At this point in time, it’s pretty clear that the future is multichain. The past two years, we have seen a massive rise in the amount of alternative layer one blockchains. Many of these alt l1s were branded as Ethereum killers, but rumors of Ethereum’s death have been greatly exaggerated- Ethereum is still the number one smart contract blockchain. The majority of innovation and non-BTC capital exists on Ethereum, and this seems unlikely to change.
That being said, Eth has bled some of its market share to competitors, most notably SolLunAvax.
However, let’s rewind a bit, back to BSC season. BSC offered a place where users new to crypto could make quick, cheap transactions. Users new to crypto were introduced to the magic of blockchain currency- being able to lend out their money, earn yield, use a dex, etc. Eventually BSC season ended, mostly due to the market crashing in May last year, but also because actual innovation on BSC was rather low. Most projects were clones of Ethereum protocols, and there was also a ton of shitcoins in the ecosystem. At the peak BSC had a TVL of 31 billion, crashed down to 12 billion, and has recovered to 16 billion. Considering how the rest of the market has managed to recover, I have a hard time believing that BSC will ever recover its peak of 21% TVL across all chains now. That’s an absolutely insane number. For reference, SolLunAvax today is less than that 21% that BSC once held. Plus the chain has some technical issues with it- not an expert here but I remember reading that nodes were failing to sync and blocks hardcoded to produce every X seconds was failing as well. All in all, turns out you can’t just make a faster version of Ethereum that easily. However, the rise of Binance Smart Chain solidified that Ethereum has gotten the core principle of what people need in a smart contract blockchain correct. The only issue with Eth is that fees were too high, making it very inaccessible for new users. As Vitalik Buterin once stated “the internet of money should not cost 5 cents a transaction.” BSC season proved that chains with cheap fees and enough good products (even if they were clones) were able to succeed.
So that leads us to today. In many ways AVAX can be seen as the spiritual successor to BSC, an EVM compatible blockchain with cheap fees and good products built on top. It even came with a great shitcoin ecosystem as well, Snowbank and Wolf Game clones to name two. In a way shitcoins are bullish for an ecosystem in that if there’s an active shitcoin that’s getting a lot of attention, that means that there’s actual products worth using on the chain. Otherwise no one would be using the chain in the first place. (Though I guess DOGE is the sole exception here, since that is literally a shitcoin blockchain.) Luna on the other hand was built with its stablecoin in mind, which makes it pretty unique. It’s not a blockchain with a stablecoin, it’s a stablecoin with a blockchain. Sol is also another incredibly unique blockchain. Performance wise it blows everything else out of the water- it’s extremely cheap and incredibly fast. It relies on Moore’s law for scaling (Sol gets faster as computers get faster). However there’s not too many things to do on Sol at the moment, but I’m optimistic that will eventually change. There’s some interesting financial applications that can be done with it, the one sticking out the most to me being CLOBs. I also think there’s a lot of potential for gaming on Sol. I think FTX signing a deal with TSM is a big indicator that Sam has gaming in mind for Solana already. Plus fading the Bankman is typically a dumb move to begin with- I don’t think there’s anyone on the planet with more influence in both the crypto and tradfi world as him. Lastly, a lot of new layer ones have offered large incentive programs enticing users to build/bridge over. This has been pretty successful at getting traction going for these alternative chains, helping sap away Ethereum’s market share. Without a doubt, more people have onboarded onto these alt L1s compared to L1 Eth in the last year.
All in all, there’s a lot of chains out there, each with their unique proposition as to why users should use them. So now the question is, what’s the best way to invest in this idea of a multichain crypto ecosystem? The simplest way is just to buy the native token of all of these chains, and pray that they’re around in 5 years.
Personally, I’m a big fan of infrastructure bets. In order to connect all these chains, we need something that we can use to transport assets from one chain to another. And that leads us to… bridges! Personally I’m a fan of Synapse, a cross-chain AMM is really innovative + they have a good team. However, I think any bridge with good usage and innovation should be fine here. You want to bet on a bridge that will see good future usage while keeping in mind things like current market cap/FDV/tokenomics. Stats like total amount bridged, % growth over the past X time, amount of chains available for bridging, etc should also be kept in mind.
