When Aptos launched earlier this year, it joined a smorgasbord of public blockchains vying for prominence. And, considering the imminent launch of Sui, it won’t be the last.

This made me reflect on the endgame for public blockchains. Do all the layer-1 blockchains, from Algorand to Zilliqa, have a future? In fact, what must a layer-1 be in order to have long-term relevance?

Unfortunately, the question became more existential with the spectacular collapse of FTX. The frost of (self-)doubt has extended to many an old-timer. Is the grand experiment failing? Why are we here?

In this article, I articulate a thesis for the endgame of public blockchains.

The TL;DR is that a blockchain must, above all else, be a monetary and political project. If a blockchain is not creating a global store-of-value that underpins a sovereign digital economy (or “digital commonwealth”) — it is headed for a dead-end.

To understand why, let us begin by covering some fundamental principles.

Principle I: technology is table stakes — only

Solid technology is a minimum for any blockchain to compete, but — over a long-enough time frame — it can hardly create a unique selling point or economic moat in a space that is fundamentally open-source. If the narrative of a layer-1 blockchain is based on a technological angle such as throughput or virtual machine, a superior alternative will emerge soon enough, quite possibly building on the former’s code.

This is not an abstract, theoretical point: layer-1 blockchains like Avalanche, Binance Smart Chain and Polygon came to life as faster and cheaper clones of Ethereum, whereas Aptos is already described as the “Solana Killer” for its anticipated throughput.

In short, even if having a technological edge is a prerequisite for relevance, it is not a mechanism for long-term value capture. A layer-1 blockchain must be something more.

Principle II: fees will tend to zero

Blockchains are locked in a fierce race to offer users the lowest network fees.

The incumbent smart contract platform Ethereum is shifting transactions off the main chain (L1) gradually via assorted “rollup” technologies. This will reduce demand for layer-1 blockspace, and — in turn — the price of gas. The combination of lower transaction volumes and transaction unit costs will trend Ethereum’s “fee revenue” downwards.

Meanwhile, every challenger to Ethereum is placing high throughput and low transaction fees at the core of their competing designs and narratives.

As Cosmos’ Sunny Agarwal and Zaki Manian explained recently, transaction fees should “not be a meaningful source of revenue” for layer-1 blockchains because “block space is going to be cheap in the long-run”.

Ergo, narratives of value accrual based on fees will not hold in the long-term:

1. Fees will not make a blockchain’s native token deflationary.
2. Fees will not represent meaningful yield on the native asset for proof-of-stake validators.
3. Fees cannot be relied upon to cover a network’s security budget.

Principle III: no (valuable) token, no security

In proof-of-work, a valuable token incentivises miners to invest in hashing power. The higher a network’s hash rate, the lower its vulnerability to a 51% attack. In proof-of-stake, the price of the token is a key factor in the value of the total stake. The more valuable the total stake, the more expensive it is to undermine the network via stake acquisition. In short, the success of a network as a secure and credibly-neutral economic layer cannot be divorced from the success of its native token.

A Thesis For Longevity

Considering the three principles above, I propose that a public blockchain will only endure if it succeeds in delivering a self-sovereign currency that underpins a thriving digital commonwealth.

The concept of a digital commonwealth echoes the journey from “startup society” to “network state” described in Balaji Srinivasan’s eponymous book. It can be understood as an online community united by shared interests, based on a moral innovation and capable of collective action.

It is important that a startup society’s basic innovation has a moral basis. It attracts “citizens”, rather than consumers or mercenaries. Bitcoin’s moral innovation — in essence, the separation of money and state — has demonstrated its staying power. An innovation focused on cost or scalability, on the other hand, can hardly form the basis of a new society.

With a moral innovation at its core, a startup society must also clearly build a strong social layer. As Balaji says, “community building on steroids”. But if this society is based on a blockchain, I believe two other aspects merit particular focus: the social smart contract and the native currency.

Social Smart Contract

A portmanteau combining Rousseau’s concept of the social contract with the blockchain concept of the smart contract, the term “social smart contract” denotes the programmatic governance parameters (or terms and conditions) that bind a blockchain’s participants.

At a minimum, a blockchain’s social smart contract should uphold censorship-resistance and credible neutrality. If OFAC can meaningfully initiate or cause the exclusion of Iranian or Russian users from a given blockchain, it becomes hard to find a moral premise for this blockchain’s existence. In fact, one could even question the commercial premise, as such a blockchain effectively competes with permissioned systems ranging from Google Cloud to Visa.

Beyond this, a blockchain’s social smart contract should offer democratic mechanisms for evolutionary change and collective action. This is not only about the political importance of empowering “citizens” to shape the future of their “society”, but also about absorbing innovation and funding public goods. Tezos’ community governance model is an early example, having facilitated several chain upgrades and a subsidy mechanism (via inflation) for tez liquidity.

Native Asset

A public blockchain’s native currency is its backbone, for the following reasons:

1. As per principle I, technology can be copied, making the native asset a key instrument for creating sticky network effects.
2. As per principle II, blockspace is ultimately a cheap commodity, leaving the native asset as the blockchain’s only pathway to value capture.
3. As per principle III, the blockchain’s social smart contract is vulnerable to a coordinated attack if the market capitalization of the native asset does not reach critical mass.
4. A digital commonwealth without a sovereign currency is not sovereign, rendering it pointless existentially.

