Why do we need more blockchains?
The Scalability Trilemma and the rise of Ethereum alternatives
Given you’re reading this, I’m assuming you have some understanding of what blockchains are and what bitcoin is. However, it's better to set some initial context and ensure we start from the same page. Don’t worry, we won’t start with Alice and Bob exchanging money, that’s a saturated analogy.
Bitcoin essentially decentralized money by using blockchain technology to create a global permissionless ledger. Post that multiple blockchains came up for different use-cases (different DB schema, consensus algorithms, some new logic in the protocol code). Ethereum further generalized this by allowing not only static data in this network but also code. It did this by introducing the concept of ownerless wallets with code ie smart contracts. If I send money to a smart contract, it executes code within that smart contract and as a result of that code money goes elsewhere (maybe another smart contract, another wallet, etc.)
So in terms of tech, the Ethereum blockchain is the Bitcoin blockchain + a virtual machine for running code (the VM is embedded in the protocol code). This opened up powerful possibilities. Any immutable code could be deployed on the blockchain.
Ethereum, by putting up a VM on the blockchain basically decentralized compute. Pretty much anything can be built on top of it. So if Ethereum solves all use-cases, why do we still need other blockchains?
Well, we’ve created a very trustless and secure system, but it’s inefficient.
The Scalability Trilemma
Vitalik first coined this term in one of his blog posts, it basically means scalability, security and decentralization are interlinked forces and a blockchain can only optimize for two at a time while sacrificing the third.
Blockchains are highly inefficient because:
Everyone stores all the data
The data is immutable, the chain keeps getting bigger
Everyone competes to verify the data, effort is frequently wasted
Everyone has to accept the changes, updates are slow
So as the network scales:
More storage is required to run a node
More CPU power is required to validate transactions the fastest
More requirements → High cost of running a node → Only a few big nodes participate in the network → Centralized system
The urgent need for scale
Rising Ethereum transaction fees and slow network speed have been the major catalysts to the adoption of alternate smart contract platforms.
(X) In Early 2021, Ethereum started facing severe scaling issues. Gas fees were hitting All-Time-Highs
Txn. fee for a simple trade on a DEX was around 100$
Transactions took more than 15s to go through
(Y) BSC, backed by the Binance CEX’s $100 Mn ecosystem fund was the first mover to gain traction. But most of the TVL comprised of incentive-driven short term capital
(Z) Polygon, with its proximity to Ethereum came out as the next trusted solution. Deployment of AAVE, SUSHI, CURVE propelled its TVL to $10 Bn by June 2021
(K) By late 2021, NFTs started garnering adoption, Txn fee spiked again. Many Web2 retail users entered the market during this phase further magnifying the need for scale and alternate platforms cemented themselves in the race
Most smart contract platforms were optimizing for scalability (the need of the hour) whilst may or may not sacrificing the other two parts of the triangle.
Type of Scaling Solutions
Layer 2s are complementary to Ethereum whereas Layer 1s by their approach are more competitive. They do everything from scratch and have to build their own network of validators/miners and hence bootstrap their own security and decentralization
This is why L1s like Solana, Avalanche etc. are branded as ‘ETH killers’ whereas Polygon calls itself ETH’s Business Development Partner
More on the Layer 1 Wars coming up in the next article. Stay Tuned! :)
Why do we need more blockchains?
Nice one... Never knew abt the trilemma 😲
The categorization chart helps understand the ecosystem better Aditya. Great writeup