The Protocol Wars: How Blockchains are competing to achieve scalability and consumer adoption
Blockchain protocols are fiercely competing to see who will be the first to push the technology to mainstream adoption. In this post, blockchain protocols are defined as networks which address the core stack in the web3 architecture. Although Bitcoin and Ethereum are the oldest and most dominant blockchains, their inability to scale in the short term has opened the doors for other blockchains to attempt to solve what Vitalik Buterin calls the ‘scalability trilemma’ in their own unique ways. The scalability trilemma addresses the issue of how we develop a decentralized, fast transacting and secure blockchain, without compromising any one of those components.
Currently, most blockchains fit into two camps:
- Decentralization and Secure, with transaction speeds improved through layer 2 scaling solutions (like Lightning network or Sharding). Bitcoin and Ethereum are the most high profile blockchains in this category
- Fast transacting, but with moderate to severe compromises in decentralization and/or security. Platforms like Hashgraph, GoChain, Aion, and IOTA belong to this category.
Each blockchain protocol offers a different value proposition. For example, Aion is tackling blockchain interoperability, Ethereum is a platform for launching ICOs and developing Dapps, and IOTA has a strong focus on disrupting the IOT space.
Yet despite their differences, all protocols within these 2 camps are in an arms race to draw in new developers, deploy huge amounts of capital, and build larger communities that will support their efforts to scale better than their competitors.
The X factors for protocol success: dApps and token circulation
For a blockchain protocol to become successful, a critical number of applications need to be moving their tokens around the ecosystem.
Today, the vast majority of tokens are bought and sold by speculative investors who have no use case besides to sell them at a higher price, then convert back to Bitcoin and Fiat. Blockchains are currently struggling to provide real use cases for their utility tokens. In order to achieve utility, protocols will need to launch dApps with value propositions that are compelling enough to encourage users to buy their tokens because they believe the products/services they are paying for are more valuable than the BTC or fiat they can make from simply selling the token.
Ethereum currently has about 1,777 dApps on their blockchain, with most accruing less than 1,000 daily active users. The dApps range from lending and remittance services, to marketplaces for trading virtual items like crypto kitties. Ether is the native currency used to pay for verifying transactions on the Ethereum blockchain. This currency is essentially “fuel” for decentralized apps on the network.
ERC20 is a token standard for dApps native to the ethereum blockchain to produce their own tokens that go towards paying for their products/services.
Based on these components, it makes sense that a healthier ecosystem filled with more dApps and more users spending ERC20 tokens should raise the value of both Ether and those ERC20 tokens.
Transaction speed is one critical factor that needs to be addressed in order to allow more people to transact within a blockchain protocol once the demand is there. Yet if the majority of token holders are only trading their coins to earn more Bitcoin, clearly the demand for the products/services offered by protocol dApps is lacking.
Catering to Industry Needs
Winning the protocol wars will require blockchains to carefully cater to industry needs. Many enterprises are facing challenges adopting blockchain technology, primarily because of the resources required to educate and develop the appropriate infrastructure for companies to share information across private distributed ledgers. These challenges need to be mitigated by protocols developing customized and enterprise-ready solutions. I foresee a significant number of “application-specific blockchain protocols” that are public networks designed to handle the unique challenges of one vertical.
For example, the logistics industry generally operates on low margins and require multiple participants around the world to connect on the same platform in order to exchange information. Companies also need to swiftly manage disputes, reduce the costs of regulatory compliance across borders and provide significant customer service improvements. Blockchains built for logistics particularly will need to recognize the scale required for the use cases they service.
A number of projects are springing up to help with general needs for all industry, but those will not be enough by themselves. Like to handle dispute resolution, Sagewise is building a smart contract SDK using Hedera Hashgraphs distributed ledger technology. The platform has a library of functions that help carriers and shippers swiftly resolve their disagreements.
Scaling generally is being addressed, like by Ethereum’s Plasma which spins up private blockchains to operate as a top layer, while the Ethereum public blockchain functions as a fallback for managing disputes between parties involved in the private chain. For example, if a smart contract transaction is made between two banks on a private blockchain, and there is a dispute over the authenticity of the data that triggered the funds to move from one party to the next, both parties could take the dispute to the Ethereum public blockchain in order to solve the matter via a proof of stake consensus vote.
Lastly, Ontology describes itself as a “blockchain/distributed ledger network which combines a distributed identity system, distributed data exchange, distributed data collaboration, distributed procedure protocols, distributed communities, distributed attestation, and various industry-specific modules. Together this builds the infrastructure for a peer-to-peer trust network which is cross-chain, cross-system, cross-industry, cross-application, and cross-device”. In my opinion this platform will fail without a more focused strategy. Ecosystems will need to package these general solutions together to meet the specific needs of their industry.
As blockchain protocols continue to produce innovate new solutions to tackle the problem of scalability and enterprise adaptability, the defining metric that the industry will evaluate success by is token circulation and utility. Without evidence of frequent use for protocol tokens (beyond buying and selling as speculative investments), these technologies will not achieve the level of adoption necessary to support a vibrant developer community and continue the cycle of innovation required to disrupt their respective industries.
General solutions to scalability might not be enough. Industries should gather together and collect requirements necessary for any blockchain protocol to succeed. Expect a number of application-specific blockchain networks spinning up in the future.
Ultimately, blockchain technology is still in its infancy, with many comparing this phase to where the Internet was in 1994. Keeping this in mind, in the coming years we should expect todays protocol marketplace to churn out 1 or 2 platforms that will achieve the perfect combination of decentralization, security and scalability, while providing a strong use case for their tokens via high-quality dApps with compelling value propositions.
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