The Protocol Wars, Vol. 3
Moving Towards the Internet of Blockchain
A Multi-Chain Future
To achieve the vision of web3, the internet will need to function on blockchain.
Integrating blockchain will give users the power to own digital assets, and lay claim to physical goods in a more efficient way. Companies, then, can interact with their consumers in new ways, like airdropping NFTs to reward loyalty and allowing those loyal users to redeem the NFTs for a physical good.
But what blockchains will these brands use?
In The Lord of the Rings, there is One Ring of Power to bind the rest of the rings together.
We think the opposite will be true in web3: we anticipate a multi-chain future. The coined term “Protocol Wars” is misleading because it implies one winner. A better way to frame it would be the protocol collective.
EVM vs. Solana
Based on the idea that businesses have two years to figure out their blockchain strategy, we think the future leaders exist. In the competitive game of blockchain, the key players are already in the lineup.
The two leading blockchain standards are the EVM chains and the Solana ecosystem. Considering metrics like blockchain fees, transactions, and total value locked, these two platforms have risen above the rest.
Imagine EVM as Window’s OS and Solana as Mac’s iOS.
EVM stands for Ethereum Virtual Machine. The EVM is the bedrock of Ethereum’s operating structure, responsible for executing transactions and smart contracts to compute the network’s state for each new block added to the blockchain. Binance, Avalanche, Fantom, and Polygon are all EVM compatible too, creating strong network effects for developers — they are all composable with each other. EVM leads to common protocols like ERC-20, which have become a standard of sorts.
You can think of non-Ethereum EVM chains as “lego clones” and Ethereum as Lego. The clones are compatible with Legos and use the same round shapes to connect, but are made by a different manufacturer and might be made of slightly different materials.
Solana operates completely separately from the EVM ecosystem. Like ERC-20 standards in the Ethereum ecosystem, Solana has its own token standard called SPL tokens. Blockchains are software, and they compete with each other to attract developers.
There are bridges that connect Ethereum and EVM chains to Solana. There are also cross messaging blockchains that have EVM integrations like Polkadot and Cosmos. The line between the circle around Solana and Ethereum in the graphic below is a good illustration of the role the bridges play.
To get to 1 Billion users
For blockchain to scale to 1 billion users, the technology will need to enable users to interact with chains and tokens in the background — through mobile and Internet-of-Things (IoT) devices— while the user interface looks familiar. It’s likely that these users will interact with applications that operate on multiple chains to help with scaling and product features. We think this will happen with interoperable EVM chains and Solana leading the way.
Imagine logging on to a social media app and seeing your post got 1,000 likes.
On a web3 app in the internet of value, these “likes” would be tokenized, meaning you’d be able to extract value for those “likes.”
What could you do with that value? You could convert those likes to a widespread used blockchain currency, like USDC, and click over to your mobile data provider app to pay for your data credits using the USDC you earned.
Extrapolating that vision further, you could use those “like credits” as collateral for a loan, or for points to redeem for a trip. All of these things will require tokens to be exchanged cheaply, accurately, and quickly using multiple blockchains each optimized for its particular function.
Chain Scaling
EVM
Since developers can build applications that are composable with multiple EVM chains, it’s likely we see this as a feature going forward. Some examples of this are Metamask and Opensea: Metamask allows users to switch between EVM chains with the click of a button; Opensea has Solana and Ethereum NFTs on one platform.
Additionally, developers can jump from one EVM layer 1 chain to another with little friction. At ETHDenver, most developers spoke about web3 as a goal. There was a vision of unity — it seems that developers in the community would rather work together than jockey for position.
Look for EVM chains like Avalanche, Fantom, Polygon, Skale, Moonbeam, Evmos, and Aurora to benefit from this composability and have upside in adoption compared to Ethereum. Remember, ethereum does not equal EVM, it is the first and largest chain that uses the EVM.
As you can see in this graphic, alt-EVM chains have gained almost 30% of the total value locked (TVL) market share from Ethereum (dark purple) over the last two years.
Solana
Solana is built to scale without the need for add-on chains. It does not need additional layers to increase transactions per second, making it more of an all-in-one product. Many dapps, especially in the decentralized trading category, will choose to go with Solana for this reason. Cross-chain bridging platforms between Solana and EVM chains will continue to grow. Look to Wormhole as an example.
Difficulties with Bridges
Cross-chain bridging has become a vulnerable target to hackers. Famously, Wormhole’s Ethereum-Solana bridge was exploited for $300M and users were refunded by Wormhole’s backers. Vitalik Buterin has a famous post about the vulnerabilities of cross-chain bridges, in which he famously said the future would be multi-chain, not cross-chain. Bridges are vulnerable due to their complexity. The more lines of code something has, the more chances of exploiting it there are. Bridges right now are like slow trains from the 18th century that were a major target of bandits and robbers. They will need to improve vastly from where they are today.
Future Outlook
It seems like brands are going to approach web3 through the NFT model. This makes sense since they can cut out the advertising middleman, and directly engage with consumers’ wallets. What chain to build on will be a crucial decision, and it seems likely that some version of this will play out:
Brands will build their own chains or build on Solana.
However, these bespoke chains might be EVM compatible because brands see the value in the developer community that already exists there, and they will want to tap into that network.
Gaming platforms will be another harbinger of a multi-chain web3 model.
Gaming platform Forte raised a $725M series B round in November 2021. It seeks to “integrate with multiple layer-1 blockchains (such as Cosmos and Solana) and layer-2 protocols (such as Ethereum-based Polygon).”
Resources:
What is EVM?
➡️ About FirstWatch Crypto ⬅️
FirstWatch Crypto was started by Dan McGlinn (@DigitalDanMcG) and John "Blaize" Hrabrick (@blaizebitcoin) who have been investing in the space for a combined 8 years. FirstWatch Crypto is on a mission to simplify the crypto investment landscape.