On Network effects of Blockchains and EVM compatibility
31 Jul 2021
Update: The author doesn’t agree with everything in this post anymore but is too lazy to update it
Every new Blockchain or crypto-ecosystem strives to grow its user base to increase its value, resilience and longevity. This has been an incredibly difficult task that only few have succeeded in (BTC, ETH), many have tried and failed (IOTA, NEO, EOS, …) and many are trying (ADA, ICP, BSC). The reason for this is obvious, establish yourself as a widely used and time tested L1 and a high market cap valuation is sure to follow. Let’s try to look at why some projects have succeeded while many have failed.
Those that succeeded
Bitcoin quite obviously (though it might not have been at the time) had the first mover advantage. For the longest time everybody who had exposure to crypto had exposure to bitcoin. As the value of a coin is also depends on the amount of “users” (or holders in bitcoins case) and bitcoin had by far the most it was a logical buy for all newcomers in an extremely volatile industry as is crypto. Because of it’s largest marketcap it was also the most resilient to attacks and had a history of stableness which certainly helped.
Ethereum in a sense also had a first mover advantage in being the first smart contract general purpose blockchain. It gained its first set of users on the promise of a new technology and the bet that it would one day be big. Over the years more and more Dapps got build and attracted new users as well as capital. Now there was a network effect not just on the Blockchain to use but also one around it’s ecosystem (Dapps) where ETH strived.
Strong network effects
Here lies on of the bigger problems new 2.0 or 3.0 Blockchains have, in that there is no real reason to use them as a user when you get do the same on a more resilient/trusted/time-proven/liquid/exchange-supported/wallet-supported blockchain and get to do even more, as its ecosystem and projected future success (and thus Dapp-stack) is larger. Swapping your ETH to SOL is a hassle and installing a SOL wallet and using a new interface/address format/blockchain also is. With the rise of DeFi the burden to use a new Blockchain grew even larger as new chains don’t have the liquidity ETH provides nor its wide arsenal of Dapps. If ETH can successfully upgrade to 2.0 and achieve it’s thousands of transactions a second it will be very hard for other projects to take ETHs place, as they bring nothing new to the table (maybe marginally smaller fees and faster speed) and are lacking the Dapp stack and liquidity as well as establishedness ETH provides.
So how do you compete with Ethereum as a new Chain? There have been two ways to tackle the Problem of the missing Dapp stack: Make your Blockchain EVM compatible or don’t.
EVM compatible
The idea behind making your chain EVM compatible is giving devs the opportunity to just clone working ETH Dapps and deploying them on (i.e.) BSC, as with pancakeswap and uniswap. This gives new Chains the ability to basically have the same DeFi stack as ETH with all its research and time-testedness that went into it at basically no cost (time and money). The only thing missing then is the liquidity and actual user base of ETH to make use of all the Dapps, which will be very hard to get and maintain as you bring virtually nothing new to the table and ETH has the greater userbase/liquidity/etc.. The only thing that might keep a project from getting blatantly cloned from one chain to the other is developer pride, that they don’t just want to take another’s work as their own, I don’t think this variable is too strong though, especially when there’s a lot of money on the table.
EVM incompatible
The other way of competing with ETH more directly and aggressively is making your chain EVM incompatible. This gives you a much slower start, as everything as to be (re-) developed on your platform. This obviously also works the other way around. If a great new Dapp gets developed that attracts hundreds of thousands of users on your chain, cloning it on ETH is not so easy.
Should you make your Chain EVM compatible or not?
As Zhu Su recently said (and I’m paraphrasing) “At this point there is no question, you have to make your chain EVM compatible”, the disadvantage of missing out on the entire DeFi stack (also of other EVM compatible chains) might overweight here. There is also the question of if clones a dapp is really cloning a dapp or just cloning the code, what I mean by that is that a dapp is very much its brand and TLV, just cloning the code doesn’t do enough to attract users, you have to build the brand and do some modifications. If you build i.e. a successful game on on SOL and its get copied to ETH it wont have the same amount of users and traction.
Making your Chain EVM compatible might in end be the right move, I just don’t see how you can overtake ETH as an EVM compatible Chain, maybe everybody is just fighting for #2, calling it ETH-killer seems to be quite the overstretch in that case though…