as a ” store of value ” macroeconomic asset;

  • Use BTC as a ” medium of exchange ” to pay for Bitcoin block space.

The economic value provided by Ethereum and Bitcoin is enormous . So, what value can other blockchain networks-especially such as Binance Chain, Polkadot, Cardano, etc.-provide? Frankly speaking, the value propositions of these blockchains are very confusing, and they cannot be effectively distinguished from Ethereum, and there is no effective difference between them.

1) Many blockchain networks claim to have ” increased transaction throughput ” as a major selling point, but most of these blockchains have made significant compromises in terms of decentralization and security . In order to achieve an increase in its transaction throughput. Developers are well aware of these trade-offs, so many of the most talented App developers focus on Ethereum.

In addition, if all other blockchain networks claim to provide the same level of additional throughput improvement, then this value has actually been commoditized, that is, it is no longer unique to a certain chain . This makes it impossible for any single blockchain to attract a large number of economic activities to form an economic network effect and a composable ecosystem.

2) Some other blockchain networks claim that they will serve as a central hub , creating a powerful ecosystem composed of sub-chains and Apps (remarks, such as the Hub-Zone model adopted by Cosmos, and Polkadot’s Relay Chain/Parachain Mode, see 👉”Five Differences Between Cosmos and Polkadot” for details).

Personally, I always think that the idea of ​​a certain blockchain simply claiming to be a “central chain” or “the Internet composed of many blockchains (ie sub-chains)” is naive. This is because when the “central chain” relies on gathering organic economic activities, they cannot claim to be the central chain in advance; they must naturally accumulate usage and value over time. Trying to design this value in advance is unlikely to succeed.

The irony is that we actually see that Ethereum is becoming a natural “central chain.” Almost all other blockchains are keen to build their own bridges to achieve cross-chain with Ethereum.

3) There are also some blockchain networks that indicate that their on- chain governance is better than Ethereum’s consensus-driven (off-chain governance) development model. The problem is that the market has not yet shown that their governance is desirable in public blockchain networks . Many criticisms of these on-chain governance models point out that they will essentially lead to future oligarchy governance behavior or censorship. Time will tell everything, but this value proposition may not be sufficiently different from a centralized or government-managed system.

But for other blockchains, the two best potential value propositions I can determine may be: 1) communities around other chains, 2) development of some specific niche market use cases (and eventually accept it as an Ethereum side chain).

In terms of the communities in which they emerged , I do think that some like-minded people will come together to develop and implement a common vision. They may want to develop a certain chain in their own way and according to their own rules, incorporating their own philosophy and beliefs into it. I think we may see this kind of market segmentation with some economic activity, which will trigger the rise of other blockchains; this will either last for a period of time or be indefinite. Their entire economic ecosystem may be built on their network, but loosely connected to the Ethereum network.

It is also possible that some chains will be optimized according to the selected niche market use cases , basically becoming a “self-heavy” blockchain, but actually becoming an Ethereum side chain. For example, today we may see it on the block chain Flow: Flow is trying to build a focus on NFTs block chain, although Flow through a number of strategic partnerships and high transaction throughput (because it greatly reduces go Centralization) has achieved early success, but except for some carefully planned NFTs or native financial applications, Flow is also struggling in other aspects, without a dynamic economy. This may change over time, or they may focus more on becoming a bridge sidechain for Ethereum.

My view on the multi-chain world

For other chains, the biggest challenge currently facing is Ethereum’s Layer 2 technology (L2). This article does not discuss L2 technology in depth, but various L2 technologies are currently being developed to extend Ethereum, the most promising of which are Optimistic Rollups and ZK-Rollups . If successful, they can expand Ethereum by several orders of magnitude, and these L2 networks rely on Ethereum (ie Layer 1) to provide security. These Rollups chains can also interact with Ethereum-based assets locally, and directly inherit the trust minimization operation from Ethereum (L1).

Some of these Rollup solutions are already in operation, but there are barriers to adoption (such as extensive EVM compatibility, communication between different Rollup chains, etc.). In the next few months, many obstacles are expected to be overcome .

