The Multichain Myth
The idea that there will be a multitude of layer 1 (L1) protocols that operate with significant widespread adoption is a myth. This myth is dependent on the misguided reasoning that we will utilize many different blockchains for specific tasks that cannot be effectively optimized otherwise.
This concept of a multichain future belies the fundamental structure that will exist within a technologically and economically mature decentralized ecosystem. The much more likely long-term outcome is L1 chain minimization in which the vast majority of economic value operates on and is secured by a minimal number of L1 protocols.
Nature of the Myth
So why does this myth exist? In order to answer this question, let us first define a L1 protocol. We will broadly define a L1 protocol as one that primarily acts as a permissionless settlement layer and source of security to the native on-chain asset itself as well as more specialized applications and assets dependent on it. As an example, a token offering profit sharing/buybacks from its revenue as a derivatives exchange is not a L1 protocol and is not perpetuating the multichain myth. The same applies for stablecoins tied to fiat or any number of assets that service more specific applications.
Now that we have roughly defined a L1 protocol let us explore the properties of the multichain myth. Given the relative immaturity of blockchain as a technology, there exist some current protocol limitations. For this reason, developing a L1—or L2 solution — to optimize all qualities deemed appropriate has yet to be effectively implemented. More specifically it has not been implemented with any regard for decentralization or censorship resistance— the precise raison d’etre for blockchain based systems. While this is a limitation to varying degrees, it is not an inherently fixed hard limitation.
The rather myopic solution to these current limitations, in accordance with the multichain myth, is to build a blockchain for each quality and then to individually use each of these systems for that specialized request.
Do you need privacy? There is a chain for that.
Do you need scalability? There is a chain for that.
Do you need governance? There is a chain for that too.
This concept, however, fails to consider that with technological maturation comes L1 feature expansions. The result is a minimal number of protocols that capture most, if not all, value add features.
The feature specialization we have seen in many protocols to date is merely a response based on technological shortcomings while working within current protocol designs. As an increasing number of protocols, either through L1 or L2 solutions, effectively implement ever more desired features — like scalability and privacy — the idea of an expansive multichain future will largely be dispelled from long-term value driven investment theses.
Products vs Features
The implication of this multichain future is betrayed by the fact that most L1 protocols are actually features masquerading as products. Proper discernment of a specific feature of a blockchain from a complete product offering is required. The myth would like to have you believe that at one instant you might be utilizing a blockchain designed specifically for decentralized social media or gaming and later another protocol aimed exclusively at scaling or transacting privately.
In accordance with the multichain myth, all features are offered as separate and complete products. In order to best understand the intertwined nature of products and features, we will look at the rise of the mobile phone.
Before the advent of the mobile phone, the landline, GPS device and camera were all complete products — they each offered a specific use case that could hardly be accomplished with any other device. If you wanted to make a call you needed a landline. If map reading was an inconvenience you needed a GPS. And if you wanted any visual record of the past it required a camera. Each of these devices were completely separate in its use, unrelated to and unable to be bundled with any of the other devices. They were all complete products.
However, with continued technological advancement, these separate products were converted into features of a single product — the mobile phone. With the rise of mobile phones owning a separate device for GPS is largely unnecessary. In a similar way, so too will it be to interact with limited feature blockchains misappropriated as complete products. While it is true that limited feature blockchains may act as products at a given time, much like the GPS device, as protocol advancements are made they indubitably become features of products.
Ultimately, L1 protocols that offer some features but are not complete product offerings themselves, within a given technological state, will be unable to compete with solutions that offer a more complete feature set.
Protocol Cooperation vs Competition
L1 protocols are not cooperative in nature but rather competitive. They all exist in competition with each other to serve as the primary backbone of the decentralized economy. These protocols are interacting in a winner takes most environment. Eventually all L1 protocols will converge on a set of highly similar features. As protocols converge on a set of similar features, the stated objective use cases will become largely identical. With little purported feature set differentiation, the need for users to migrate to other L1 protocols for specific features (e.g. privacy, scalability) will largely dissolve.
Although feature sets will converge among L1 protocols, that is not to say that all protocols will accomplish the same ends equally or with the same means but rather their objective use case will have similar end goals. Competing L1 protocols will arise from differing technological and economical parameters resulting in different technological solutions to deliver these similar feature sets.
Protocol evaluation will be hallmarked by how effectively any given protocol might accomplish the entire — or near complete — set of features. Once a given L1 protocol has effectively implemented the desired features and reaches some threshold of adoption with significant network effects, the use case for other competing protocols will greatly diminish. The vast majority of users and developers alike will have little interest in working against network effects to utilize new platforms with nearly identical feature sets.
Community Stagnation vs Adaptation
A fundamental benefit of blockchain based systems is the open-source nature of their protocols. This allows for the adaptation and implementation of specific properties from any number of distinct blockchain protocols. The basic assumption under this pretense is that due to the open-source nature, any existing protocols could benefit from simply adding all valuable properties that had been developed on competing chains.
Theoretically, existing protocols are wholly capable of implementing new features, however, in practice, well established blockchains have had a much harder time shifting their communities. The stickiness in community ideas has to do with the establishment of specific social contracts. These social contracts act as anchors that solidify previously defined platform ideas. While strong social contracts are immensely important, allowing protocols to remain dedicated to a specific vision, they also act as anchors to more drastic underlying changes.
The reality is that although blockchains are fully able to adapt new interesting technological solutions that differ from the original vision, the communities are much less adaptable and act to resist drastic changes that were not addressed in the original social contract. For this reason, we often see the launch of new projects rather than the modification of existing protocols when too many core changes are required. This does not mean all projects will fail to adapt, however, the vast majority will find it too difficult to migrate the community and slide into the wasteland of stagnation and irrelevance.
Market Discovery vs Resolution
Now that we have addressed the properties of the multichain myth, let us understand how the market responds to a L1 chain minimalistic future. There are really two distinct timelines that have very different results. There is the short-term market uncertainty and discovery and the long-term market resolution and solidification. We shall consider both of these timeframes separately.
We are currently well placed within market discovery and uncertainty. This process will likely continue for the next 3–5 years as market participants acquire greater directional certainty with technological maturation. During this time of market discovery, many L1 protocols will coexist with vibrant, impassioned communities and eye-popping high valuations. Make no mistake, investors looking to capitalize during the market discovery phase will likely benefit from the appreciation of most, if not all, moderately compelling L1 protocols. These L1 protocols — within the market discovery phase — will appear to operate with seemingly differentiated use cases or in cooperation with other L1 protocols.
Market resolution will begin to take place following market discovery and will largely solidify in the following 5–10 years. This is the period of L1 protocol consolidation. During this time, L1 protocols will exist in intense competition marked by the emergence of a select few outsized winners and many many losers.
Conclusion
The L1 protocol that secures the majority of the decentralized economy stands to become an immensely valuable piece of infrastructure. If the idea of a multichain future is to be believed, this value would be captured instead by a plethora of L1 protocols each operating with unique value add features with a more equal distribution of market share. However, this thesis is burdened by exemplifying specific features while operating within a technologically immature state.
As we progress through the maturation of the decentralized economy, most competing L1 protocols will have little ability to add additional value. Throughout this time, the pool of competing protocols will greatly consolidate resulting in near complete market dominance for a minimal number of L1 protocols.
