Beyond Ethereum – Third Generation Blockchain Will Drive Mass Adoption

Third Generation Blockchain Drives Mass Adoption

Author: Kingsley Bowen; Source: The Tie Research; Translation: Lynn, MarsBit

Bitcoin and Ethereum, as the main cryptocurrencies, dominate the market in terms of market capitalization, but still face a series of issues such as long transaction confirmation times, high fees, and complexity. This leads to an important question: why aren’t more people using cryptocurrencies?

This article will first explore the shortcomings of Bitcoin and Ethereum, especially their scalability issues, as well as the new challenges brought by third-party solutions. It will then introduce third-generation blockchains, how they address these problems, and why they have potential advantages in the payment and decentralized application (dApp) fields.

Finally, it will discuss practical use cases for payments and dApps, and why third-generation blockchains may be better suited for mass adoption. The current market is mainly dominated by platforms with high fees, long settlement times, and risks, while third-generation blockchains provide a cheaper, more secure, and faster user experience, which may attract more people to join the cryptocurrency ranks.

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Introduction

Bitcoin and Ethereum have gradually improved the traditional financial track by settling transactions faster (from weeks to minutes), limiting or eliminating third-party risks, and removing banking restrictions such as payment processing protocols, limited operating hours, and international transfers.

Although Bitcoin and Ethereum dominate the cryptocurrency market in terms of market capitalization (accounting for about 67% of the total market capitalization), the total number of users for these blockchains is still relatively low, around hundreds of millions, compared to the potential market size of 5.18 billion global internet users.

So, the question remains – if Bitcoin and Ethereum are so great, why aren’t more people using cryptocurrencies?

In addition to the significant technical knowledge and user experience barriers that hinder all cryptocurrency networks and applications, the first and second generation blockchains (Bitcoin and Ethereum, respectively) lack native scalability and cannot handle the growing demand without compromising user experience or significantly higher costs by increasing the final settlement time. Their scalability relies on third-party solutions such as the Lightning Network or “L2,” which introduces risks and requires further education to use.

Blockchain networks with native scalability are considered “third-generation” or “alternative L1” blockchains. They reduce network complexity by limiting or eliminating interfaces with third-party solutions, resulting in a more secure, faster final settlement network that is better suited for mass adoption through payments and decentralized applications (dApps).

Before delving into the discussion of payments and dApps, let’s first examine the state of Ethereum and then make a comprehensive comparison with third-generation blockchains.

Ethereum

The Ethereum mainnet consists of a single blockchain protected by 23.5 million ETH (currently valued at around $38.7 billion), ensuring a high cost of corruption, i.e. strong economic security. However, when there is high demand for space on the Ethereum mainnet, individual transactions can be costly for most users (> $100).

To improve scalability of the Ethereum mainnet, many projects in the Ethereum ecosystem use Layer 2 (L2) blockchains to reduce transaction costs. L2 blockchains inherit the security of the base layer and execute computations on auxiliary blockchains that settle on the Ethereum mainnet subsequently. This approach gives the Ethereum mainnet the slogan of “global settlement layer,” similar to settlement banks in traditional finance.

L2 scaling designs require the Ethereum ecosystem to interface with third-party solutions in several categories, including data availability solutions and middleware, for scalability and interoperability. While these solutions address their respective problems, third-party interfaces introduce new risks, user experience issues, and delayed finality. Before understanding how third-generation blockchains address these challenges, let’s delve into these challenges in more detail.

Data Availability

Data availability ensures that blocks are distributed and verified by all full nodes (storers of the entire history of the blockchain) in the network. L2 requires strong guarantees of data availability for historical data, but downloading all historical data slows down L2. To address the data availability problem, solutions such as Celestia, Avail, and EigenDA use cryptographic proofs to ensure data availability for L2 blockchains. These solutions become dependencies for proper L2 functionality, increasing the overall risk profile of L2.

