A hot topic within the crypto space is whether decentralization should be the backbone of every application.
I don’t think so. At least, considering the juncture at which Crypto currently sits.
Some context:
Satoshi Nakamoto’s intention with creating Bitcoin ($BTC) was to create a financial system that was antithetical to Wall Street. A trustless, bankless ecosystem without gatekeepers. The first evolutions in the space, like Ethereum ($ETH), have closely adhered to the principles identified in the Bitcoin white-paper and have expanded on them considerably.
I don’t like viewing crypto sects through a religious lens, but there’s no better descriptor than “evangelist” for describing some of the early adopters and builders within the Ethereum ecosystem. First prodding, then shouting and now banging incessantly on the drums, they insist that any protocol that isn’t decentralized tends to mirror the failures present in the traditional financial infrastructure.
If we were in the Metaverse, I’d shed my golden, brown Vasanth skin, put on my limited edition Mutombo skin and give them a satisfying finger wag.
There’s truth to their argument but they fail to acknowledge the many layers within decentralization. By their own standards, DeFi (a short-hand term for decentralized finance) should be considered centralized due to material amounts of validators being under a single roof and token supplies being controlled by oligopolies (whales).
Which, brings me to my point:
The short term goal should be to onboard as many people as possible into web3.
The long term goal should be decentralization.
For all intents and purposes, web3 is a marketplace and it is currently supply and demand constrained.
web3 is supply constrained in terms of developers, creators and builders. The founders of Airbnb recognized that in order to improve demand for their app, they first had to get more home owners to list on their app.
Paul Graham explained it best here:
Marketplaces are so hard to get rolling that you should expect to take heroic measures at first. In Airbnb's case, these consisted of going door to door in New York, recruiting new users and helping existing ones improve their listings. When I remember the Airbnbs during YC, I picture them with rolly bags, because when they showed up for Tuesday dinners they'd always just flown back from somewhere.
This lesson holds true for web3 as well, but in this case we need to focus on attracting web2 developers into the ecosystem. Beyond developers, web3 also requires a greater supply of designers, economists, creatives and other builders.
web3 is demand constrained in that liquidity (volume of capital) continues to be a difficult barrier to entry for creators and builders. Liquidity can be thought of as the blood that keeps the system functioning and, frankly, we’re hemorrhaging. Badly. The solution is simple:
Provide the sort of value that incentivizes potential users to give web3 a chance.
Provide an onboarding experience that maintains low transaction costs and assures potential users they’re not going to get skinned alive.
Better market existing value to potential users who are currently in the dark.
Ethereum has mostly failed to deliver on either constraint and to date has focused on maintaining their decentralized core competency. The broader Ethereum community is currently transitioning to Layer 2’s which promises greater accessibility at a lower cost. Vitalik, the founder of Ethereum, explains this in greater depth here.
I’m sure Ethereum will succeed but it’s already been a year and another protocol is executing and shipping creative solutions rapidly - if Ethereum is the soil on which the DeFi forest is currently being seeded, Solana ($SOL) will provide the sun, water and atmosphere that’ll allow the forest to reach a full canopy.
Solana is similar to Ethereum in that it is a decentralized protocol on which applications can be built. It offers composability. It also supports tens of thousands of transactions per second while Ethereum can only support 13 transactions per second (this is expected to change once they move to Layer 2). Solana operates at a fraction of the cost, almost negligible compared to what’s required on the Ethereum network. I consider it a better Ethereum but with some caveats.
Let me identify those caveats before I break down Solana’s edge:
It’s possible that Solana isn’t entirely decentralized. I’ve heard that something close to 40% of their validators are housed under a single warehouse in Europe. (There’s no public source for this but I’ve had this confirmed by multiple people who deliver crypto intel for a living).
An oft cited criticism is that a significant amount of Solana’s supply is held(controlled) by venture capitalists who invested early. This implies there’s a risk that the VC’s can flood the market with Solana, ultimately crashing its price.
A significant number of applications that run on Solana are not open source. This means that you cannot find their code on Github and other projects cannot “fork” them. Meanwhile, almost all projects on Ethereum are open source and available for inspection by the general public.
Solana has recently experienced down time but I believe the overall impact has been exaggerated, see Raj Gokal’s (a cofounder of Solana) take here:
I’ll be the first to admit that every solution in crypto has some caveat, whether it’s transaction costs for Ethereum or outright fraud in a number of smaller market cap operations, there’s simply no getting away from the caveats. It’s the cost of doing business in this space.
If you’re plugged into the space, you’ve probably seen that Jack Dorsey, former CEO of Twitter, is unhappy with the central role VC’s are playing in web3.
I’m not a VC apologist. I mean sometimes I am if it’s after 9pm on a Friday. But, mostly I’m not. I can, however, see the value that VC’s bring to the table and it’s especially obvious in the Solana ecosystem.
Ex-founders who are now VC’s in the space have a number of seasoned playbooks to funnel both suppliers (creators, etc.) and audiences onto emerging consumer platforms. I mentioned AirBnB earlier, but there’s also Zillow, Instagram, Uber, and much, much more. These are all huge successes because they cracked the flywheel.
A combination of Solana’s technical edge and its VC network has led to a wide assortment of celebrities to launch their NFT’s on Solana.
Steph Curry (who’s actually a VC himself) has maniacal fans worldwide, do you think he might have persuaded some of them to purchase Solana to grab his NFT? Do you think this initial bridge into the ecosystem is just the beginning of a particular fan’s journey into the world of NFT’s, cryptocurrency and potentially DeFi? I do.
So to some extent, I am seeing the following flywheel play out:
Celebrities and creators flock to Solana because of low transaction costs.
Fans, who previously were unaware or uninterested in Crypto, onboard into the Solana ecosystem.
Some portion of fans stick around afterwards, incentivizing a fresh round of creators to contribute.
Cycle repeats.
This process originates partially because of Solana’s technical/cost advantages but it gains velocity due to a growing captive audience.
I think Solana potentially being centralized can and will be a definite cost. But, for the time being it’s allowed them to pose as a unified front while executing a calculated marketing approach:
They’ve cleverly positioned themselves as a competitor to Ethereum, encouraging investors to diversify their risk by investing in Solana.
If you listen to any podcast episode involving a Solana VC, they’ll repeat terms like “composability” and “scalability”. This pitch is typically meant to attract new developers to the space, and it’s working:
In late November, when the Developer Count chart above was posted, Solana’s market cap was 13% of Ethereum’s. Contrasting Solana’s market cap against Ethereum’s is another common pitch to onboard new capital.
Also, it turns out that having a strong marketing approach is fairly important (arbitrum and zksync are Ethereum L2’s):
I’ll note here that crypto is not a zero sum game. It is common for people to maintain a wallet in Ethereum as well as Solana, it’s only a minority that tend to stick to a single blockchain.
With that said, I also firmly believe that DeFi’s future looks far more homogenous than it does now. Meaning the majority of capital transacted will consolidate onto two or three chains rather than the many chains we currently have.
Solana succeeding isn’t a negative marker for Ethereum or any other chain, rather it’s positive for the entire space. I say let’s focus on growing the pie, decentralization will come.
Disclaimer: This piece is not investment advice and is meant for informational and entertainment purposes only.