Crypto launched over ten years ago when Satoshi Nakamoto published the Bitcoin whitepaper. The nine page document introduced blockchain technology, solving the Byzantine Generals Problem – it finally proposed a feasible solution to coordinating in a trustless setting.
However, Bitcoin has little to no programming features, transaction speeds set roughly every 10 minutes, and no meaningful forks since the early days. This is intentional: Bitcoin serves as storage of value and needs to maintain its immutable reputation to continue to attract the next incremental investor. Like real gold, Bitcoin’s value comes from its stable yet scarce supply.
Fortunately, the open ethos of crypto led to the creation of Ethereum by Vitalik Buterin. Vitalik built upon Bitcoin’s blockchain technology with smart contract mechanisms. With smart contract features, money is now truly programmable and Vitalik’s invention further removed the need for centralization to transact. With a series of “if this then that” language, money can change ownership in a trustless fashion.
Consequently, Ethereum unlocked a cambrian explosion in Crypto. The list is endless – Compound launched DeFi summer with liquidity mining, UniSwap brought automated market making to crypto, Bored Ape Yacht Club ignited the NFT craze, DAOs surged as governance mechanisms, MakerDAO created a cryptonative stablecoin, etc.. As Kyle Samani put it, tech crypto has finally overtaken money crypto.
While crypto is riding high today, the ecosystem continually runs into systematic problems. Ethereum’s block space is full and constantly choking – steadily increasing gas fees and glacial transaction time. The Ethereum Foundation plans to solve the issue with the Merge and data sharding. However, all of this takes time and solutions are needed today. As a result, how does the crypto community solve or get around Ethereum’s congestion problem? What’s going to iterate on top of Ethereum, like how Ethereum iterated on Bitcoin?
I believe one solution is a modular design: swapping out Ethereum as a Layer 1 with a faster Layer 1 but preserving the Ethereum-led primitives and community with Ethereum Virtual Machine (EVM) compatibility. Crypto moves forward by upgrading the network and consensus layer but keeping the application layer intact.
To pull it off, the next winner will need five key traits.
First, a foundational feature will be an Ethereum bridge. Ethereum holds the second most crypto wealth, with whales eager to try new projects and diversify their crypto holdings (whether that be in Ethereum or elsewhere). Just as equally important are the average users locked into Ethereum but turned off by the gas fees. An Ethereum bridge provides an escape valve for Ethereum users into other chains.
Second, the competitive chain needs EVM-compatibility. Most crypto developers are on Ethereum and as a result, Ethereum generates most of the new, innovative primitives. EVM-compatibility provides an opportunity for the exact same project to exist in other chains. While liquidity and the user base will be fragmented, EVM-compatibility provides an avenue to leverage Ethereum’s innovation while rapidly building out one’s own crypto ecosystem efficiently.
Third, the blockchain needs to be scalable, i.e. non-linear gas fees and high TPS. Both are the competitive wedge against Ethereum. Otherwise, user experience suffers and provides no compelling value proposition for Ethereum users to leave their native ecosystem.
Fourth, the chain needs to be built for interoperability with other chains. The future is likely a multi-chain world with liquidity fragmented and innovation happening across multiple chains. As a result, the chain needs to provide a core feature that allows other coins to bridge in / bridge out and forked projects to easily launch while maintaining a seamless user experience. The only way to future proof the chain is to have the technology to integrate future innovation.
Fifth, the team behind the chain needs operational execution capabilities. Like a startup, a strong leader with credibility needs to serve as a beacon to attract new users. Meanwhile a capable team is required to carry the long march to build community, ship new features / solve bugs as the project scales, and work with other crypto projects and real-world partnerships to sustain momentum. Early in its life, projects need coordination and centralization to fight for legitimacy.
The five key items listed above are necessary to containerize the EVM. EVM provides a way to package Ethereum’s innovation and export it into a faster Layer 1. Think of it like this: EVM is the application layer for crypto projects while a different Layer 1 can serve as the networking and consensus layer. EVM is Layer 2 and the EVM-compatible chain is Layer 1.
Conceptually, it’ll be something like this:
Avalanche serves as the networking and consensus layer.
Developers port over an Ethereum-native DApp onto the C-Chain with EVM-compatibility.
Transactions on the DApp are secured by the Avalanche Mainnet but done cheaper and faster because of Avalanche’s networking and consensus mechanisms.
An example of EVM containerization today is Aave. The leading deposit and lending DApp exported their project across chains with EVM – their lending mechanism exists across Ethereum, Polygon, and Avalanche. On an aggregate basis, Aave holds $25B in TVL across all chains and only $14B of Aave’s TVL is from Ethereum.
Ethereum provided two great innovations to propel crypto even further: smart contract mechanism and EVM. However, crypto is a ruthlessly fast environment. Due to open-source culture, new value propositions are easily copied and propagated. In the Layer 1 market, projects have to continuously innovate to win new users and hold onto existing users. Thus, the best way to win is to capture as much cross-chain innovation as possible while leveraging Ethereum’s user, developer, and DApp network effects.
Note: I am still exploring Ethereum Layer 2 scaling solutions. I believe the future is a multi-chain world, with Ethereum Layer 2 playing a crucial and significant role.
Disclaimer: I hold investments in Ethereum, Ethereum projects, Avalanche, and Avalanche projects. This is not investment advice.