Centralized Components

Currently, L2s have centralized components, whether it’s the sequencer or the prover. Centralized sequencers can change transaction ordering (providing the largest opportunity for front-running) and scrutinize transactions or users. Provers or proof generators require computing resources that are not easily accessible to the majority, reducing the number of potential provers. Centralized points of failure increase the risk of transacting on L2 as they make the network more susceptible to attacks. For example, Coinbase is the sole sequencer for Base L2, meaning Base could be subject to scrutiny by Coinbase or US regulatory agencies.

Projects like Espresso, Astria, and NodeKit aim to address the issue of centralized sequencers by sharing sequencers. Other projects like Scroll, ZkSync, and Polygon are working to improve performance and reduce the computational requirements of zero-knowledge proofs.

Liquidity Fragmentation

With L2 scaling, liquidity often moves from L1 to L2 where decentralized applications (dApps) reside. Reduced liquidity for L1 users means more slippage and volatility. dApps rely on third-party messaging layers and bridges like LayerZero and Axelar to unify liquidity, which introduces risks and imposes trust assumptions on multisignature wallets that most users are unaware of. Alternatively, L2 dApps can operate solely within L2 and be subject to the influence of a smaller market.

Middleware Protection

Due to the lack of a local messaging layer between L2s, asset transfers involving L2s are implemented through third-party bridges. Most bridges must ensure their security (the cost of compromising the network), making them popular attack vectors. According to CoinDesk, the value of bridge exploits exceeded $2 billion in 2022 alone.

To address the middleware problem, solutions like Eigenlayer re-pledge Ethereum stakes to create customizable networks. In other words, Eigenlayer stakers use the same funds to stake on their chosen Eigenlayer network and stake again on Ethereum. While Eigenlayer has many other applications, one of its main use cases is protecting middleware infrastructure (such as bridges and messaging layers).

In a recent blog post titled “Don’t Overload Ethereum Consensus,” Ethereum co-founder Vitalik Buterin pointed out the potentially catastrophic risks of re-collateralizing ETH stocks, especially if the application recruits Ethereum’s social consensus. Such applications could result in network forks, imposing severe penalties on Eigenlayer and Ethereum stakers, and posing security threats to both networks.

Long Settlement Time

Just like how services like Venmo or CashApp provide instant finality, L2 also offers the appearance of instant finality; however, transactions on L2 are only considered final after settlement on the Ethereum mainnet. In other words, L2 users can transact, see balances change in their wallets, and their transactions are still recoverable. The current finalization time for Ethereum transactions is approximately 15 minutes, which is the shortest time any transaction in the Ethereum ecosystem is considered final. Sometimes, finalization on the Ethereum mainnet takes longer; in May 2023, Ethereum stopped processing transactions for about an hour.

Third-Generation Blockchains

Third-generation blockchains typically employ two approaches to solve scalability issues: holistic architectures like Solana (a single L1 blockchain) and application chain architectures like Avalanche and Cosmos (deploying many L1 blockchains).

Let’s see how third-generation blockchains address the aforementioned problems:

1. Data Availability – Through L1, full nodes can verify that they possess all the data necessary to generate the next block, and all other full nodes have received that block.

2. Decentralized Components – Through L1 scalability, sorters or verifiers are not required, making the network decentralized when consensus permits.

3. Liquidity Fragmentation – Holistic architectures already have unified liquidity within their ecosystems. Application chain architectures currently have fragmented liquidity but can have a primary liquidity hub (e.g., Avalanche C-Chain) or unify liquidity in the future through native messaging layers (e.g., Avalanche Warp Messaging or inter-blockchain communication).

4. Middleware Protection – While both holistic and application chain approaches rely on third-party bridging and messaging for external communication, they minimize the increased risk within their ecosystems. For external communication, only the funds in the bridge are at risk, not network stakes.

5. Long Settlement Time – Many third-generation blockchains have fast settlement times, with the fastest blockchain having finality in sub-seconds (Solana around 5 seconds, Avalanche around 1 second, Cosmos around 1-2 seconds).

