Public Chain, Cross-Chain, and Everything Else You Need to Know for the Coming Year
Views expressed below are the analytical views of the LD Capital and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions
2021 proved to be another big year for blockchain technology. Not only did we see the introduction of a variety of new cryptocurrencies, but we officially hit 70 million registered blockchain wallets. And while there was quite a bit of ebb and flow in terms of coin value, the explosion of NFTs proved the blockchain is anything but predictable.
But what about 2022? Well, that's what we're going to discuss in this report. Below, you'll find a comprehensive list highlighting everything investors, developers, and blockchain-curious individuals need to know.
Ethereum & Layer2 Are Poised for Major Expansion
Throughout most of 2021, the development direction of Ethereum primarily focused on decentralization. This made sense, as decentralization is key to developing a safe, reliable, and expandable ecosystem. Of course, developers need to ensure decentralization of the underlying public chain to guarantee high-performance transactions. Therefore, it's necessary to transfer settlement to the Layer2 network, which operates above the main Ethereum network, to improve efficiency.
Layer2 is often commonly associated with rollups because it aggregates or "bundles" transactions together, executing them in a new environment before sending the restructured transaction data back to Ethereum. To accomplish this, Layer2 uses two different sets of technical solutions: optimistic rollups and ZK Rollups.
Teams are currently developing corresponding networks for both of these technical routes. However, they also have ecological support, such as Arbitrum for Optimistic rollups and dYdX for ZK Rollups. Based on the speed at which things are moving, 2022 may be the year that the Ethereum consensus mechanism will be changed from POW to POS. Currently, we anticipate this milestone event occurring in the second quarter, but things can always change.
Once this happens, the general consensus is that Ethereum and its second layer expansion technology will have formed their primary framework. Even without considering if or when sharding technology is implemented, this new framework should be able to handle far more complex and high-frequency applications.
That said, if POW turns to POS, a large number of users who staked Ethereum 2.0 may sell their assets on the market. After all, when Ethereum 2.0 started staking, the price was less than $600. However, the price of Ethereum will most definitely be much higher at that time. It would be more than enough temptation to trigger a potential sell-off, but it is far from a certainty.
What is clear is that 2022 will be a year of continuous, rapid development of Ethereum technology, and the results will be very interesting.
Layer 1 is Currently at a Crossroads
After talking about Ethereum, we cannot ignore another major driver of 2021's bull market. Specifically, I'm talking about the increase in the application of Layer 1. As you may know, Layer 1 is currently dominated by new public chains like Solana, Avalanche, Terra, Binance Smart Chain, HECO, OKEX, AVAX, NEAR, and FTM. Altogether, the ecosystem has a net worth of over $10 billion.
These new public chain answers can be divided into two categories: those that are incompatible with the Ethereum Virtual Machine (EVM) and those that are. Those in the former group will pose a challenge to the Ethereum ecosystem in the long run, especially those public chains that rely on it to boost capital. After all, the underlying value in the public chain is that it can carry a massive, independent ecology.
So if the underlying public chain cannot be as technically decentralized as possible, creating such an ecology would be impossible.
There Will Likely Be More Growth in Sidechain
In the past year, we saw a growth in another solution known as "sidechain." This is essentially a chain built between Layer 1 and Layer 2. And while it is partially compatible with the Ethereum mainnet, it is not part of Layer 2. Instead, the sidechain is specifically designed to handle the excess capacity of Ethereum and to host Ethereum applications in a complementary way. However, it is not designed to compete with Ethereum as a whole.
In mid-2021, a particular sidechain called "Polygon" attracted people's attention. Now – just a few months later - Polygon is an industry leader with a value of nearly $5 billion US. On top of that, its ecosystem has deployed more than 100 DeFi and game applications, including the most mainstream Aave and Sushiswap, among others.
Polygon claims to be a scaling solution aggregator, but Uri Kolodny, the co-founder of StarkWare, emphasizes that Polygon is a sidechain rather than Layer 2. This is meant to imply that Polygon's security does not depend on Ethereum. Moreover, it's clear that Polygon is not helping Ethereum grow, but is instead expanding its own capacity. Similar to BSC, it is a completely independent Ethereum clone based on a POS mechanism. It takes advantage of the ready-made Geth by removing the consensus code, increasing the gas limit, and using multisig as a bridge back to Ethereum.
