The day when ethereum is one & only in smart contract world is behind us. There’re > 40 L1 & L2 chains w/ more to come.
A framework to help you assess which ones will win & if you’re the operator, how to grow your own chain 👇
The big picture: instead of thinking of L1 chains like companies, they should be considered as ecosystems similar to sovereign economies.
You can argue all day abt which chain has faster settlement or is more decentralized. But end of day the value of a L1 depends on size & productivity of applications built on top, i.e. its on-chain GDP.
That’s why even though cross-chain comparison today centers around tech specs, true winners will be the ones that can bootstrap & grow their on-chain economy. It’s a complicated endeavor. Being a fast, cheap & secure chain is only a small piece of the puzzle.
So how do you grow a blockchain ecosystem? Experience of countries w/ fast growing national economies in past decades offer lots of insights.
Today competition of L1s is abt tech– being faster, cheaper, more secure.— Tascha (@RealNatashaChe) November 22, 2021
Tomorrow those'll be mere table stake.
The real race is who can foster greatest amount of innovation on their platform that gets traction.
The ones w/ superior 'industrial policies' win.
For an economic ecosystem to thrive, the following conditions are critical:
1/ Sufficient provision of production inputs
2/ Peer competition within industries
3/ Clusters of supporting sectors
4/ Quality of domestic demand
(p.s. this framework is heavily inspired by the “national competitive advantage” scheme of Michael Porter.)
All of these conditions apply to blockchain nations & can help guide your thinking in whether a chain is on the right track to grow. Let’s go through each of them in the context of layer 1s.
1. Sufficient provision of production inputs
Economic growth is turning production inputs— e.g. capital, labor, materials— into value added. So for a chain to grow, enough raw inputs need to be available.
The important inputs:
a. Human capital
Shortage of qualified engineers in blockchain space is real.
Qs for our checklist:
✅ How much effort is the chain making to onboard talents & produce its future army of developers?
✅ How easy is it for non-web3 developers to convert? (e.g. C++ & Java peeps can learn Rust, used by Solana, in a month. For Avalanche you can code in multiple languages. Few likes Solidity.)
✅ Is the chain getting traction in regions w/ lots of developer supplies? (e.g. India, Ukraine)
b. Financial capital
The degen ethos that scorns at VC investment is entirely misguided.
Every DApp project needs funding. For a chain to get an ecosystem going, it needs hundreds & thousands of DApps. You can get retail money via token sales but it’s hard to scale. VC / whale involvement is necessary & should be celebrated.
In fact you should see it as a 🚩 if a new layer 1 is not backed by a legion of reputable venture capital.
This is b/c if a VC has substantial investment in a L1, they’re more likely to invest in apps built on top as well, to help their initial investment along. Incentive alignment de facto creates a pipeline of financial capital for the chain’s burgeoning economy.
Instead of fussing abt VCs front-running you, do realize you need massive capital to build a nation from ground up. For projects of country scale, size of the 🥧 is way more important than how big a slice you get.
Q for checklist:
✅ How much financial ammunition does the chain have in pipeline?
Just like roads, electric grids & broadband network are crucial inputs to a national economy, L1s need infrastructure. Aside from underlining blockchain itself, things like wallets, browser extensions, dev tooling, SC libraries are bedrocks of ecosystem.
Ethereum is miles ahead in this given longer history. But it’s not like its lead is so big as to be impossible to catch up. We’re still early.
Q for checklist:
✅ How much infrastructure does the chain have or is at least being planned?
2. Peer competition within industries
For a chain to thrive its native DApps need to be *internationally competitive*. e.g. Ultimately a lending protocol on ethereum is competing w/ lending protocols on all other chains.
But international competition starts w/ domestic competition, where a project practices its innovation & execution skills.
That’s why you want to see multiple projects on the same chain in the same niche. They are immediate competitors that propel one another forward, improving the chain’s prospect.
In this respect the much lauded open source culture is a double-edged sword.
Yes open source makes knowledge sharing faster & developers’ job easier. But if the prevailing culture shames/pressures people into open-source everything, it becomes an incentive destroyer even though few will openly complain cuz people don’t want to be politically incorrect.
Qs for checklist:
✅ Are there signs of strong rivalry in same niches emerging within the L1?
✅ Does the dev culture of the chain strike right balance btw encouraging peer knowledge sharing & respecting proprietary IP?
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3. Clusters of supporting sectors
Any niche or industry does not develop in vacuum. Upstream & downstream sectors progress together & help each other out. e.g. NFT sector supplies deFi w/ more collaterals. DeFi sector supplies NFT w/ better liquidity.
It’s easy to copy a single app. It’s way harder to copy entire supporting cluster.
That’s why overtime what you want to see on a L1 is clusters of industries forming mutually beneficial relationships, taking advantage of composability on the same chain to create collaborative innovation & build stronger moat.
Q for checklist:
✅ Are there signs of synergetic niches / industries emerging within the L1 ecosystem?
4. Quality of domestic demand
A savvy, demanding “domestic” user base forces projects to iterate better & innovate faster.
The initial size of a chain’s native user base doesn’t matter as much as its quality: native users need to be picky enough to provide projects w/ right early signals of wider market trends.
And any distinctive characteristics of a platform’s user base will shape the product offerings in its ecosystem.
The fact that Parisians have sophisticated tastes helps French labels dominate global fashion industry— if you are good enough to win customers in France, you can win everywhere.
Similarly if you have an early stage tech project, 5k loyal early users in San Francisco may be more useful than 50k users in Nigeria.
Qs for checklist:
✅ How does the user profile of this L1 compare to other chains?
✅ Where in the world is the chain getting most adoption?
Role of the blockchain itself
Historian A. Toynbee had a famous insight abt why some civilizations thrive & others don’t—
For a civilization to go far, the challenges it encounters in its native environment must be a *golden mean*— not too much to crush it, not too little to cause complacency.
Same applies to companies or any innovative projects. The environment needs to have competitions, tech obstacles & demanding users that inspire entrepreneurs to give their best. But challenges cannot be so daunting to make overcoming them impossible.
The goal of “industrial policies” of any nation state— physical or blockchain— should be to create such a golden-mean environment as much as possible.
If a L1 platform goes out of its way to “help” projects that build on top, in the long run that actually hurts & only creates demand for more helping.
On the other hand, there’s a legit role for the platform to provide critical infrastructure, encourage rivalry, invest in human capital, promote innovative culture — things that will help projects in its ecosystem gain competitive advantage in long run.
Qs for checklist:
✅ What’s the chain doing to promote rivalry among its native projects & stimulate innovation?
✅ What’s the chain doing to improve infrastructure & human capital supply?
✅ Is the chain “subsidizing” certain projects to help them gain ST advantage, which may inadvertently undermine innovation & competition in LT?
The last one is tricky. Some countries have done well “picking winners” early on, which may indeed turn out great, but often at the cost of creating monopolies.
e.g. Samsung, recipient of much state support in early days, accounts for 20% of S. Korea’s exports. At the end of day, is it really wise for any country to put its chips in so few baskets? Maybe not.
We’re in early days of economic governance for blockchain nations. I’m sure we’ll see new tactics emerging from different chains to try to create such “golden mean” environment for their ecosystem. Something to look forward to.