The Infrastructure Conundrum
Infrastructure is trendy again. Crypto’s attention traditionally swings from the apps that provide decentralized services (Uniswap, Maker, Opensea,…) to the rails those apps need to operate. These days eyes are on the rails.
The infrastructure layer of the blockchain is still undefined. The challenge of scalability (affecting throughput, price, revenue, and user experience…) is big and unsolved, and there are many competing visions of what the future might look like. The following is a walk through four of these possible visions. But don’t let the classification fool you: these separate visions are not cleanly different boxes. The whole infrastructure ecosystem is more a mesh of gray areas, making predicting new trends as uncertain as possible.
Layer 1s
Layer 1s are hot.
Let chatGPT explain what a Layer 1 is to the newcomers.
“Layer 1” generally refers to the underlying blockchain protocol upon which a given cryptocurrency is built. Layer 1 protocols provide the foundation for the cryptocurrency’s core features, including its consensus mechanism, transaction validation, and data storage.
Examples of layer 1 protocols include Bitcoin’s blockchain, Ethereum’s blockchain, and the Cardano blockchain. These protocols are designed to be decentralized, meaning that no single entity controls the network, and transactions are validated by a distributed network of nodes rather than a central authority.
Ethereum is the #2 most important Layer 1, and it is one month away (giver or take) from the Shapella upgrade, a fork that will close the cycle of staking. After that, Shapella is expected to unleash the full power of staking and liquid staking on Ethereum.
Just to give a brief appetizer of what we might be looking forward to, only ~17% of the total circulating ETH is staked, while other Proof of Stake blockchains like Cosmos Hub or Solana has over 60%.
And nobody expected this, but Bitcoin is in da house too. Ordinals, the NFT wave on bitcoin, has brought new momentum to the ecosystem (whether some hardcore bitcoiners like it or not). As a result, fees are increasing, devs are rolling up their sleeves and putting in the hours, and we’re even witnessing DeFi emerge on the horizon through Stacks.
Layer 2s: the race toward scalability
Layer 2s couldn’t be hotter, either.
“Layer 2” generally refers to a secondary protocol built on top of a layer 1 blockchain. Layer 2 solutions are designed to address some of the scalability and performance limitations of layer 1 protocols by offloading some of the network’s computational load to external systems or infrastructure.
Recently Arbitrum surpassed Ethereum in the number of transactions in the same week Optimism announced they were Coinbase’s new best friend. If this weren’t enough, we would probably see Optimism launch Bedrock, its next most significant improvement, in the upcoming month or two.
Zero-knowledge rollups, the other prominent flavor of L2s, keep taking baby steps. We already knew they would be slow (and they’re losing the momentum game against optimistic rollups). Still, projects like Polygon and Matter seem to be closer and closer to launching something significant.
Also, once Shapella is finalized, let’s say in April, devs will turn their eyes onto EIP-4844, which will introduce “protodanksharding,” a significant upgrade in Ethereum’s scalability meant to improve the efficiency of rollups, especially the optimistic ones.
Fat chain VS Appchain thesis
But the Layer 1 VS Layer 2 narrative has other competing visions.
The appchain thesis, embodied by the Cosmos ecosystem, claims that instead of having a single blockchain become a massive base layer for as many use cases as possible, applications will develop their tailor-made blockchains (the debate is usually referred to as the appchain VS fat protocol discussion) The Cosmos community has developed the tools for this: an SDK to build blockchains, an interoperability protocol (the Interblockchain Communications system or IBC) and is trying to build a functioning and interlaced economy with ATOM at the center.
Cosmos is currently struggling, entangled in governance discussions. But the appchain thesis remains reasonable.
Modular chain approach
And if three competing views weren’t enough (the competition between L1s, the race between L2s, the fat chain VS appchain thesis), there’s another possible future for infrastructure: the modular blockchain thesis.
Blockchains must perform four functions: Consensus, Data availability, Execution, and Settlement—monolithic blockchains. Modular blockchains “outsource” at least one of these four tasks. For example, rollups (like L2s) are one type of modular blockchain that performs executions and delegates the other three functions (consensus, data availability, and settlement) on Ethereum. But the number of possible combinations is much broader.
Lately, Ethereum developers have favored the modular thesis, getting their infra ready to welcome these innovative add-ons.
The infrastructure layer of the blockchain is still undefined, with the challenge of scalability affecting throughput, price, revenue, and user experience. The competition between Layer 1s and Layer 2s, the fat chain VS appchain thesis, and the modular blockchain thesis are all competing visions for the future of infrastructure.
It’s impossible to predict which infrastructure vision will ultimately win out. The crypto space is too intertwined, and technical advances in one area can majorly impact another. Additionally, the unpredictability of the human components of regulation or community building can have a massive impact on the development of the space.