So for me:

The clear long-term value proposition of Ethereum L1 is to promote decentralized economic activities that require the greatest degree of censorship resistance, composability in the Ethereum L1 ecosystem, and local access to ETH and other local assets;

The value proposition of Ethereum L2 is to use Ethereum local assets to achieve higher throughput activities, with a trust assumption similar to Ethereum L1 (no trust required), but initially reduces composability;

The value proposition of a centralized side chain is that it is managed by financial entities and other institutions. These entities/institutions run their own version of “internal” Apps compatible with EVM, but retain full or joint control of the side chain ecosystem.

In this world, economic settlement and security have become the main value proposition of Ethereum L1 , and L2 and centralized side chains are used as the computing layer to use these assets . L2s can interact with those L1-based assets without additional trust assumptions; while side chains may require a large number of additional trust assumptions (for certain situations/use cases, this is acceptable).

In my opinion, the real question is, can other L1 chains provide a real value proposition that people are willing to pay for? My current answer is that I am not sure, but my answer tends to be negative. In terms of the current state of other blockchains, many chains are in a disturbing middle ground between “decentralized Ethereum” and “centralized sidechains .”

Over time, as these blockchains can prove that they have a fair, censorship-resistant operating method, and can also develop dynamic economic activities, then they may become more attractive. But so far, based on actual network transaction fees and usage, the market believes that these blockchains do not have a unique value proposition . For example, it is obvious that after Ethereum, the most used chain is Binance Chain (Note: The author here should be Binance Smart Chain BSC), which is actually a centralized EVM side effectively controlled by a single institution Chain, rather than some other competitive and more decentralized L1 networks. However, if we reach the limit of Ethereum L1 transaction fees (that is, the transaction fee is too high), and Ethereum L2 cannot adequately address the additional (user) needs, then this situation may change.

In general, I think that over time, Ethereum L2 will solve most (if not all) of the needs , and the future may be like this tweet I posted a year ago (see the picture below). Of course, I will leave room for mistakes. I will pay close attention to the development of the Ethereum ecosystem in the next few years, based on actual use and fundamentals, rather than market hype (there are no lack of other alternative L1 protocols in the market).

Analyze public chain trends from the value propositions of Bitcoin and Ethereum: Will we see a multi-chain world?

Invest in a potential multi-chain world

My favorite investment style is to focus on the long-term . I would rather hold a few investments for several years, rather than repeatedly buying and selling to catch the latest wave of hype. For this reason, I avoided long-term investments in L1 protocols that self-proclaimed as alternatives to Ethereum. Some current blockchains claim to be a “better Ethereum”, which is not a convincing value proposition, especially considering the difficulty of establishing (similar to Ethereum) economic network effects, although they may Provide short-term investment returns based on narrative and speculative hype.

In addition, it is unlikely that other current L1 protocols will be able to develop their native tokens into a form of currency, so as to obtain a premium demand for a currency on top of basic utility and speculative demand like BTC and ETH. Over time, I actually expect that the premium demand for currency will be where ETH obtains most of its financial value —that is, the application of ETH as (Eth2.0) staking collateral and as a programmable store of value in DeFi More and more widespread.

In order to get in touch with the potential multi-chain world, I instead focus more on the App layer. Some DeFi applications are exploring opportunities for deployment on other chains . Most of these apps seek to use Ethereum as a “liquidity center” to push economic vitality to other chains, or to pull economic vitality from other chains to Ethereum to expand their own operations and user/transaction fee base. So far, there is no obvious economic demand on most other chains, but if a real ecosystem emerges on these chains, this situation may change.

My theory is: The best Apps will naturally expand the scope of operations to other chains in a profitable way and prove the effectiveness of this approach. If they (ie these Apps) succeed, they will increase their economic value and charging potential. I don’t need to guess which competitive L1 might succeed, they (ie these Apps) will help me figure it out.

That being said, I don’t like Apps adopting a “shotgun approach” to achieve this growth. They should think carefully, look for opportunities, and add revenue to the existing App stack and acquire new users based on actual usage patterns and economic activities. In my opinion, simply “throwing the application on the wall and seeing where it will stick” will not produce long-term results, and may cause distracting technical debt, management costs, and risks.

Nevertheless, by allowing myself to diversify investment in these DeFi application assets, I feel that if we find ourselves in a multi-chain world, I will have enough exposure. Even if it is not, I still hold tokens in some excellent Apps, which are likely to continue to run very well on Ethereum.

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