The Cost Of Sovereignty - Consolidate The Chains
App Chain Thesis Is Evolving
Thousands of blockchains.
So many, they blot out the sun.
Over 1,000 blockchains are in existence as of 2024, and it begs an extremely important question - is that blockchain really necessary?
What is the history behind more & more new blockchains coming into existence instead of applications building on top of existing ones?
It boils down to a lack of understanding behind the cost of sovereignty.
A combination of greed, convenience, and unsound economic principles all contribute. As with most problems, things are multivariant and not to be trivially drilled down into something as dogmatic as: “…we only need Solana & Ethereum…” ]
The Cost Of Economic Security
Fundamentally, the building of a blockchain versus using a pre-existing distributed ledger involves a cost.
Countless nodes around the world (running agreed upon acceptable hardware) all run software that can successfully asynchronously update collectively shared state in a way that is cryptographically sound. These nodes are run by different node operators in various geographical locations (improving resilience while adding in some…latency). There is also the human capital cost of updating software in a synchronous way that does not disrupt state or interactions with state for extended periods of time (shout out to Solana for being famous for this complaint).
This coordination cost involves:
Developers coordinating upgrades with node runners
(often) community governance (via stakers) coordinating on a decision
Node runners coordinating with each other
Applications coordinating with developers / noderunners / users
The 2022 - early 2024 era was marked by apps experimenting with the app-chain thesis - the idea that tailor made blockchains could make better applications than stand alone smart contracts sitting on top of architecture & tech the underlying app does not control. Boiling it down to an even simpler terms:
Sovereignty.
The ecosystem that was a shining leader on this front was the Cosmos ecosystem (although we will examine the EVM landscape in a future blog) - since 2021 we have seen over 89 blockchains emerged using the Cosmos SDK. An open source toolkit designed to make the creation of blockchains incredibly easy & intuitive.
However, there is a cost to sovereignty the market is rapidly pricing in. The costs that were listed above all amount to a $$$ cost reality that has been budgeted for via chain inflation. With 100,000,000 tokens priced at $1, a 10% inflation rate means a year later there will be 110,000,000 tokens. All things being equal, if demand remains fixed and supply expands, then you will see the token price drop (assuming those new tokens are put into circulation via selling from node operators or stakers).
If an app chooses to be a smart contract instead of its own blockchain, users pay for security on a per usage basis. If an app chooses to be its own blockchain, it pays for security on a per block basis with an unknown amount of txs per block. Until an app has overwhelming amount of usage, it makes zero sense to pay for security when usage isn’t even there to justify it. Smart contracts are essentially a SAAS product that rents out their usage on a per transaction basis. This is hyper cost efficient.
“…but the UX of being able to have my governance token ALSO be used as a gas token will drive utility and value…”
No.
You are (often) adding in unnecessary friction to consumers to force value accrual to an underlying system that (should) accrue value for providing some valuable service as an app. Exceptions to this rule are generalized L1s where security is the service - and even then, I would predict that reducing gas friction as close to 0 as possible with fee abstraction will be the inevitable end game over time as well!
So stop paying extra security costs + shoehorning tokens into being gas that should be accruing value through different mechanisms.
Part of the confusion around security budgets is it blends economic incentive to own a token with the need to lock up enough supply to increase the cost of an attack on a proof of stake system. However, it begs the question - has there even ever been 51% ownership attack on any Cosmos chain? The most vulnerable are low marketcap chains that are securing a large amount of value. However, even these attacks are unlikely as smaller chains with lower marketcap tend to have bad liquidity - making attacks not even feasible from a token acquisition attack perspective.
The takeaway from the above in my opinion is that staking to date has largely been about giving people incentive to hold a token. You don’t need all the overhead of a blockchain to create a similar staking smart contract. Same goes for governance. If something like DAO DAO adds in a staking module, we will have replicated the key functions that teams are actually interested in.
That is to say, I believe many chains were started out of the desire to have said out of the box app functionality more than they cared about what can be obtained from being a sovereign blockchain (hot take, some will disagree).
