What’s Next? The Multi-Chain World
Note: Data in this section last updated August 26th, 2022
Many argue that a “multi-chain” world is all but inevitable at this point. Due to its high gas fees, Ethereum’s market share has steadily decreased over the last 18 months.
Ethereum’s Market Share Has Declined From > 95% to ~ 60% in the Last 18 Months
While “maxis” will claim that this is temporary – that ETH 2.0 is the panacea that will bring everyone back and return the project to 90%+ market share – this is highly unlikely for three reasons:
Platform economies trend towards multiple players
Ever increasing demand will drive a constant stream of new entrants
The need for specialization will carve out an opportunity for niche players
Platform Economies Trend Towards Multiple Players
The “winner-take-all” phenomenon is one of tech’s greatest myths. It’s a forgivable mistake – after all, if you define Google and Facebook’s markets as search and social media, then they are definitely monopolies. But once you realize those are simply distribution channels, and that their real market is digital ad spend, it’s clear that’s not the case.
No Single Tech Company has a Monopoly on the Customer
Indeed, virtually every platform economy has been dominated by two or more incumbents.
Some technology markets, such as PC and mobile operating systems, browsers, PC chipsets and graphics cards, evolved into duopolies.
Other markets saw the emergence of three or four dominant players. For example, the cloud computing network is dominated by Amazon AWS, Microsoft Azure and Google, and the credit card processing landscape is dominated by Visa, Mastercard, American Express and Discover.
While we can debate whether there will be two, four or ten major players in the smart contract market, one thing all but certain – platform economies have historically not been “winner take all”.
Ever increasing demand will drive a constant stream of new entrants
Chris Dixon of A16Z argues that the demand for every important computing resource has always outpaced its supply and that this generates a mutually reinforcing feedback loop.
In essence, as demand increases:
New blockchains emerge to satisfy the demand
Old blockchains are forced to upgrade to compete
This generates more use functionality and uses cases
Which in turn generates more applications
Generating more users
Who generate even more demand
…and start the loop again
We’ve seen this dynamic play out across multiple industries including CPUS, GPUs, memory, storage, mobile, gaming, etc… and its all but certain to play out in the crypto space, with a constant introduction of new technologies and blockchains.
The need for specialization will carve out an opportunity for niche players
We’ve discussed the scalability trilemma previously, and to the extent that that isn’t fully resolved, it’s easy to imagine consumers making tradeoffs between decentralization, security and speed. For instance, it’s plausible to imagine a world where financial transactions happen on blockchains that prioritize decentralization and security, while gaming transactions occur on chains that value speed.
Furthermore, even when it comes to performance, there are nuances. In particular, there are two measures of “speed” and efficiency:
Transactions per second (TPS) refers to the volume of transactions that the network can process and is strongly correlated with fees
Finality refers to the time it takes to actually finish a transaction
For some use cases, high TPS and low fees might be ideal, while others might prefer faster finality times.
Finally, as discussed above, different structures (e.g. monochain vs. multichain vs. modular) may have different consequences and tradeoffs themselves. So even if ETH 2.0 eventually offers the best performance, its modular structure may have some composability drawbacks, leaving monochains such as Solana the ideal choice for those that want to maximize interoperability and utilize features such as flash loans.
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