Navigating and Thriving in the World of 1000 Blockchains
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If you're a founder or investor who wants to make it big in the future world of thousands of blockchains, read this post. It shows where the major hidden opportunities are.
High Level Summary:
The onchain economy will soon consist of thousands of interconnected but independent blockchains. The major categories will be smart contract platforms (Ethereum, Solana, Avalanche, Layer 2 blockchains), brand-specific blockchains (Flow, Soneium), and use case-specific blockchains (Bitcoin for most of its history, DePin networks, private blockchains like Pineapple).
New blockchains will bootstrap with one core use case, which is overwhelmingly likely to be one of the following: store of value and investments, trading and exchange, payments, collectibles. These core use cases have been the historical revenue drivers of the onchain economy, and will continue to be.
There are chain-localized competitive advantages that accrue to specific types of dApps, which I call ‘defensible primitives’. They consist of the following: the dominant DEX, the primary crosschain bridge, the leading lender, the leading name service, and the leading stablecoin. More may emerge. Defensible primitives are capable of venture-scale returns today.
Investors and founders can outperform the broader market by investing in and building defensible primitives on winning chains. Winning chains can be probabilistically identified by the salience of their competitive advantage vs other chains in the same category. Platform risk remains a real risk.
We are rapidly approaching a future of a thousand blockchains.
United by chain abstraction solutions like the Superchain, Polygon Agglayer, and Everclear, and made cheap to launch by new blockchain frameworks and rollup-as-a-service platforms, these chains will transform the onchain economy and let users and assets travel freely across borders, chains, and applications. Most consumer activity will migrate to rollups and other Layer 2 (L2) and Layer 3 (L3) solutions.
With this shift comes opportunities, and the key challenge for builders and investors lies in identifying which blockchains are poised for success and capitalizing on these emerging ecosystems early.
Looking ahead, we can expect to see different types of chains emerge around different types of value propositions:
Smart contract platforms: These are the main types of high-value blockchains today, including heavyweights such as Ethereum, Solana, Avalanche, BNB, and many others. The central value proposition of these chains is overwhelmingly financial. The finance sector is likely to adopt blockchain technology as a ledger system, with major institutions developing their own chains to maintain control and meet regulatory requirements, which will increase the number of such platforms.
Brand-specific chains: More intriguingly, we may see major consumer brands launching their own blockchain ecosystems. Flow, developed by Dapper Labs, is an early example of this trend, although it's somewhat limited in its technological scope. The consumer electronics giant Sony announced Soneium, its own Ethereum L2. As brands recognize the potential of blockchain for customer engagement, loyalty programs, and digital asset management, we will see a proliferation of brand and IP-centric chains.
Use case-specific or novel coordination chains: Another exciting class of blockchains will be those that coordinate disparate and disagreeable parties in a trustless way, and which require a chain to maximize value capture. Every DePin network can be such a chain, as are some of the more unique private chain implementations, such as Pineapple. The most famous example of this type of chain was Bitcoin itself.
Here's a few and where they could fit; of course there are far too many blockchains now to list, proving the point.
There are already hundreds of independent blockchains, but the major growth is still to come. That growth doesn’t need to be from new use cases; niche economies where a winner would like to control the financial system of record to better monetize their assets will be reason enough to launch a blockchain for many brands.
To bring color to this picture, many dApps will be incentivized to build their own chains: Whether a chain is designed to handle fungible commodities or non-fungible collectibles, whenever use of blockchain creates a potential financial market where onchain assets reach a certain amount of value, the asset creator will be incentivized to create their own blockchain platform to better monetize interaction with their assets. With so many ways to create high-value digital assets, from finance to brand IP to collectibles and more, this makes a world of countless blockchains inevitable.
I call this inevitable world, the world of a thousand and one blockchains, and it is upon us.
The Real Money Generators
Each of these new blockchains will revolve around a primary revenue driver that forms the initial anchor of the ecosystem. Since the birth of Bitcoin, the core use cases that drive onchain value and popularity have remained stable: as a store of value and for investing purposes, trading and exchange, making online payments, and as collectibles.