Another thing I’m really big on is blockchains being able to interact directly with one another. I think we should call it… IBC. Inter Blockchain communication. Oh wait, it already exists. Yes, I hold ATOM and am bullish on the Cosmos Internet of Blockchains. One of the current issues with Ethereum (by design) is that it uses a mainframe approach on a shared state machine. What this means is that every single transaction is processed by every single person. (In the future, I imagine that a lot of Ethereum usage will move to other chains that are more specialized for different types of work, but for now Ethereum is one of the few working ones with a crap ton of things built on it already and it’s hard to move these things somewhere else overnight + there’s usually not somewhere better to go) But 99% of the time we don’t care about what other people are doing on the blockchain. So what if we had a bunch of blockchains specialized for different uses splitting up all the work doing things and that these blockchains could communicate and work together when needed? That would be cool, and that is exactly what IBC enables. IBC also allows you to do things like send ERC-20s from Ethereum to Atom. However, doesn’t that make bridges useless?
The difference between IBC communication and a bridge is that bridges are like direct roads between blockchains, while IBC is like a highway that any blockchain can use. Bridges must be individually built between each blockchain, which takes time and resources. IBC offers a way that a blockchain can be connected to other layer one chains, without require a direct bridge being built. So what’s better between the two? Depends on what you need. IBC is more of a general solution, while direct bridges are kind of like an express lane. I think layer one blockchains with enough interaction between a pair will naturally create demand for a direct bridge. I’m relatively confident some sort of incentives to encourage people to use bridges will emerge eventually, since on some level bridges are competing to transport your assets. Something really simple would be lower fees for frequent/high volume users, similar to how cexes offer lower fees for prolific traders.
An interesting Messari prediction from their 2022 report: the most popular L1 <> L2 / L1 <> L1 / L2 <> L2 bridge protocols will have higher daily volumes than the most popular centralized exchange within five years.
I encourage thinking of bridging protocols today similar to Americans railroads in the 1800s. There was a lot of places to go, and these companies worked tirelessly to connect the nation. This is very similar to all the different bridges connecting the different blockchains today. When investing, think about which railroad company/bridging protocol you think will build the best/most used roads in the future.
Here’s a really good spreadsheet by @XLBao_ on the bridges that exist today:
I think right now everyone is happy that bridges exist, but eventually bridges will become the norm and bridging protocols will be forced to compete for users. We’ve currently only run into problems with scaling on blockchains, but with enough usage I think we may run into the same issue of traffic on bridges. We’re pretty far out from running into issues with bridging scaling though. Lastly, in the distant future I think we may see only a handful of bridging protocols, better bridges will have built a dominant brand and swallowed competitors.
Another thing to consider is how each bridge is constructed. I’m not going to go into this too much, because I think Dmitriy Benzon’s article does it better than I could. But if you look at the graphic above which I pulled from his article, building a bridge is similar to the blockchain trilemma of scalability, decentralization, and security. It’s hard to do all of those things really well, and prioritizing one generally means sacrificing in another area.
This article has somehow turned into a really large bridging article, but another thing I want to mention when it comes to the rise of the multichain is stablecoins. I think they’re quietly underrated in the role they play in helping newer chains grow since we tend to take them for granted. The two in particular I want to highlight are USDC and UST, though I’ll also include USDT at the bottom because it’s the oldest and biggest.
All three of these stablecoins exist on multiple chains, and currently make up around ~130B in market cap.
Quick stablecoin tangent: Stablecoins really exploded in 2020, which is a good thing for crypto. By switching from coin-margined futures to stablecoin-margined futures, it’s harder to cause brutal cascading liquidation candles, making crypto markets less volatile. They’re just a lot more sticky when in comes to the total crypto market cap because BTC can nuke 40% in a week, but one USD is technically always one USD (ignoring inflation).
Anyways, stablecoins are helpful because you can go to a new chain and spend your stables there. It’s a smoother experience than selling stables to buy a token in order to interact with a new chain. Additionally, no one wants to go to an illiquid chain, liquidity benefits everyone. Stables make chains a lot more accessible with deep liquidity, gone are the days of denominating solely in BTC on chain. JOE has 200m in AVAX/USDC, RAY has ~400m in various USDC and USDT/Sol pools, BOO has 90m USDC/FTM, etc. They’re very similar to how Roman currency was accepted in Europe, Asia, and Africa in ancient times. Good money allows economies to flourish. That said, I don’t really know how one can bet on stables from a purely multichain point of view- they’re more of an enabler of a multichain future imo.
I think this mostly sums up my thoughts on a multichain future. As stated, my exposure is primarily through ATOM, but I also hold some SYN. The two combined currently comprise ~40% of my portfolio, but this is obviously subject to change. There’s definitely many ways to bet on the multichain, this is just my personal method. A little bit of digging and I’m sure you could find something earlier than 90% of crpyto traders. DYOR, this article is not financial advice, and don’t blindly trust strangers on the internet.
Until next time!