Rather than focus on the native currency, many layer-1s optimize for the application layer with priorities like scalability and throughput. Setting aside the resulting blockchain designs that have compromised the social smart contract, this approach puts the cart before the horse. As Lyn Alden explains, it is analogous to building Mastercard or Visa without an underlying dollar system:

These [projects] [sacrificed] some degree of stability, decentralization, immutability or auditability in order to optimize themselves as higher-throughput media of exchange, even though hardly anyone was using them as a store of value yet. They were basically just building fintech payments companies and expecting to compete with Visa, despite having way worse user experience, way slower speeds, and way less transaction throughput.

For clarity, a blockchain’s application layer is crucial to attract developer talent and export utility to the world. However, without a strong native currency, it becomes “an extension of the incumbent fiat system”. This not only kills the moral innovation, it is also economically precarious for an open-source technology that charges fees tending towards zero. It is for these reasons that Ethereum Foundation researcher Justin Drake is pushing the Ethereum ecosystem to “make ether succeed” as a monetary asset.

Does optimizing for the native currency sacrifice the application layer? With the rise of modular blockchain construction, not really. The vision of high-throughput, custom-VM rollups secured by a maximally decentralized chain is not far from reality. In other words, the “blockchain trilemma” is ultimately solved.

The most compelling pathway to critical mass is to design the native asset as universal money.

Partially, money is a meme, whether centered on the Federal Reserve, EIP-1559 or the face of a Golden Retriever. Yet, it also has design aspects. In the latter respect, how do you optimally craft blockchain-powered money?

To begin with, just as a social smart contract requires a strong cryptocurrency to be credible, a cryptocurrency requires a credible social smart contract to be strong. It is difficult to envision anything that is not credibly-neutral and censorship resistant being an alternative to the yuan or dollar systems. The following choices are therefore problematic:

1. A high barrier of entry for block producers. The social smart contract is more resilient if it is upheld by a set of block producers that is broad-based and easily accessible. Conversely, a restricted validator set (whether by design or de facto) leads to censorship vectors and a form of “elite capture”. This is a function of hardware requirements, minimum stake, ease of setup and the severity of downtime penalties — among other things.
2. An investor-centric initial distribution. It is hard to envision a real future alternative economic system being owned or orchestrated by a small clique of exchanges and venture capitalists.
3. A weak or ill-defined framework to alter the social smart contract. A social smart contract that can be altered through clear democratic procedures is more credible than one that can be altered via informal, backchannel consensus — or worse, a set of admin keys.
4. Illiquid proof-of-stake. This design requires locking up native tokens and, in some cases, exposing them to slashing risk in order to accrue inflationary block rewards. The ensuing friction reduces the percentage of total circulation dedicated to securing the network — e.g. Ethereum is secured by only ~12% of ETH supply, a number that is closer to 75% for Tezos and Cardano. It also inevitably leads to the rise of liquid staking derivatives. As LSDs tend to concentrate the native token with a handful of issuers, they have been described as a “stratum for cartelization”. (And, if LSDs do not emerge, the native token is subject to an inflation tax if you want it available for usage, which is not a compelling design for money)

A final reflection is that tokenomics must elegantly balance the objectives of network security and monetary soundness. Here, the first principle is that supply caps are a design flaw memed into credibility. Namely, if fees cannot be a compelling source of revenue as per principle I, the only long-term compensation mechanism for block producers is inflationary rewards. You can read more in this post by Arthur Breitman.

If inflation is a must, the chain should be designed to dynamically find a level of inflation that is high enough to compensate block producers, but not too high as to undermine store-of-value qualities.

There is no conclusive design in the industry, but I find that liquid proof-of-stake is the most compelling. Under this paradigm, the average user can delegate without lock-ups or slashing risks to a validator. By facilitating broader access to inflationary block rewards, liquid proof-of-stake makes inflation less dilutive. If inflation dilutes nobody, it is functionally irrelevant. As for the security budget, it is the aggregate of commissions charged by validators, which can evolve based on market dynamics.

_________________________________________________________________

In summary, the only endgame for a public blockchain is to enable digital economy anchored in a strong, self-sovereign currency. All technical and social design decisions must reflect this.

I have no intention of ending this article with a pontification about what layer-1s are better and worse. Maybe Bitcoin has already won, or maybe we are too early. In truth, I believe that this is still all a grand experiment, and that no blockchain ticks all the boxes.

But I will end it with a call to action. If blockchain technology succeeds as a political and monetary project, it will offer humanity something monumental. If it merely offers an open-source extension to the fiat system, or a “global, permissionless, gigantic casino of worthless digital assets”, it becomes hard to see the point.

So, let us stand against the current and return to first principles.

In our industry filled with smoke, mirrors and grift, too many builders have made decisions based on mindless pattern-matching and deceptive social proof criteria. We must call this out; the change starts with us.

And, in a world where even Canada can freeze the bank accounts of those who protest government policy, blockchain technology is the only visible spearhead for human freedom. Its success in delivering this vision should be top-of-mind — not for reasons of ideological pontification, but because it is core to whether this industry makes any existential sense.

_________________________________________________________________

Not financial advice. Special thanks to Arthur Breitman, Balaji S. Srinivasan, Lyn Alden, Polynya and others for inspiring this article with their insights.

Interested in discussing these ideas? Reach out to helvantine@pm.me.