It’s a multi-chain world.
Whether you’re a developer or an investor, we’re all asking the same question: which chain has momentum? For a developer, it can influence where you build. For an investor, it can influence where you allocate capital. All this is amplified in a down market when the real building and accumulation occurs.
There are different approaches for measuring momentum. I’ve been a firm believer in the more developers = more applications = more users equation, and Electric Capital publishes a great annual report on developer activity across chains. Smart contract blockchains are platforms at the end of the day so the real value comes from what is built on top.
But maybe there’s a more nuanced way to measure developer momentum. I’ve starting asking another question recently…
Is there novel innovation?
Meaning, are there categories of assets and applications that exist on one chain that don’t exist on others? Is it net new?
Novel innovation can be a valuable indicator of a chain’s momentum because it signals (a) there’s a healthy amount of experimentation, and (b) the people building are thinking differently.
When you look across the multi-chain landscape, novel innovation is hard to find. Most chains are in the middle of executing the Ethereum playbook, building applications inspired by or pure forks of applications that originated on Ethereum. The industry is collectively spending billions so faster/cheaper chains can get feature parity.
But there are tiny pockets of novel innovation out there.
Disclaimer - I’m not intimately familiar with the pipeline of innovation on every chain. I spend the majority of my time on Ethereum and other EVM compatible chains. This means I have blind spots. If I’m not acknowledging a corner of novel innovation on another chain, let me know!
Let’s zoom in…
For a point of reference, let’s look at some of the novel innovation on Ethereum and the impact it had on it’s momentum and competitive advantage.
Smart contracts. Smart contracts unlocked an entire world of innovation that wasn’t possible on first-generation blockchains.
Token standards. Ethereum was the first chain to adopt smart contract standards for fungible and non-fungible tokens. This allowed it to corner the asset issuance market from 2016-2019. During that time, over 250,000 fungible and non-fungible assets were created on Ethereum.
ICOs. As early as 2014, teams were experimenting with public token sales as a mechanism to raise capital. But the ICO was refined, popularized and scaled on Ethereum, due in large part to the adoption of the ERC20 token standard. The impact of the ICO was initially an influx of capital into the Ethereum ecosystem, and ultimately led to the first generation of dapps, including DeFi.
NFTs. While non-fungible tokens weren’t invented on Ethereum (I’m 95% certain that technically the first NFTs were on Counterparty), Ethereum was the birthplace of the modern NFT (Cryptopunks, Cryptokitties), and as a result, most bluechip NFT lives there.
DeFi. Using smart contracts to facilitate common financial products and services like asset exchange, lending and borrowing, and derivatives was novel innovation in 2017. It was created by necessity - everyone held tokens, but you couldn’t do anything with them. Ethereum-based DeFi applications became the first ecosystem of dapps with clear product market fit, attracting a lot of liquidity and users.
DAOs. The concept of a DAO existed pre-Ethereum, but the first major DAO was THE DAO. Decentralized communities need to be governed, and DAOs are a crypto native approach. DAOs have allowed major protocols to become gradually more decentralized. They’ve also opened the door to community investment and ownership models.
How does novel innovation happen? It’s a byproduct of something I talk a lot about…compounding innovation. Creating something novel requires you to combine things that already exist in a new way. You have to experiment.
The more building blocks there are, the faster and more varied innovation will compound.
If you look at the above list - token standards, ICOs, NFTs, DeFi and DAOs - the common building block was smart contracts. Combined with fundraising, they enable ICOs. Combined with financial products and services, they enable DeFi. Combined with community governance, they enable DAOs. Each of these novel innovations is itself a building block now, and can be combined with other things to produce something novel.
Where to look
You would expect Ethereum to compound innovation faster than any other chain because it has the most building blocks and the largest developer community. However, Ethereum is also burdened by high gas fees, which has a negative impact on experimentation.
It would seem reasonable then for a concentration of novel innovation to occur on cheaper EVM-compatible chains like Polygon, Avalanche and Arbitrum because they get the best of both worlds. They can tap into an existing developer community, cost of experimentation is lower (cheaper gas fees), and they can leverage six years of Ethereum building blocks. I don’t care how fast and scalable a new chain is…you won’t outpace the compounding innovation happening on a chain (or family of chains) with a 6-year head start and a growing developer community.
I’ve heard anecdotally that Polygon is being used as a testnet by some projects because it is more reliable than Ethereum testnets and gas fees are still low in comparison. This is interesting, because it could mean chains like Polygon are getting a disproportional amount of experimentation. Overtime, enough experimentation will yield novel innovation, and that innovation will attract new capital and new users.
Here’s are some interesting statistics about the number of NFT contracts on Ethereum vs. Polygon…
Is NFT experimentation slowing down on Ethereum? Is innovation compounding faster on Polygon?
Yes? This is something I’ll have to dig into more in the coming weeks.
My point here is that maybe there’s another variation of the equation for a chain’s success:
Experimentation = Novel Innovation = New users
Pockets of activity
Novel innovation usually shows up in the form of tiny pockets of activity. It’s actually rare for a single project to be experimenting on their own. There’s usually a few that arrive at the same conclusions around the same time. Some of the most interesting pockets of novel innovation I see right now are:
Web 3 Social. If DeFi defined 2018-2020, Web 3 social applications will define the next two years. Capital is pouring into these projects, and the first generation will launch this year. Based on my assessment, the majority of this is happening on Ethereum.
Identity/reputation/credentials. The growth of DAOs and NFTs have revived identity as a core building block. Capital is pouring into these projects too, and the interplay with DAOs and Web 3 social is a perfect storm in the making.
P2E/Metaverse gaming. Not my area of expertise, but cheaper EVM-compatible chains seem to be enjoying the bulk of the innovation here. Examples include ICE Poker on Polygon, and Bridgeworld/TreasureDAO on Arbitrum.
Community ownership/investment. I touched on this last week, but DAOs as a framework for community ownership/investment is heating up. The interplay with Web 3 social makes this pocket of activity more significant.
Real world assets (RWAs). In the spirit of the upcoming men and women’s NCAA tournament, RWAs are my “sleeper team”. Centrifuge is doing some really interesting, and hard, work to bring real world assets onto blockchains, and it’s working, albeit slowly. If RWAs can be onboarded to a specific chain at scale, this brings a new category of assets and users into the ecosystem. As far as public blockchains go, most of this seems to be on Ethereum and Polkadot right now.
If you’re trying to measure novel innovation, and the primary ingredient for novel innovation is experimentation, then it would seem that the largest and most experimental developer communities would yield the most novel innovation.
If I’m trying to build an ecosystem around a blockchain - of course you need feature parity with Ethereum, but you also need to be investing in outside the box, weird, non-obvious projects. That’s where the novel innovation will come from, and the competitive advantage.
Thanks for reading,
Not a subscriber? Sign up below to receive a new issue of 30,000 Feet every Sunday.