While the crypto community still asks for "real use cases" and hunts for brand-new concepts, we shouldn’t overlook the profitability of proven use cases. Traditional use cases are delivering compelling financial results, and to be distracted from them is to harm one’s own investment performance. Despite the constant influx of new projects and ideas, these fundamental financial applications still account for the lion's share of cash flows in the onchain economy. They've withstood the waves of change in narratives, regulatory outlooks, and technological advancements, emerging as the bedrock of the onchain economy. They are robust.
That’s where we as founders and investors need to pay most attention, because the future 100x returns are already here. The past indicates that these real money generators are the chief places we should be looking for asymmetric returns.
Returning to the world of 1000 blockchains, we should expect almost every major blockchain to fit this historical cast in some way. The blockchain will launch, and initial use cases will center around several core applications that act as what I call ‘defensible primitives’. These foundational protocols enjoy real moats and network effects within their respective blockchain ecosystems, which I call blockchain-localized advantages. As a particular blockchain economy grows in value, it will incentivize creation of functioning DeFi markets and interchain commerce to service and better monetize its onchain value. There will be the same products, built and rebuilt, across every chain.
This story of blockchain birth and growth also shows us how to best navigate this world of 1000 blockchains, since we need only follow the historical money and invest where the market has already proven the defensible advantages to be.
But before we dive into the defensible primitives in the onchain world, let’s talk about why the onchain economy creates truly incredible businesses in the first place.
Pushing COGS to Users at Limitless Scale
What sets onchain protocols apart from all other internet businesses is the ability to push cost-of-goods-sold to end-users, alongside scalability bounded only by the underlying blockchain platform. For traditional internet companies, the cost of servicing individual users is often negligible, but DeFi platforms charge users for the compute through gas fees instead. Compare this to Google, which, despite having near-zero marginal costs for individual queries, must operate 37 data centers and spend $50 billion on CAPEX in 2024 alone.
The beauty of decentralized onchain projects lies in their ability to generate revenue without relying on traditional web infrastructure. These projects can earn money directly from user interactions without the need for centralized servers or extensive physical infrastructure. This decentralized nature allows for a lean and efficient business model that's unprecedented even for internet companies.
A prime example is Uniswap, a decentralized exchange protocol. Uniswap generates over $640 million in annual recurring fees for its stakeholders. Following a recent rewards proposal, Uniswap could distribute between $62 million and $156 million in annual dividends to UNI token holders. The project itself owns almost 40% of all tokens ($2.46 billion held in reserve) out of the fully diluted valuation of $6.198 billion. In a mere six years, Uniswap created enormous value for its owners. Because of its moat, the monthly trading volume on L2s has also tripled since last year.
Onchain projects like Uniswap represent the pinnacle of internet business efficiency. They've managed to create a model that generates substantial cash flow with virtually zero marginal spending. This sets them apart from traditional businesses of all kinds. This staggering figure underscores that Uniswap has essentially become a pure cash machine within the onchain economy. And there are others.
Defensible Primitives
A defensible primitive like Uniswap exists in a winner-take-all market, with power law distribution of market share and user adoption due to network effects. Those network effects are largely bound to the blockchain where they have dominance. I call such network effects blockchain-localized advantages.
To put this dominance into perspective, Uniswap's market share is nearly three times larger than that of its closest DEX competitor on Ethereum, Curve. Being a defensible primitive makes it increasingly difficult for newcomers to challenge the established leader on local blockchain.
When users need to swap one token for another, they gravitate towards the DEX with the most liquidity and trading pairs: the platform with the most capital in its liquidity pools can offer the best exchange rates and minimize slippage, creating the best end-user experience. As more users make this same choice, they further entrench Uniswap's position, creating a virtuous cycle of growth and dominance that has brought Uniswap to its leadership position on the Ethereum blockchain, and act as a self-reinforcing cycle of success.
But these advantages end at the border of their home chain, and Uniswap’s advantages have not gone far beyond Ethereum; they have been outcompeted on Ethereum L2 blockchains like Optimism and Base by much smaller competitors (Velodrome and Aerodrome, respectively) and this seems to be the pattern, not the exception. Their advantages are blockchain-localized, though they may have such advantages on multiple chains if they are able to dominate the competition fast enough.
