2022: "Broadband Moment" for Crypto
Every year we make a few predictions about what will matter in the coming year within crypto, but this year is a bit different, we believe one single theme is monumental to advancing the digital asset industry and will eclipse and underpin the rest of the innovation in relative importance – and that is “Layer 2” adoption.
To that end, this year we are simplifying it to one key theme and prediction this year, that we believe “2022 is The Broadband Moment for Crypto” with the first general availability and widespread of Layer 2 blockchain scaling solutions in the market. These second-layer protocols will provide a more efficient and scalable infrastructure for blockchain applications, resulting in a better user experience and greater mainstream adoption. As businesses and developers begin to understand the potential of layer 2 blockchains, we can expect to see many exciting new use cases emerge in the coming years.
Investing at the earliest stages in crypto, web 3, and digital assets is incredibly dynamic and fast-moving compared to other industries. At Underscore VC we often call web3 as a set of technologies at "the primordial soup stage," with all of the right elements coming together to make something spectacular and new category-defining companies and protocols. It's an area we've been excited about since the beginning of the firm, with seed-stage investments like Chainlink Protocol, Messari, Ceramic Network, and newer Series A investments, like Kaiko that are all at the infrastructure layer of crypto where we have been investing for over half a decade.
While we are “in the flow” on a day-to-day basis, each year we like to zoom out and review some of the key themes, predictions, and questions that will get answered by the industry in the next year. In 2022 – it’s different – the one prediction we believe that will matter is the widespread adoption of layer 2 blockchains, so let’s dive in:
Layer 2 Scalability Solutions Go Live The Broadband Moment for Crypto"
Let's face it, to date, blockchains have struggled with a scaling problem.
Worse yet, as the world woke up to the potential of blockchains last year, their inherent problems and limitations ironically only became more pronounced and visible! High gas costs with expensive block space, slow transaction times, and overall network congestion to reach blockchain state finality.
The more adoption, the more scalability problems arose. Fortunately, at the end of 2021 that began to change with the release of the initial batch of Layer 2 scaling solutions that will help define 2022 as “The Broadband Moment for Crypto” when everything changed and the scalability problem was shifted by an order of magnitude.
Pre-History
Let me take you back to the early internet – do you remember how long it took to load a picture on the early internet dial-up modems (insert terrible dial-up sound here!)? Not to date myself, but I do, and it was painful!
Blockchains Today
That's what using blockchains today has felt like – for all of their potential power, they leave you longing for that magic moment when everything loads or the transaction is complete! It’s pretty awful to be frank, but that is where some of the best and brightest entrepreneurs have been investing their time (and we’ve been investing our capital).
The inherent trade-off with scalability is depicted below as the “scalability trile
mma” – where it is challenging, if not impossible, to achieve all three decentralization, consistency, and scalability simultaneously. A tradeoff is necessary, in that, you can choose any two but not all.
Source: Vitalik Buterin (Ethereum Founder)
Today we’ve made the tradeoff to prioritize decentralization and security, and as we enter the next phase of development, cracking scalability, while not compromising the other two elements has been the name of the game.
In the last several years, this has been THE problem to solve if blockchains were ever to fulfill their promise as a global trustlessness settlement layer of consistent consensus. While this problem is not fully “cracked” there are solutions that are going to bend the curve of transaction throughput scalability by an order of magnitude that is just on the horizon – just as we knew broadband technologies would bend the curve in the early internet.
Today
In 2022, broadband scalability solutions are coming to town in a big way, and the blockchain dial-up experience of the past will slowly fade away as developers and entrepreneurs (and investors) capitalize on the potential of this new infrastructure.
As depicted below, there are over 15+ viable “Layer 2” scaling solutions for Ethereum "Layer 1" blockchain alone reaching their first availability this year!
Source: Coin98 Analytics
There are several approaches in the market “running the race” to solve the difficult problem of blockchain scalability that run the gambit from: {zero-knowledge (zk) rollups, to optimistic rollups, to hybrid rollups, to plasma, to state channels, to sidechains}… with transaction data, state storage, computation all on-or-off-chain.. with validity proofs or fraud proofs to verify... and even data sharding} as approaches to solving the scalability problem... oh my… I won’t bore you with the details, because for those not investing directly, they are mostly irrelevant (if you are curious or advanced, I’ve always liked this overview as a starting point).
TL;DR– the goal this year is delivering scalability and there are many approaches to achieving it. Some that are here and practical, some that are further out and theoretical – and combinations therein of all of the above. Either way, this is the year that this critical piece of infrastructure arrives and there are many teams competing for the right-to-own transaction market share.
In 2022, we will see the first lap of this race – and it really is anyone’s to own. As we play out the year, we expect horizontal market share battles (generalized use for a single Layer 1) and continued verticalization (gaming, media, etc). Moreover, we see privacy as more of a feature than a stand-alone value proposition, and cross-chain interoperability in a multi-chain world happening on Layer 2 as well.
No matter how it shakes out, the question we’ll be looking for the answer to this year is – who will pull ahead in the Layer 2 scalability race? While we don’t expect we’ll see a clear winner emerge, we’ll see a few that start to pull away from the pack and solidify their lead.
As always, we’re excited to meet the next generation of great founders in crypto, so please do reach out on Twitter or Discord, or simply follow along here for more writing as we go.
We look forward to chatting with you in the new year ahead!