The investment case for a multi-chain Web3 ecosystem

As we move deeper into the era of Future Finance, blockchains are progressing towards a seamless, interoperable multi-chain ecosystem. With the help of Layer-2 (L2) solutions, Layer-1 blockchains serve as the foundation that will guide our digital economy towards Web3. However, the future of this sector does not hinge on a single, dominant blockchain. Instead, we will likely witness a diverse array of chains driving the next wave of innovation, adoption and new investment opportunities.

Over the past decade, the crypto market has witnessed a pattern where the bright stars of one bull market often fade in the subsequent cycles. Remember the likes of Namecoin and Peercoin? Or perhaps more recently, IOTA, NEM, and Dash?

During their glory days, these crypto projects made it to the top ten by market cap, hailed as the next big thing, be it digital cash or the new Internet of Things (IoT) ecosystem.

The reality is, however, many of these projects never repeated or even came close to their initial success and have slowly but consistently fallen down the ranks. Only a select few, like Bitcoin (BTC), Ethereum (ETH), Cardano (ADA) and Dogecoin (DOGE) consistently hit new all-time highs each cycle. This doesn’t mean all top projects will fail, but it does signal that the real challenges begin after the hype fades.

Actors should be cautious when considering “winners of the past”, despite their appealing upside potential. But it’s worth noting that some crypto projects impacted by the bear market are still displaying positive growth indicators. Identifying them demands diligent research, however – provided you know that to look for. 

That being said, projects dubbed the new “Ethereum killers” might struggle to maintain momentum given Ethereum’s popularity, especially if they operate in isolation. Meanwhile, those that adopt a more cooperative approach, focusing on things like interoperability, may witness stronger growth in the event of a new bull market cycle. Only time will tell, of course.

Is this time different?

Undoubtedly, the crypto ecosystem is maturing. The rise of advanced protocols, progressive regulatory strides, and institutional-grade investment products demonstrates its progress.

Blockchain projects are also tirelessly driving adoption, particularly in the Web3, DeFi, Layer 1 and Layer 2 market sectors, evident in the heightened activity despite the bear market and macro uncertainty.

So, is this time really different? We believe there are reasons to think so.

Competitor blockchains are here to stay, but their competitive edge may differ

While Ethereum still reigns as the go-to for most decentralised finance (DeFi) projects, persistent issues like high gas fees and network congestion have given rise to competitors like Solana (SOL), Cosmos (ATOM), Cardano (ADA), Binance Smart Chain (BNB), and Layer-2 solutions, like Optimism (OP), Arbitrum (ARB), Base and zkSync.

These alternatives have attracted significant user interest, while the success of L2 solutions has even influenced Ethereum’s development roadmap, prompting developers to prioritise L2 solutions in their upcoming upgrade.

There has been a noticeable shift across many of these blockchains. Painful lessons from hacks, smart contract vulnerabilities, centralisation and scalability problems have fuelled a demand for improved communication and interoperability among them.

As users engage with different crypto market segments, each with their own unique ecosystems and applications, transferring numerous assets across chains safely becomes both a security concern and a necessity for user experience enhancement. Protocols excelling in this area could emerge as front-runners in the next bull cycle.

We know that blockchain works and protocols are reliable, demonstrated during last year’s liquidity crisis. Now, the focus isn’t solely on how “good” blockchains function, but rather on how smoothly they can interact with one another. As such, successful interoperability and cross-chain communication efforts will be pivotal for creating a seamless, secure, and risk-free user experience in the world of Web3. But we are still in the early stages, and this progression carriers its own set of risks.

Still, this is what should command the attention of users, crypto enthusiasts and all stakeholders alike.

Removing speculation and focusing on what matters

Understanding how to assess the value of crypto assets and their respective blockchains remains a challenge for many market participants, especially when the primary emphasis has always been on token prices. Meanwhile, freshly launched projects are speculative and inherently riskier, while older projects with minimal activity may warrant discontinuation, even if they have been endorsed by prominent venture firms. So where do we start?

There are many projects that have thrived throughout the bear market, sustaining or even increasing in user engagement, community growth, transaction activity and tokens locked – regardless of the decline in prices. Factors like these are unsurprisingly overlooked, given the macro backdrop, the high-profile announcements like BlackRock’s Bitcoin ETF filing and Ethereum’s Shapella upgrade, yet they are crucial in identifying blockchains with genuine potential for success.