These are the big categories of defensible primitives that I know of today; you can argue that block explorers and MEV tooling could also deserve a place here, and I'm sure there are others yet undiscovered.
There are many types of dApps that seem to share Uniswap’s blockchain-localized defensibility. The key categories typically include:
A dominant DEX: The aforementioned Uniswap is a good example of a winner-take-all DEX dominating an ecosystem.
A primary bridge for cross-chain transactions: Circle CCTP, a bridge allowing USDC to flow between chains, processes over $30 million every 24 hours, and it dominates bridge volumes where USDC dominates.
A leading lending provider: Aave operates over $11Bn in total volume locked, and it is harder to find a safer lending platform on Ethereum.
A widely adopted domain name service: over 2,000,000 domains were created with ENS, Ethereum Naming Service, which has become an embedded standard.
A leading stablecoin: Whichever stablecoin is dominant on a particular blockchain is likely to remain so for the future, barring surprises. On Ethereum, that’s MakerDAO. On Tron, that USDT. On Base, that’s USDC.
It's important to note that each blockchain ecosystem has limited space for these defensible primitives; each are winner-take-all competitions. Notably, a brand can win these blockchain-localized advantages across multiple chains (as bridges and naming standards often do) if they can get to a big enough scale and their network effects take hold on that chain. Winning these blockchain-localized advantages for the long term is all about building those network effects fast enough.
Given the limited number of these positions and the power of narrative within market cycles, the historical strategy has been to differentiate from direct competitors by inventing new categories or rebranding existing ones. For instance, some projects rebrand bridges as "transport layers" to avoid direct comparisons. But at their core, these services focus primarily on moving assets between different chains, and participate just as much in these winner-take-all competitions.
Thriving in the World of a Thousand Blockchains
If you’re a founder or investor and want to take advantage of these natural, blockchain-localized advantages, you can do so by creating or investing in the leading defensible primitives on a chain-by-chain basis. While many of these positions have already been filled, there will be countless vacancies in the onchain world to come; multiple for every blockchain, in fact.
The challenge will not be selecting the leading defensible primitives (since their leadership position should be fairly obvious) but selecting which blockchain itself to bet on!
Of course, this strategy won’t always work (the Uniswaps, ENSs, and Circle’s of the world will successfully muscle into some of the new chains), but the odds of making a compelling return will be much, much higher than they would be for the median blockchain startup. Moreover, they will tend to scale and grow alongside their underlying blockchain: the venture-scale outcomes available to L1 blockchains gives defensible primitives a similar venture-scale return profile, critical to founders and investors alike.
One question remains: How does one choose a winning blockchain to invest or build on? To answer this, we need only return to our initial categories and ask: what kind of blockchain is this, and do we have reason to believe it will stand out in a crowded market?
Smart contract platforms are generally assessed on the weight of their technical innovations and GTM teams.
Brand-specific blockchains can be assessed on the market strength of their sponsoring brand, and the appropriateness of their core use case for their IP.
Use case-specific and novel coordination blockchains (like most DePin networks) can be assessed on the strength of their founders, existing access to market, and TAMs.
Comparing the salient advantages of blockchains against their competitors has proven a reliable enough heuristic for picking winners in the past, and I expect it will continue to. Big funding rounds for the protocol can be a good signal, but not a definitive one. Winning patterns are unlikely to change, but more intense competition between more blockchains fighting for market attention means that the bar for salience is constantly rising.
As of October 2024, L2Beat now shows 96 operational L2s with an additional 87 L2s and L3s in development, and Coingecko lists hundreds more operational L1 blockchains.
Here's the best map of the industry that I know, and we're still just getting started. The world of a 1000 blockchains is almost here.
Some people call this “oversupply” due to excessive investor interest. I look upon this as the natural beginning of the world of 1000 blockchains, and a decade’s worth of founder and investor opportunities.
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Interesting piece and worth the read. The term "defensible primitives" can actually be thought of as "The Law of The Mind" which is one of the 22 immutable laws of marketing by Al Ries and Jack Trout. Also another principle from the 22 laws of marketing called "The Law of Category".