The Cost Of Interop / IBC
Another explicit cost of sovereignty within Cosmos is the cost of maintaining IBC bridging. Here are some of the costs:
Cost of relayers spinning up channels between blockchains
Cost of relayers maintaining channel connections between blockchains
Cost of front-ends needing to maintain & update bridging interfaces in lock step with relayers
So while an internet of ever growing blockchains that are all connected is exciting, it is increasingly expensive & difficult to scale. Sure, there are things in the works like self relaying that will come to fruition - but the cost of managing so many different unique blockchains is inevitably difficult. Someone has to pay for it, and as an appchain you are not only focused on maintaining a whole blockchain, but also having to focus on the upkeep of giving people the ability to even traverse assets onto said blockchain!
The Cost Of Delegated PoS Governance
Decentralized governance represents the ability for a collective community to govern parameters & capital of an underlying protocol. It is one of the most important long term differentiators in both nation states & the micro niches of stand alone sovereign blockchains. A community of bad capital allocators & misaligned incentives can spell out catastrophe for an ecosystem. Cosmos delegated proof of stake puts massive amounts of voting power from passive (often time unengaged) voters into the hands of validators (representing the underlying appchain / blockchain). This has created large (and often permanent) token distribution and governance problems for apps and protocols that have been forced into this schema due to forcing users (who just want to earn yield) to actively give up their governance power to a small subset of actors that may or may not be consistently aligned with what is best for the blockchain. And while validators are capable of being good stewards of the chains, I would argue that there is no one more aligned with a chain than active token holders.
Apps that choose to not opt in to this mechanism design will have much better governance & long term token distribution. Cosmos governance drama is a meme, but it shouldn’t be. One of the costs of sovereignty WITH delegated proof of stake is expensive human capital governance brain drain. Community fatigue. Misaligned validators.
Much of this can be avoided by not being a blockchain.
The Cost Of Fragmented Liquidity
Sovereign state management = fragmented liquidity. 89 blockchains in Cosmos represents increasingly fragmented DeFi. Solutions to this involve cross-chain liquidity aggregation. While considered to be useful, incredible amounts of capital are being spent on (often centralized) infrastructure to support a better UX for bad UX created as a result of fragmentation. It is almost to say we celebrate solving a problem that exists because the vast amounts of liquidity is needlessly fragmented by living in their own little silos.
Additionally, there are core pieces of DeFi infrastructure that have to be repeatedly be built on these new blockchains:
DEX
Oracles
Bridge pages (on a per app basis)
Lending products (can’t be built until you have localized liquidity)
Leverage products (can’t be built without localized liquidity)
NFT products (need access to liquidity to make good UX oftentimes)
And so, as we continue to see more blockchains come into fruition, we see repeated (failed) experiments to build up the (same) core building blocks necessary to progress to more interesting use cases.
Wasted energy that could be avoided by simply…consolidating apps around existing liquidity sources. Sure, you can try to recreate the same set of building blocks from scratch but…good luck!
The Cost Of Software Development
Building a city is not cheap. You need transportation vehicles to import resources. You need plumbers, architects, builders, electricians, woodworkers, road & bridge builders, public sewers / transportation, police, firefighters, food stores, internet utilities, etc.
A stand alone blockchain is no different. The cost of updating the CosmosSDK and building standalone modules to add to the city takes a large amount of technical knowledge (along with audit costs). It is small subset of builders that can perform this (compared to say solidity or CosmWasm) and this leads to (1) less people reading code (2) less people building tooling. Clunkiness is okay, but setting on the journey to build and maintain custom modules for a blockchain compared to building with a smart contract is a question builders should be seriously asking themselves before they begin.
*(side note, the CosmosSDK is an incredible tool we are all blessed to have. I just want to challenge folks on the cost of building with it)*
The Role Of Venture Capital
Another reason the cost of sovereignty has been so blatantly ran head first into is because venture capital in the 2021-2022 era were heavily focused on investing into infrastructure instead of applications. Builders realized that they could get 2 birds with one stone:
“…I’m an app AND I’m infrastructure AND I *could* become a generalized layer…”
Venture capital ate this narrative up aggressively, setting builders on the path to recreate the wheel and spend money & time on the things that distract them from their core missions. This venture capital interest fueled retail confidence and interest.
