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Third Generation Blockchains
The Blockchain Sector @ 2022-10-23
The Blockchain Sector provides information relating to emerging financial technologies. It should not be considered financial advice. Disclaimer below.
Let's first define what I mean by third generation blockchains. The first generation blockchains are based on Bitcoin. This is a transactional blockchain which acts like a ledger of addresses and balances 1st gen blockchains use cryptography to map out who owns what to create a scarce digital asset.
Second generation blockchains I would describe as virtual machine-based blockchains like Ethereum and Solana. Where you have a virtual machine which is executing users code, known as smart contracts, within that virtual machine on a decentralized P2P network. This is fundamentally different technology compared to 1st gen blockchains, which are all based on Bitcoin and earlier seminal technologies.
For third generation blockchains I think that's going to be something else entirely that redefines how we understand blockchain technology.
Currently blockchains are slow, expensive and they can only store tiny amounts of data. They are well suited for financial transactions and programmable money but are somewhat limited in their capabilities. A third generation blockchain will be technology which can achieve the promise of web3 solutions that compete with web2 infrastructure like cloud computing.
3rd gen blockchains will be able to store and distribute user databases, images, video, rich content on a decentralized network. Eventually becoming a version of AWS without Amazon.
Second generation blockchains also have some problems with centralisation. Although the network is distributed and smart contracts are executed on the distributed network:
Everyone connects to the same digital wallet
Everyone that digital wallet connects to the same kind of RPC network Infura
There are valid centralization concerns around the flashbots relays
The Apps (decentralized applications) that we interact with on the front ends are all run on standard Web2 technology.
We use DNS domain names. Resolving to an IP address on a server which is delivering that content
Perhaps with third generation blockchains we will see an all in one solution. An application in itself, which can display basic browser content and provides a digital wallet integrated into that. Most importantly it needs to provide a powerful l, programmable backend execution engine for the smart contract itself.
The last couple of bull cycles we have seen the emergence of Ethereum killers. The first one was EOS whose technology made a promise of greater transaction speeds and zero cost transactions where you are actually paying for data storage and execution, rather than the actual transactional cost. This was interesting from a development perspective because it made it possible to build different things which relied heavily on transaction throughput.
In the most recent bull run we saw the rapid growth of Solana. Another blockchain which executed smart contracts within a virtual machine, similar to Ethereum. It was faster, had more transaction throughput but has ultimately lost traction and some credibility recently because of centralisation issues and problems that led to reliability factors.
At the moment there's nothing that comes close to the technology and the developer ecosystem built around EVM blockchains. I think that for web3 developers Solidity is currently the best option for building out decentralized applications and DeFi protocols. This dominance is unlikely to last forever and over the next few years I think there will be the emergence of new and interesting products which developers can use to build out dApps.
Building and modifying an existing layer 1 is much harder than working on something new from scratch. We saw it in the time it took to roll out the merge, which was a very important update but it took years and years of planning and development work by some of the smartest people in the industry.
Updating Ethereum has been described as “trying to change the engine on an aeroplane while it is flying at 40,000 feet”
The point I’m getting to is that during the next market cycle there will likely be another contender, another Ethereum killer and maybe it'll be third time lucky.
EOS and Solana haven’t been able to compete for developers over the long term. The grants, hackathons and incentives weren't enough alone without the technology and developer experience. There needs to be a compelling enough system to attract the best developers working on the most important things within the blockchain sector.
I would like to see a third generation blockchain emerge which is built for developers primarily. Obviously it needs to be great for users as well but before that you need applications being built to develop an ecosystem.
Developers want simplicity. We want something that's easy and enjoyable to work with. We want to be able to express ourselves creatively through our code. We don’t want to concern ourselves with the quirks of the architecture that we're building on top of.
I will be actively looking for third generation blockchains emerging in the next bull cycle. Perhaps something completely different that is interesting and attractive for developers. I’ll be looking out for new technology where devs are building because of the merits of the system rather than where dev activity is incentivised by grants and funding.
In the long term it would be nice to have at least a duopoly where there is a choice for developers. If anyone is working on something like this I’d love to hear about it.
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Disclaimer: Not a financial advisor, not financial advice. The content I create is to document my journey and for educational and entertainment purposes only. It is not under any circumstances investment advice. I am not an investment or trading professional and am learning myself while still making plenty of mistakes along the way. Any code published is experimental and not production ready to be used for financial transactions. Do your own research and do not play with funds you do not want to lose.