Destined for Obsolescence?
how modular blockchains can harness innovation rather than continuously fight it
With the completion of the Ethereum merge, and recent fundraising announcements from next-gen blockchains Aptos and Sui, I thought it would be interesting to revisit a thread of mine from April which explained my thesis for modular blockchains (don’t worry its only 5 tweets!):
Developers are continuously improving blockchain technology: creating new programming languages, consensus mechanisms, and networking architecture designs (app-chains, IBC, data sharding, etc.). These technical advancements have increased throughput capacity, decreased latency, and minimized transaction costs (although there are design trade-offs). Looking back at blockchain evolution (below), its clear each successive generation raises more capital and promises higher execution performance than before. Which then begs the question: will all blockchains continuously become obsolete as next-gen tech comes out?
To be very clear, I agree blockchains to-date have failed to reliably scale for mass-adoption — the race for long-term blockchain supremacy is far from over. Maybe Aptos and Sui end up becoming the dominant chains of the future. Maybe the 5th generation cohort finally gets it right. We’ll have to see.
But I see a logical solution to these continuous innovation cycles: modular blockchains.
WTF are modular blockchains?
In short — they are blockchains that outsource some functionality to other chains or off-chain compute/storage. A monolithic (non-modular) smart contract platform has the following functions:
(Messari)
There are many possible modular configurations, but for simplicity, let’s focus on the Validium/Celestium designs below, which both outsource the data availability (DA) and execution functions for Ethereum (although other chains could use this design as well).
Why focus on these? DA-specific modules can bring down transaction costs (offloads blockchain history data, freeing up on-chain storage space) and execution-specific modules can optimize transaction throughput. Therefore, theoretically, a chain could keep its core function (verifying and securing the correct state of the network) and continuously upgrade DA and execution modules with the latest and greatest tech. This would enable the blockchain’s ecosystem to keep up with next-gen throughput & low transaction costs without having to start from scratch every few years.
Ethereum will be a case study in modularity as it continues to upgrade to Ethereum 2.0. Although there are still several hurdles ahead (The Surge, Verge, Purge, Splurge), throughput is expected to improve nearly 7,000x while transaction costs fall under 10 cents.
As illustrated earlier, Ethereum has inferior performance metrics across the board today….but it is by far the most valuable smart contract platform by market cap.
Why is that?
Network effects.
The more participants & economic activity, the more valuable the network becomes. (TVL is far from a perfect metric, but likely the best proxy for blockchain economic activity today.)
Recruit supply-side participants (validators) → increases decentralization
More decentralization → attracts developers to build dApps
More dApps → attracts users & new dApps (because of composability, developers can build on top of existing dApps to create more complex applications & take advantage of growing userbase)
More users and dApps → increases demand for blockspace
More demand for blockspace (token value appreciation) → attracts more supply-side participants
Repeat.
Therefore, rather than recreate these network effects every 2-3 years, the most efficient long-term strategy is likely a modular blockchain design that continuously leverages next-gen tech for ecosystems already in place.
Monolithic Caveat
As an investor across a variety of smart contract platforms, I believe different blockchain designs will be better suited for different use-cases. Despite potentially higher obsolescence risk, monolithic blockchains have superior transaction finality times, which is imperative for applications requiring synchronous composability (flash loans, high frequency trading, etc.).
Photo cred: themetapicture.com
Disclosure: Omnichain Capital has positions in several tokens mentioned.