It is 2024.
We can now say we have firmly felt the damage of too many chains incorrectly pursuing sovereignty, at the cost of countless users & investors.
Shame.
When It Makes Sense
A perfect case study of when it does make sense is when a use case has:
You are building a unique category with a precise goal
Risks it cannot entrust to a different underlying system
Regulatory
Certain degree of performance
You already have a (large) amount of pre-existing demand
Both dYdX & Noble check all of those boxes. And while building your own blockchain spells out a promise of infinite builder freedom, does it justify the cost and do you actually need it immediately at launch?
Consolidate The Chains - A Neutron Vision
(Credit to Lunar Dyno Inspiration)
Cosmos has seen gruesome atrophy & churn on both dApps & chains (Terra, Juno, Crescent, and many more I could name but I will be polite). One has to wonder, what happens if these dapps and chains were more consolidated? What would have happened if they did not fall prey to the cost of sovereignty? If they had properly built out their ecosystem within an ecosystem, creating more momentum and network effects working in tandem with others?
What then?
They would have received the benefits of:
Significantly more sustainable tokenomics (significantly smaller security budget)
More efficient governance (avoiding delegated PoS)
Closer proximity to liquidity you don’t have to necessarily bootstrap
Pay for security on a per transaction basis (cost efficient)
Easier onboarding
More dev time to focus on the stuff that actually matters
Closer proximity to other users
Strong network effects
A growing amount of wisdom of the village
An L1 that can also (somewhat) assist with growth & marketing
Cross chain smart contract calls
Less tech debt spent on integrating with other ecosystems (as this is largely done for them)
With cross chain smart contract calls heading towards a more mature phase, increasingly apps can get the benefits of IBC without needing to take on the many costs listed further up in this blog.
Neutron with its integrated application thesis appears to be a healthy tech stack and community that is positioning itself to provide all of the above benefits to new projects and/or distressed projects. Importantly, Neutron is avoiding the mistake of having the L1 team build dApps that compete with their dApp layer (something I have seen other generalized smart contract ecosystem blockchains make in Cosmos).
The only other primary competing force I see to #consolidatethechains is a movement towards PSS / shared security. While I think this solves one component of the cost of sovereignty (primarily economic security) the VAST majority of the other problems continue to exist.
Thus the need to consolidate the chains.
We need less chains trying to be Ethereum killers, less dApps on the wrong build-a-blockchain-side quest & more consolidation around building dapps on top of healthy ecosystems with excellent leadership, capital, community, tech, and builders.
Conclusion
The proliferation of blockchains, exceeding over 1,000 as of 2024, raises the crucial question: is every new blockchain truly necessary? This trend stems from a mix of greed, convenience, and unsound economic principles. Historically, the app-chain thesis—where tailor-made blockchains were thought to better serve specific applications—gained traction, with ecosystems like Cosmos leading this movement. However, the costs associated with sovereignty are becoming increasingly evident.
The economic security of running a blockchain involves significant coordination costs, including software updates, governance, and node operations. Applications might find more efficiency and cost-effectiveness by operating as smart contracts on existing blockchains, paying for security on a per-transaction basis rather than per-block.
Moreover, maintaining interoperability and governance in a sovereign blockchain setup adds layers of complexity and expense. Fragmented liquidity further compounds these challenges, necessitating repeated investments in core DeFi infrastructure for each new blockchain. This fragmented approach results in wasted resources that could be avoided by consolidating applications around existing liquidity sources.
Despite the allure of infinite builder freedom, the practicality of sustaining a standalone blockchain is questionable without substantial pre-existing demand or specific regulatory and performance needs. Consolidation, as exemplified by Neutron's vision within the Cosmos ecosystem, offers a pathway to sustainable tokenomics, efficient governance, and closer proximity to liquidity and users. This approach mitigates many of the costs associated with sovereignty, fostering stronger network effects and reducing technical debt.
In conclusion, the blockchain space must critically evaluate the necessity and sustainability of new blockchains. Consolidating chains and leveraging shared infrastructure can provide a more efficient, scalable, and cost-effective path forward, ensuring the long-term viability and growth of the blockchain ecosystem.