The focus isn’t on speculating which blockchains will surpass Ethereum or whether Ethereum will surpass Bitcoin’s market cap. Contrary to popular belief, numerous blockchain projects are working to facilitate a multi-chain approach for Web3 development, rather than trying to be or dethrone Ethereum. This acknowledges that no single blockchain can cater to all blockchain needs simultaneously, highlighting the need for collaborative efforts if the industry wishes to achieve mainstream adoption.

That said, several popular applications have already launched on multiple blockchains. Decentralised exchanges (DEX) Uniswap and Curve, as well as DeFi lending protocol, Aave, are great examples of this. More recently, the popular Solana-based wallet, Phantom, recently announced its plan to release multi-chain support for Ethereum and Polygon, while Ethereum-based wallet, MetaMask is aiming to integrate multi-chain support by the end of the year.

“MetaMask has historically been an Ethereum wallet. We need to start moving beyond that. The multi-chain future is very clear”, says Senior Product Manager at MetaMask.

Ethereum’s declining market dominance signals a multi-chain future

As new blockchains begin to mature, Ethereum’s declining market share should not be perceived as a negative; it highlights the need for diverse chains catering to various consumer needs. Many L1s and L2 are becoming more specialised, hence the value they offer becomes siloed. This only emphasises the importance of interoperability in order to uphold their distinct value propositions.

Ethereum’s dominance vs. other development platforms

Source: Measured by Total Value Locked (TVL) DeFiLlama, Sygnum Bank

To match this demand, some established chains are focusing on intercommunication, data exchange and supporting major applications to interact seamlessly with multiple blockchains. Here’s a few projects to consider (this list is by no means exhaustive).

  • Chainlink: A decentralised oracle network for external data integration in multiple blockchains
  • Cosmos: Inter-Blockchain Communication (IBC) protocol enables data, security and asset exchange among its network’s blockchains
  • Polkadot: multi-chain structure and XCMP protocol facilitate data and asset exchange across connected blockchains
  • Polygon: Polygon SDK allows creation of interconnected sidechains interacting with Ethereum and each other
  • LayerZero: Omnichain protocol connecting L1 blockchains and L2 solutions for cross-chain data sharing.

Other Layer 1 blockchains like Cardano and Injective have also launched their own (or in partnership with) interoperability solutions, like Injective’s Cascade, an L2 testnet that will enable various Solana smart contracts to be deployed within the Cosmos universe, or Milkomeda, Cardano’s L2 rollup designed for bringing EVM capabilities to non-EVM blockchains.

Positioning for a multi-chain future

So, what can we draw from this? Just as the internet thrives on diverse components, crypto’s path ahead involves a multiverse of chains. Dismissing this perspective seems rather shortsighted, much like assuming only Bitcoin and Ethereum will monopolise the entire landscape moving forward.

It’s not about picking a winner; it’s about discerning the inherent worth of future potential in myriad blockchains and solutions – particularly those devoted to a collaborative Web3 evolution. How well do they thrive together, and what efforts are they actively pursuing in order to achieve this?

Whether it’s a L1 blockchain, an L2 solution, a decentralised application (DApp), or a regulated crypto business, each offers distinct strengths, technological innovations and practical applications. Speed, user-friendliness, security, specialisation – these attributes vary. Yet together they lay the groundwork for a novel Web3 economy, a new financial system and revolutionary applications as we enter a new era.

Disclaimer: The information in this publication pertaining to Sygnum Bank AG (“Sygnum”) is for general information purposes only, as per date of publication, and should not be considered exhaustive. This publication does not consider the financial situation of any natural or legal person, nor does it provide any tax, legal or investment advice. This publication does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum to purchase or sell any assets. No elements of precontractual or contractual relationship are intended. While the information is believed to be from accurate and reliable sources, Sygnum makes no representation or warranties, expressed or implied, as to the accuracy of the information. Sygnum expressly disclaims any and all liability that may be based on such information, omissions, or errors thereof. Any statements contained in this publication attributed to a third party represent Sygnum‘s interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. Sygnum reserves the right to amend or replace the information, in part or entirely, at any time, and without any obligation to notify the recipient of such amendment / replacement or to provide the recipient with access to the information. Simultaneously, there is no obligation of Sygnum to inform recipients of information, if before provided information later becomes outdated, inaccurate or obsolete, unless otherwise provided by applicable law. The information provided is not intended for use by or distributed to any individual or legal entity in any jurisdiction or country where such distribution, publication or use would be contrary to the law or regulatory provisions or in which Sygnum does not hold the necessary registration, approval authorisation or license. Except as otherwise provided by Sygnum, it is not allowed to modify, copy, distribute or reproduce, display, license, or otherwise use any content for commercial purposes.

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