Payments and Dapps

Different blockchains have advantages that are optimized for certain use cases. There are many reasons why people choose to use Ethereum; it has the most mindshare, the deepest market, and significant economic benefits for Ethereum (ETH) holders. Some high-net-worth borrowers may be willing to accept longer finality periods and higher fees as valuable transactions to enter the deep market of Ethereum.

However, the prospects for large-scale adoption of blockchain technology in payments and dApps require different trade-offs.

Payment Methods

Do fund users prefer near-instant settlement or settlement that takes a few minutes? Of course, near-instant settlement. Near-instant settlement ensures that once a user’s wallet balance changes, it will not revert. In the case of peer-to-peer settlements, both parties benefit from knowing that the payment is near-instant and indisputable.

Fund users also typically prefer a unified fund management experience rather than a fragmented one. For example, managing funds between multiple investment accounts, payment processors like Venmo and LianGuaiyLianGuail, bank accounts, loyalty reward programs, gift cards, and credit cards can be complex. Splitting funds between L1 and L2 would approximately double the complexity, especially when users need to pay significant fees to transfer funds between them or wait a significant amount of time to move from L2 to L1 (which could take weeks if local transfers are involved).

In addition to settlement time and unified liquidity, the ideal payment system would have negligible transaction fees. One core advantage of cryptocurrencies is that peer-to-peer transactions are more efficient and cheaper than traditional finance. However, using Ethereum for payments is essentially untenable for ordinary people.

For Ethereum, users must pay mainnet gas fees to move funds to L2 for “near-instant settlements” (and face centralization risks and fragmented liquidity without local messaging), or use L1 and pay mainnet user fees for each transaction. Furthermore, L2 payment systems penalize those with lower fund balances as bridging funds from L1 to L2 can be costly. Those with lower L2 balances are often forced to pay this fee to transition to L2. Comparing this poor payment experience to third-generation blockchains like Solana or Avalanche, transaction fees can be negligible (< $0.01).

Dapps

If you manage finances on-chain, you would want certainty about the state of the blockchain, which can sometimes be problematic when reorganizing blockchains like Ethereum.

Imagine you are a professional GameFi esports player participating in a tournament game. The winner of this match will receive a reward equivalent to $30,000. After months of practice and sacrifice, you win the game and the $30,000! Congratulations! A few minutes later, you check your wallet balance again to show your friends and family, only to find that the wallet balance has disappeared. Ethereum has encountered difficulties in finality, and the new version of Ethereum does not recognize you as the winner. You have now lost $30,000.

Or imagine yourself as a DEX trader, making profitable trades one after another with small-cap tokens for arbitrage. After a few hours of trading, you check your wallet balance and find that due to a blockchain reorganization, some of the transactions are invalid, resulting in the loss of hundreds of thousands of dollars. All dApp users benefit from near-instant finality to avoid blockchain reorganizations.

In addition to finality, transaction fees also affect the types of dApps that the general public can use. We have determined that due to high fees, most people cannot transact on Ethereum L1, but dApps often require multiple transactions per user operation, which can increase transaction costs. For example, yield aggregators routed through multiple sources can access the blockchain at lower fees, but it is costly for many on the Ethereum mainnet.

Conclusion

In this article, we have introduced how cryptocurrencies gradually improve payment methods compared to traditional finance in terms of finality, risk reduction, and complexity. Then, we use the same standards of assessing Ethereum’s current state as a third-generation blockchain. Finally, we discuss specific use cases, namely payments and dApps, where third-generation blockchains have significant advantages over Ethereum.

So, let’s get back to this question: Why aren’t more people using cryptocurrencies?

The current market is predominantly dominated by platforms that are expensive, dynamic in fees, long settlement times, and high risks. Mass adoption must come from blockchains accessible to those with lower balances and require less technical knowledge to facilitate robust operations and transactions. Third-generation blockchains often offer a cheaper, more secure, and faster user experience that can scale to the next generation of cryptocurrency users.

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