Around August of last year, Polygon announced an investment of $1 billion for work related to ZK-rollup. Since then, two acquisitions – totaling $650 million - have since been announced: Hermez and Mir. Even more recently, the group behind Polygon announced "Polygon Miden," a STARK-based Ethereum-compatible rollup, and Polygon Nightfall, a privacy-focused rollup built in partnership with EY.
Unlike BSC or Avalanche, which simply copy the Ethereum ecology, Polygon's imitation of Ethereum is far more exact (and more complete). In fact, at the time of this writing, the gas fee of Polygon is less than 0.01% that of Ethereum, and the speed is comparable to that of BSC. This means that if ZK-SNARKs can be realized, it will be the most prominent EVM-compatible option in the public chain.
Cross-Chains Are Poised to Be a Game Changer
Despite what some "experts" may say, Cross-chain is something we can't avoid discussing. After all, if blockchain technology continues to develop, the future world of web3.com cannot be dominated by only one blockchain. Instead, it must be an ecosystem with multiple chains and currencies coexisting in parallel.
Polkadot and Cosmos are two cross-chain architecture projects that have garnered attention in recent months. The vision behind their development is to provide a strong underlying security system to connect various public chains and create a space where different blockchains with different functions can coexist and communicate in this network. Essentially, we're talking about an "Internet of Blockchains."
For example, Bitcoin and Ethereum are the two most popular public chains at present. And while they are both blockchains, they are two completely independent and unique animals. They are therefore, unable to communicate with each other. The goal with Polkadot and Cosmos is to enable separate blockchains like Bitcoin and Ethereum to connect and form a network – to "talk" to one another.
In simple terms, this would solve the problem of "information islands" existing between chains. With cross-chain infrastructure, we would be able to share data between chains in an extremely secure manner. Developers could also create "cross-chain" applications. For example, the application of views on Ethereum could not only be used on that chain but also on others.
That said, these two cross-chain projects have stark differences in both design concept and focus.
For instance, Polkadot is lagely focused on centralization. That is, the block verification of the side chain ecology will be provided by Relay chain, as will computing and security. With such a design, any chain accessing the network would not need to recruit verifiers themselves. Cosmos, on the other hand, advocates decentralization. This means that the Cosmos hub is really only there to coordinate interaction and record / transmit data. As a result, other side chains connecting to the network would need to complete their own ecological governance.
But there's more to it than that.
- Polkadot's management philosophy also favors centralization. In a way, it would focus on serving the architecture, much like Dapp. But since Dapp has no verifier ecology and only connects users and chain data, the entire security would be provided by Polkadot itself.
- Polkadot is also a more long-term and ambitious concept, with plans to emphasize the data exchange of each chain. Cosmos is more pragmatic and more practical, instead emphasizing the exchange value of tokens.
- In terms of cross-chain focus, Polkadot aims to achieve arbitrary message passing between parachains. Cosmos instead focuses on cross-chain asset transfer, and its protocol is far simpler.
From the perspective of ecology, Terra grew significantly in the Cosmos ecosystem throughout 2021. In fact, according to a recent report released by Electric Capital, the number of full-time Terra developers more than tripled from December 2020 to December 2021. Taking this into account, 2022 will likely be marked by cross-chain growth as funds and investors gradually turn their attention to these two ecologies and the projects they contain.
If this happens, both Polkadot and Cosmos are likely to give us an impressive performance, offering up multiple high-traffic projects that are likely to be compatible with the Ethereum Virtual Machine (EVM). In terms of technology, Polkadot will probably get the majority of the attention. After all, the scenarios it will be realized are the same that will be realized by Ethereum 2.0 in the future. And while there is still a big gap between Polkadot and Ethereum 2.0 in a lot of ways, the basic technical framework of the two remains quite similar.
2021 was a big year. Still, technology is all about moving forward, not backward. If recent history is any indication, we can expect massive growth and significant advances in multiple areas before the end of the year 2022. From Layer2 to sidechain to cross-chain, there's a lot to look forward to.