The multi-chain universe is here
It happens slowly and then all at once
Over the past week, the rise of Binance Smart Chain in everyone’s mind has been pretty outstanding. We’ve seen the hate, love and everything in between for what it represents. I’ve been pretty excited to write this article since the tension between L1s and L2s has been something I’ve covered extensively over the past year or so.
Context
Ethereum is becoming expensive to use without a doubt. Prices for some of the basic transactions you might be doing:
Token Approvals - $20
DEX Trades - $100
Borrowing - $200
Opening or expressing a simple position is about a $300 endeavour. For many DeFi natives who have 10x bags, this isn’t really an issue given the size of each trade easily exceeds $10,000. However, for newcomers entering this industry - it doesn’t matter if they have plenty of IRL money, experimenting with $100/action is just too hard to come to terms with. You’re literally burning hundreds of dollars a minute.
It’s funny because the same issues were present in 2017 and what gave credence to the rise of the “Ethereum Killers” narrative. However, I think what many under-estimated (including myself) is that user won’t be waiting for Ethereum 2.0 Phase 1 to come around or for Layer 2s to be kind of ready. The blockchain hype is starting to eat the real world and there will be a gigantic influx of new users over the coming months. Rest assured, they will be price conscious and will choose the path of least resistance.
BSC - The Dark Horse
While Binance Smart Chain is in no way decentralized, Binance’s strategy of making the switch easy to Etheruem as painless as possible was pretty spot on. Kudos needs to be given where due. By having stablecoins, money markets and a DEX (with yield farming), they managed to bootstrap the Most Minimal Viable DeFi ecosystem.
This, coupled with a large influx of users has allowed Binance to carve itself as the “kiddie pool” of DeFi which is still highly impressive since they have real users entering their platform. Now, I don’t think (and hope not) that Binance Smart Chain becomes the future given how centralised the Chain is and the lack of security guarantees it presents. Many people I know that have tried interacting and using it have reported horror stories of the bridge breaking and other incidents where their funds are literally stuck and they have no recourse except begging Binance to get their money back. I’m strongly against this. The vision for decentralised money should always be an ideal which we all strive for. However, critics who completely dismiss Binance Smart Chain are missing the point - Ethereum has failed to meet the demands of the next segment of the market (which is the early adopters). Here’s how I look at it:
I don’t think Ethereum will “lose” per se, it will most likely be the most secure decentralised layer with the best financial guarantees. However, it will most likely not be the chain where most users start their blockchain journey. “But what about layer 2s” you say?
Layer 2 Thesis
I don’t think layer 2’s aren’t useful, I just think they’re not going to be the end all solution people think they’ll be used for. If we examine the L2 landscape, we basically have the following plays:
xDAI/Stake Network, a Proof of Authority blockchain that is EVM compatible. It works, but isn’t decentralised at all.
Optimism, uses experimental roll-up technology that can secure up to $50m of value. Great for trading applications but not good for general purpose DeFi.
ZK Sync, general purpose EVM compatible L2 however is still not live. Will probably take another few months
Starkware with their zero-knowledge proofs. dYdX, Immutable and a few others are using them. Usually low latency trading is a perfect use case here. Still not general purpose DeFi ready although they will have something in the coming months.
Loopring, live L2 exchange with good trade activity and liquidity mining. Although once again limited to low latency DEX trading.
There’s others which I’ve probably missed out on, however there’s a clear trend here with most of the above approaches:
L2s are great and work today for low latency trading
L2s are not great and have not proven themselves for general purpose DeFi
L2s still require you to be on some L1 and understand how they work
I think out of all the points, the third is the most important one. User onboarding is extremely crucial in digital products and a bad user experience is the quickest way to lose users. I highly, highly recommend reading this tweet storm from Jake to get a better understanding here:
The Higher Order Battle
From what I’ve observed, the higher order battle is a values battle between staunch Ethereans versus technologies that solve the problems Ethereum can’t solve for right now. Many builders and investors in the Ethereum space are ideologically married to Ethereum given the amazing community it has spawned. I’m someone who is eternally grateful for the opportunities and friendships that Etheruem has provided me and the ability to build some amazing things.
However, I ultimately believe that technology is here to serve the world and the problems it faces. Not our ideals. Ultimately this divide is what will also cause a new opportunity for the next wave of founders. Those who are established and large on Ethereum will probably shy away from other chains and/or try to keep building on L2 ultimately alienating the next wave of users. As the technology between cross-chain becomes better, cheaper and faster - users won’t actually know which chain they’re on. They’ll only know the applications they’re using.
Which brings me to my next point, layer 1 value accrual is probably over-valued as the switching costs between chains become minimal. This isn’t a dig at Ethereum, I think ETH will do extremely well this bull cycle but over a 5-10 year time horizon DeFi tokens will be able to capture the value of the underlying chains since they’ll be agnostic and capture wherever the true value lies. Maybe the next big thing will be the Fat-Application thesis?
So, where to from here?
From what I’ve observed in crypto, each community and token goes through it’s own cycle of something like the below:
Existing incumbent has X, Y, Z issues
New project comes along that sacrifices some ideology in return for practicality
Incumbent dismisses or actively puts down new project due to ideological reasons
New project slowly proves out it’s use case and the practicality overtakes the ideology due to the value it creates
Community for new project has it’s own set of ideals until it develops it’s own issues
The cycle repeats
We can observe the same pattern as it happened for Bitcoin/Ethereum:
Bitcoin is slow, expensive and not very useful outside of the SoV narrative
Ethereum comes along and sacrifices some ideology (hard money) for practical user applications. Etheruem also hard-forks to revert a massive hack.
Bitcoiners reject Ethereans due to the centralised nature and DAO hack
Ethereum builds out DeFi and it starts getting traction
Ethereum is now so widely used that costs prohibit new users from entering in
The future pattern/narrative will look a little like:
Ethereum is slow, expensive and not very useful outside of very high value DeFi transactions
Multi-chains come along and sacrifice some ideology (extreme decentralisation) for practical user applications. Multi-chains may not have the best token distributions.
Ethereans reject multi-chains due to the lack of security guarantees and different ethos
Multi-chains build new use cases and start getting traction
Multi-chains are so widely used that <insert problem here>
It’s amazing how these things play out and how human nature plays out. Crypto’s tribal nature helps bind communities but it can also make them blind to the issues it has and keeps them closed minded. Maximalism hurts innovation and as pioneers of new technology we need to balance out ideology with practicality. Neither should necessarily overtake the other.
I hope you enjoyed this read and would love to hear your thoughts.
Great post. Very helpful to my thinking 👑👑