Compound VC partner Michael Dempsey put forward his own views on the issue of "too much block space in the encryption industry" on his blog, pointing out three fundamental problems and looking forward to two trends in the development of the industry that may solve the problem of insufficient on-chain applications. .

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Why is too much block space a problem?

Michael expressed his belief that the issue of block space inflation will erode the crypto ecosystem during this market cycle, and some even believe that it has already happened.

Developers pursue public chains rather than applications

Michael believes that most developers today believe that the most valuable projects to participate in are building new Layer1 or Layer2 networks, rather than Dapps or application-centric protocols, which results in more fragmented and useless block space.

Not only that, but developers later discovered this problem and took downgrade measures to build an abstraction layer to absorb some of the value in Layer1 and Layer2, such as Liquidity Staking (LST), Re-staking (LRT), and Data Availability (DA).

Recommended reading: Detailed explanation of the corresponding opportunities and risks of the Liquidity Re-pledge Token (LRT) project Reason for recommendation: This article describes from LST to LRT, and helps readers who do not understand the re-pledge field to review quickly, and lists in detail the existing The type of related project.

Blockspace is a good business, perhaps a clean business with lower regulatory hurdles. But the reality is that today there is a vicious cycle of incentive mechanisms (wealth effect) between founders and investors, which has led to the continued over-expansion of block space.

The supply of block space is obviously greater than the demand

Although there are many factors to consider, when you use Token Terminal to view the fees incurred by all protocols for one year, you will find that the practicality of block space is not established. The fees and growth rate of various DeFi protocols far exceed that of block space.

The truth is, protocols have more needs than block space

Recently, Uniswap, a representative of the on-chain protocol, conducted its first test by proposing to enable UNI fee accumulation. As the market re-evaluates the possibility of obtaining tangible value from “worthless governance tokens”, it has triggered a wave of rapid increase in transaction volume of other DeFi protocols.

Copy-and-paste engineering hinders innovation

These blockspace-related tokens may still be more valuable than protocol-related tokens that have practical uses. More than half of the top 100 cryptocurrencies by market capitalization are related tokens based on providing blockchain space.

As a result, many developers have joined in similar block space development or related services, such as re-staking. Although capital markets prefer existing models to reduce risks, this has hindered the development of innovative applications.

The more serious problem is that these similar projects only slightly increase the adoption rate of cryptocurrency and basically do not help the crypto industry.

How to get developers to invest in the application layer?

Faced with these problems, Michael believes that there are several possible industrial development directions to reverse this situation.

Effective monopoly or oligopoly of the basic public chain

Initially, mobile phone operating systems also flourished, with Blackberry, PalmOS, Windows Phone, Android, and iOS all competing to seize the position of priceless spec builder. But eventually two dominant ecosystems, iOS and Android, emerged, and then development energy shifted to the application level.

The development of the existing underlying blockchain network is like the early days of the mobile phone industry, with many competitors competing for TVL and users. Although Ethereum currently has a market share of about 57%, the trend still shows fragmented development.

Public chain TVL distribution (data source)

However, when the public chain develops into a monopoly or oligopoly at a later stage, it will promote the long-term value of the encryption industry. Structurally forcing innovation into the application layer and creating a flywheel to rapidly develop applications and achieve growth in the total market value of the crypto industry.

Development of decentralized and centralized application chains

The maturity of the application chain industry can meet the needs of more diverse users. Users of Cosmos may join because of the vision of the application chain, and users accustomed to centralized services can also benefit from the application chain, because the trust problem is still effectively eliminated.

It will encourage developers to develop applications in the form of application chains.

The problem of too much block space is not how to design and optimize it

At present, the market mainly focuses on the issue of block space on performance, which may eventually lead to louder debates between monolithic public chains and modular public chains, but these debates are actually not important.

What is really important is to improve the development of the ecosystem, and this requires motivating developers to participate in application-level development. It seems that there is still a long way to go.

This article Too much block space! The importance of on-chain applications is greater than that of block space. First appeared in Chain News ABMedia.