Some thoughts on the market

Our multichain thesis seems to be playing out before our very eyes. We’ve seen a trend of alternative L1s and L2s gain legitimate developer and user traction outside of the well-established Bitcoin and Ethereum ecosystems. See, for example, the growing adoption of EVM across many different chains, the steady maturation of the Cosmos ecosystem, the launch of parachains on Polkadot and Kusama, and L2s beginning to come online. As a result, the multichain future is no longer a niche thesis. It is well and truly here.

I’m seeing a trend of early adopters hopping from one chain to another chasing rewards: early adopters make their money, then the core community stops growing, causing new web3 users who missed out to move to other L1s and L2s that provide more upside. Consequently, Web3 demand will continue to grow and fractionalize users into their respective tribes across new and upcoming blockchains as they seek for new opportunities to earn life-changing wealth.

As these chains ossify their communities, they will either begin bleeding community members to other chains, or will need to find other inflection points to bring in new members. Sophistication across communities and the markets is increasing in the space, and projects being judged on real metrics, not just speculation, will continue to rise above the noise. Despite such fierce competition – and warring incentives – defensibility will come from the fact that while blockspace is fungible, communities are not.

There will continue to be tension between dapps deciding to build on generalized smart contract chains versus launching their own specialized blockchains. Consistently as applications grow, we see them contemplating and planning to build their own application-specific blockchains (e.g. Dark Forest, Compound, AxieInfinity). In a sense, the tradeoffs between the cost of coordination versus the economic efficiencies of building your own chain tips one way or another depending on composability needs and the scale of an application. As tooling such as the Cosmos SDK and Substrate continue to mature, and economic models mature, the decision to move to a standalone chain due to massive growth will become increasingly easier.

Why does this matter for Pocket?

Short to medium term, the obvious opportunity for Pocket with the rise of a multichain world (outside of attracting the largest existing dapps) is the opportunity to become the default node infrastructure platform for multichain applications and other middleware such as wallets, bridges, and cross-chain DEXs. Middleware platforms that touch many chains don’t want to deal with the complexity of dealing with many RPC providers with varying levels of reliability. Pocket shines in this respect, as the more traction a given chain we support gets, the more reliable our infrastructure becomes. Also, Pocket acts as one interface to every chain. Think about that for a second.

As little as 2 years ago, most new protocols didn’t contemplate the importance of RPC infrastructure when launching. Now, with public lessons learned by all major L1s and the wider market being educated on the importance of RPC infrastructure, new protocol teams are seeking out providers during the pre-planning phase of their mainnet launches. Protocol teams have spent millions of dollars to outsource this to centralized RPC providers. Yet, centralized RPC providers are not aggressive about adding new, less funded, or less credible blockchains as the opportunity cost and unclear revenue calculations for these blockchains acts as a challenge to their business model.

This is fantastic for Pocket. While it still takes time to spin up chains, we do not have the same cost and reliability tradeoffs that centralized companies do. The incentive structure inherent in Pocket’s decentralized marketplace for blockchain data of Pocket nodes takes care of itself without any additional cost to Pocket as a network. If there is money to be made, nodes will spin up the infrastructure to capture it. The same way Uniswap changed the exchange landscape, Pocket will do the same among RPC providers.

Long term, a fascinating opportunity is the offloading of core components from generalized smart contract blockchains. In parallel to market forces bringing new opportunities to up-and-coming blockchains, we’re seeing the beginnings of the unbundling of dapps and core client features into their own protocols. Over the next decade, we will see generalized blockchain clients become increasingly thin, offloading much of their storage and networking layers to specialized middleware protocols. Solana led the charge on this by beginning to store data on chains such as Arweave, and now Ethereum is having the conversation. Protocols such as Pocket Network and The Graph are removing the need for L1’s to worry about full nodes and indexing.

While slowly moving, as tooling (Substrate, Cosmos) improves and we have successful use cases out in the wild, new protocol founders will lean towards building simpler clients (light clients play a part in this future as well) and offloading work to other core protocols. This is where the opportunity for Pocket lies; as the web3 infrastructure stack continues to mature, we can lock in Pocket Network as the primary node interface for protocols to build on at the client layer. A potential path is core client nodes having dependencies such as the Pocket SDK for archival, full and light clients.

With all that said, it all comes down to relays and how many chains we support. We’ve closed a recent round with the explicit intent of scaling ourselves internally, and critically, externally across the community and the best node providers in the world. Timing is everything, and while coordination complexity increases with each new blockchain we support, the more aggressive we are about this, the more successful we will be.

We are unique with how we scale to dozens, and eventually hundreds of blockchains. To my knowledge, no RPC provider supports 100 blockchains yet. Pocket should be the first. Over time, the operational overhead of adding these new chains will decrease as we discover more efficient ways to coordinate across many node providers.

Looking forward to seeing how this all plays out in 2022 and beyond. Happy new year everyone.