This article will give Web3 product designers an understanding of what the blockchain landsacpe looks like today, and where things are heading in the future. We discuss the present era of Blockchain 3.0. Stay tuned for future Web3 Design Courses where we discuss emerging dApps that will disrupt the internet as we know it today.
Right now we are witnessing rapid growth in the emerging layer 1 blockchain landscape. Ethereum is undergoing major reconstruction in its transition to Ethereum 2.0, and competitive layer 1 blockchains intend to steal market dominance from Ethereum, as well as support the next wave of Web3 adoption with scalable and interoperable technologies.
Layer 1 blockchains are like nationstates. They all have their own economies powered by their native cryptocurrency. Each blockchain attracts its own developer community who then build out a Web3 ecosystem on top of the blockchain, thus attracting end-users. These are the “blockchain wars” that you may have heard people talk of. The emerging Layer 1s are sometimes referred to as “Ethereum-killers”.
At the end of the day, blockchains are competing for more end-users. Metcalfe’s law stipulates that the more users in a network, the more valuable the network is. This is also known as “network effect”, and we can look at a familiar example as to why this is. Users sign-up to Facebook because there are already billions of users with Facebook accounts. They want to go where their friends and family already have accounts. In other words, they are attracted to Facebook’s existing network effect. It wouldn’t be hard to copy Facebook’s code, and deploy TravisBook, but it would be extremely difficult to get any user adoption, because Facebook is already the dominant social network.
This relationship appears to be true for blockchain networks. Macro investor Raoul Pal has shown the market cap of a crypto network is proportional to the square of active wallet addresses. This phenomena of winner-take-all exists everywhere in the tech landscape – think of Facebook, Amazon, Google, Apple, and Netflix. How many people do you know use a search engine alternative to Google? This proliferation of layer 1 blockchains, and their Web3 ecosystems, looks a lot like the internet tech boom in the 90’s. The lesson we learned from that is that 99% fail, and 1% take all.
All of this leads to something unfortunate about Web3 culture, “chain maximalism”. People want the blockchain they are invested in to be the winner. This explains why crypto Twitter, and the culture in general, can feel toxic and divisive. It’s just something to understand as a product designer, that blockchain developers and end-users have financial incentives to oppose other blockchains, and Web3 ecosystems.
But, it likely won’t be as cut and dry as one single winning blockchain. Bitcoin and Ethereum both serve two different use-cases. Bitcoin’s design is optimized for decentralized digital currency, and Ethereum is a platform that runs decentralized applications. We will likely live in a multi-chain future as blockchain design does not appear to be a one-size fits all. Maybe people will have their preferences like PC versus Mac, but more likely blockchains will be designed with specific use-cases in mind.
For example, a blockchain built for decentralized social media doesn’t need the greatest security guarantees, but needs to process hundreds of millions of transactions per second. Whereas, another blockchain might be responsible for trillions of dollars locked in decentralized finance protocols, and need to be trusted by large public institutions. This blockchain would presumably need better security guarantees than the social media blockchain.
The Layer 1 blockchain landscape is quite varied in terms of design philosophy and software architecture; however, all Blockchain 3.0 Layer 1s have several things in common.
- Proof of Stake consensus for energy-efficiency
- Increase transaction throughput to scale blockchain to more users
- Improve blockchain interoperability and avoid siloed ecosystems
Let’s pause on Proof of Stake for a minute. Proof of Stake is the consensus mechanism of all emerging Layer 1s, and is an innovation on Bitcoin’s Proof of Work consensus. In PoW, nodes spend electrical energy in order to create blocks; whereas, in PoS, nodes stake the Layer 1s native cryptocurrency in order to create, and vote on, blocks. This is like posting a security deposit in order to participate as a validator node. The more crypto a node stakes, the greater chance that node will have to participate as a validator node, and earn block rewards.
That’s the carrot – to earn block rewards – but there’s a stick as well. Staking crypto makes it so that nodes have skin in the game. Nodes can have their stake slashed if they do something that undermines the blockchain. Nodes with the most at stake will be chosen as the validator nodes, and work to maintain the blockchain.
PoW and PoS are not intuitive and the reader still may have confusion about how consensus mechanisms work, but don’t worry about understanding these concepts fully. Consensus mechanisms are highly technical topics that play on multiple fields like game theory and computer science. We discuss Proof of Stake here because it unlocks a brand new investment vehicle for Web3 end-users. Users can delegate their crypto to validator nodes, and share in the block rewards these nodes earn for maintaining the blockchain. Users earn dividend payments proportional to the amount they delegate, and this is similar to traditional passive income assets like bonds. Staking has the potential to disrupt the financial sector as Proof of Stake Layer 1 blockchains grow in prominence.
So now we’ve discussed the brief, 13-year history of blockchains starting with Bitcoin, moving to Ethereum, and ending with the emerging Layer 1s currently vying for position in the Blockchain 3.0 era. Interestingly, the vast majority of end-users will not care which blockchain their dApps are running on. Currently, users don’t care which database technology (MongoDB, MySQL, etc.) their Web 2 application uses, and it won’t be any different for Web 3. That’s assuming that the underlying blockchains don’t impose UX limitations on them like high network fees, slow transactions, low staking yield, or a siloed ecosystem with no cross-chain communication.
If you enjoy videos over reading when it comes to online learning then checkout the course on YouTube. This is part 4 of 5 in the Blockchain Design Course 2022. Also, make sure to stay tuned for future Web3 Design Courses where we will get into more interesting topics about emerging dApps.