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

Source: DeFi Llama

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:

1. Platform economies trend towards multiple players

2. Ever increasing demand will drive a constant stream of new entrants

3. 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

Source: eMarketer.com

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.

Source: Messari

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.

Source: Wallethub

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:

1. New blockchains emerge to satisfy the demand

2. Old blockchains are forced to upgrade to compete

3. This generates more use functionality and uses cases

4. Which in turn generates more applications

5. Generating more users

6. Who generate even more demand

7. …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.