Much of what has happened over the past few months has been driven by a debate about the growing need for scalability in crypto networks. In the near future, alternative approaches to cryptographic scalability will be revealed.

Additionally, I also expect that once we get past the current phase of crypto evolution, the design space for dApps will expand substantially.

From Ethereum Killer to Modular Blockchain

This has been happening since CryptoKitties caused the first blockage of Ethereum in 2017, suggesting that the current state of major smart contract platforms is not yet ready for mass adoption. The scalability trilemma shows how difficult it is to enhance scalability without compromising other important dimensions such as decentralization and security.

What problem is the crypto ecosystem actually trying to solve?

In the most naive sense, developers and speculators are looking for solutions that provide the highest transaction throughput. One of the difficulties in scaling transaction throughput is that the demand for transactions is very volatile, so capacity needs to be able to scale up or down based on network demand. Even the best centralized networks have shown that sometimes a sudden spike in transaction demand can bring the entire network to a standstill. The reason is that the real world (chips for computing and long- and short-term data storage) needs to meet the demands of the digital world (acquiring, sending, data editing), and the real world always moves at a slower pace, especially when the global (real world) ) when the supply chain is already operating at maximum capacity.

The interaction between reality and digital is very relevant for the future scalability of cryptography. Simply increasing the block size for greater transaction throughput requires more powerful hardware to run a full node, and as a result, the barrier increases, resulting in a less decentralized network.

This trade-off has led to the creation of BCH and a split in the Bitcoin community. Larger block sizes are not the only way to achieve this trade-off. If a network requires transaction validators to perform more complex calculations or process more short-term data, this will result in a similar increase in specialized hardware or large amounts of memory, precluding most long-tail users from validating transaction integrity in the network , will lead to a more centralized network in the long run.

A key theme that I expect to see more of in 2022 is more adoption of modular architectures rather than monolithic blockchains. The first generation of smart contract platforms attempted to do everything from data storage to full Turing-complete computation on one platform. In the future, we will see the stack be broken down into data availability and consensus, block validation and construction, transaction ordering and block proposal, and multipurpose or directed computation.

Ethereum's most promising scalability solutions all address some combination of domains or stacks: sharding addresses data availability, consensus, and block building, while Rollup allows transactions to be processed at L2, with proofs of validity or fraud Linked to L1 security. Validiums and Volitions use a proof-of-validity approach, and more platforms utilizing these technologies may gradually enter the mainnet in 2022.

As the modular architecture matures, I expect there will be less demand for alternative monolithic L1 smart contract platforms in the crypto industry in the future. For many existing or aspiring professional smart contract platforms, safely bootstrapping building a monolithic chain for long-term scalability from scratch will not be as good as a second layer on top of the secure data availability + settlement layer Running is more attractive. Ethereum will benefit because in a data sharding + rollup-centric world, the current negative network effects due to network congestion will once again turn into positive ones due to higher data availability and security.

At the same time, I would like to see some interesting new developments and even more modular approaches, such as through independent data availability and consensus layers, which do not perform any computations themselves. A key issue to be aware of is the composability between various modular building blocks, and even though some preliminary solutions have been proposed, we still need to understand at scale how the world of modular cryptography evolves.

Regardless of how people shift their attention to switching between fat and thin protocols, ultimately, developers of decentralized applications will benefit from greater flexibility.

Design space expansion for post-dApp scalability

In general, I expect greater scalability and better user experience, such as broadening the design space of dApps in Web3 through abstractions of blockchain interactions. Many design choices for the user interface, as well as the nature of the dApp itself, are limited by the current architecture of the platform on which it is built.

For example, we are seeing the rise of AMMs and liquidity pools in Defi as an alternative to exchange limit order books. This is not because AMMs are generally more efficient (you don't see AMMs on Wall Street), but because AMMs are the ideal solution for the computationally constrained environments of current Web3 development. Millions of users constantly posting, editing, and canceling limit orders can congested the network as a whole, and cost a lot of gas per user. With more scalability, we might expect the return of limit order books in DeFi.

This could again have an impact on true Defi yields. With limit orders and less reliance on AMMs, there may be less demand for liquidity mining projects due to improved capital efficiency, as well as less demand for cash or stablecoins in Defi. The current Curve war may come to an end and capital may once again find more productive uses.

Due to increased scalability, DeFi may go beyond basic financial primitives and compose complex use cases, driving more real-world user needs, such as building a full-fledged DeFi bank. One of the areas that is really exciting right now is DeFi options, which is where we see DeFi succeed where CeFi failed, providing a robust crypto options market in addition to Bitcoin and Ether options.

However, there is currently no secondary market for DeFi options, so the potential for market participants to hedge or express ideas through options is still limited. A liquid secondary market for DeFi options could become a reality if scalability enables viable limit order book exchange and reduces the minimum segment size of trades (by reducing transaction costs).

Increased scalability will also enable truly long-term engagement in crypto gaming and new NFT use cases in the future.

I've also spent some time researching the crypto gaming space over the past few weeks. As a once passionate gamer, I'm disappointed to note that many games currently involve only a few very basic types of interactions that more or less look like DeFi yield farming wrapped up through a gaming environment. In addition to the increasing participation of traditional game developers and the greater flow of game talent, the increased scalability will also enable truly long-term engagement in crypto gaming and new NFT use cases in the future.

Growing demand for tools and middleware in a multi-chain and multi-layer world

A modular multi-chain and multi-layer crypto ecosystem will also require more tools, infrastructure and middleware solutions than currently exist. Existing or new crypto networks will have a place in a market focused on this new paradigm.

Perhaps, existing cloud storage protocols will expand their services and evolve into a full data availability + consensus network. Potentially, other networks will emerge, focused on providing pure computing resources as a service, focused on handling zero-knowledge proofs for Zk-Rollups. Indexing protocols, cross-chain and cross-layer oracles, or composability and liquidity layers for querying network data from different data layers will also continue to evolve.

These are just some basic ideas and may require more time and thought, but they show that with the likely imminent transition to a modular crypto world, the way various crypto protocols interact will change.

in conclusion

We're still in the early stages of being able to grasp what it all means. I would love to explore how token economics and value capture have evolved in such a modular world, and other implications that can be expected, such as on MEV and DeFi composability. The expansion of the block space acts as a massive supply-side shock that will have implications for most cryptocurrencies’ use cases and the investment cases behind them.

During this transition period, there will be many opportunities for entrepreneurs, talent, investors, and ecosystem players of any kind. New agreements will emerge, old agreements will become axes, and some will be eliminated. Due to the openness of the crypto world, there will always be multiple approaches, and I'm excited to see them advancing and evolving throughout 2022 and beyond.