After Decentralized Finance, what is the next era of Blockchain?

Original title: Onchain Finance Is Thriving; What’s Next?

Original by Mario Laul

Published date: April 15, 2024

Decentralization public Blockchain networks have been around for about 15 years, and the encryption assets associated with them are currently experiencing the fourth big market cycle. Over the years, especially since the launch of Ethereum in 2015, we have spent a lot of time and resources building theories and developing applications based on these networks. While these networks have made significant progress in financial use cases, other types of applications have struggled, mainly due to the complexity of providing scalable and silky user experiences under the constraints of “decentralization”, as well as the fragmentation of different ecosystems and standards. However, recent technological advancements have made applications both within and outside the Blockchain industry not only more feasible, but also more necessary than ever.

The early days of Blockchain adoption were driven by a rather narrow definition of its core function: the secure issuance and tracking of digital assets without relying on centralized intermediaries such as TradFi or government agencies. Whether we’re talking about Blockchain native Fungible Token like BTC and ETH, or the on-chain of off-chain assets like national coin and traditional securities, or non-Fungible Token (NFT) representing art, game items, or any other type of digital product or collectible, Blockchain keeps track of these assets and allows anyone with an internet connection to trade them globally without touching the centralized financial track. Given the size and importance of the financial industry, especially in the context of rising digitalization, globalization and financialization, this alone is enough to prove that Blockchain is an extremely revolutionary technology and enough to attract global attention.

Within this narrow framework, in addition to the underlying asset ledger and the Decentralization network that maintains them, there are currently five Blockchain applications with significant product-market adaptability: applications for issuance Token, applications for storing Private Key and transferring Token (Wallet), applications for trading Token (including DEX DEXs), applications for lending Token, and applications that make Token have predictable value relative to traditional fiat coin (stablecoin). At the time of writing, the number of encryption assets listed on the encryption market data aggregator Coingecko has exceeded 13, 000, with a total market capitalization of about $2.5 trillion and a daily volume of more than $10 billion. Nearly half of this value is concentrated in a single asset, BTC, and the vast majority of the other half is spread across the top 500 assets. However, the long tail curve of Token is long and rise, especially after NFT is also included, which shows that there is a long demand for Blockchain as a digital asset ledger.

According to recent statistics, there are about 420 million people worldwide who hold long encryption Token, although many of them may never or rarely interact with Decentralization apps. A report from hardware wallet maker Ledger shows that its Ledger Live software has about 1.5 million monthly active users, while software wallet providers MetaMask and Phantom claim about 30 million and 3.2 million monthly active users, respectively. Combined with DEX volume of about $5-$10 billion per day, on-chain lending market locked-in value of about $3-35 billion, and stablecoin market capitalization of about $130 billion, these numbers show that the current level of adoption of these five categories of apps relative to TradFi and fintech is still low, but still significant. Admittedly, these figures should take into account the background factors of the recent spike in asset prices in encryption, but as Blockchain regulations become more sophisticated (approvals in Spot Bitcoin ETF and tailor-made regulatory frameworks such as MiCA in Europe), they are also likely to continue to attract new capital and users, especially in the context of increasing integration with TradFi assets and institutions.

However, financial applications such as Token, Wallet, DEXs, lending, and stablecoin are just the tip of the iceberg of apps that can be built on a common Programmability Blockchain. Measuring Blockchain adoption should not limit it to a narrow confines as an enhanced asset ledger, but rather to a broader scope, such as as a more versatile alternative to centralized databases and web application platforms. The number of developers worldwide is now close to about 30 million, yet according to Electric Capital’s latest Crypto Developer Report, there are still fewer than 25, 000 monthly active developers on public Blockchain, of which only about 7, 000 are in full-time roles. These numbers show that Blockchain currently has a considerable gap with traditional software platforms when it comes to attracting developers. However, the number of developers with at least 2 years of Crypto development experience has been increasing for five consecutive years, the number of contributors in each ecosystem is more than 1, 000, and Crypto has attracted more than $90 billion in venture capital over the past 6-7 years. While it is true that the vast majority of these funds have been spent on building the underlying Blockchain infrastructure and core DeFi (Decentralized Finance) services, which are known as the backbone of the emerging on-chain economy, there is also considerable interest in non-financial, utility-focused applications such as online identity, gaming, Social Web, Supply Chain, internet of things, and digital governance. So, how successful are these types of apps in the most established and widely used smart contracts Blockchain?

There are three main metrics that measure the market’s interest in a particular Blockchain and application: daily active Address, daily volume, and daily fee spend. There is an important factor to understand before interpreting these indicators, which can all be easily exaggerated, so the data can only be used as a very crude estimate. Protocol to on-chain data aggregator Artemis, over the past 12-month period, six networks have stood out in all three metrics (each ranking in the top 6 in at least two metrics): BNB Chain, Ethereum, NEAR Protocol, Polygon (PoS), Solana, and TRON. Four of these networks (BNB, Ethereum, Polygon, TRON) are using EVM and therefore benefit from the utility versatility and network effects of Solidity (a programming language created specifically for the EVM). Both NEAR and Solana have their own native execution environments, both are primarily based on Rust, and while more complex, Rust has various performance and security benefits over Solidity, and it has a thriving ecosystem outside of the Blockchain industry.

On-chain activity on all six networks is focused on the top 20 applications, and the daily active Address (inaccurate data) of applications after the top 20 drops to k or even hundreds, depending on the network. As of March 2024, the top 20 apps account for 70-100% of the three metrics considered, with Tron and NEAR having the highest concentration and Ethereum and Polygon the lowest. Across all networks, the top 20 applications are mainly those related to tokenization, wallets, and Decentralized Finance (exchanges, lending, stablecoins), and there are few or very few applications that do not belong to this category (0-4 per network). Aside from the bridges used to transfer value between different Blockchain and NFT trading marketplaces (both of which should be included in the asset transfer and exchange category), the few remaining outliers are usually gaming or social applications. However, in 5 of all 6 cases, the app’s share of overall network activity is very low, e.g. Polygon’s best data is less than 20%, but typically less than 10%. The only exception is Near, but its usage is very concentrated, with two apps, Kai-Ching and Sweat, accounting for about 75-80% of all on-chain activity, and in total fewer than 10 apps have more than 1, 000 daily active addresses.

All of the above reflects the legacy of Blockchain’s early development and further solidifies its core value proposition as a digital asset ledger. The widespread criticism of Blockchain’s lack of applications is clearly unfounded, as their main function is the financialization of Programmability and the secure settlement of tokenized value. Asset issuance, Wallet, DEXs (or broader exchange), lending protocol, and stablecoin have such a strong product-market fit simply because they are closely tied to that purpose. Given the relatively simple business logic and strong positive feedback loops between these five Blockchain, it’s no surprise that first-generation leading smart contracts Blockchain tend to serve primarily the application of this narrow financial use case. And, because the use of long Blockchain apps with non-financial utility is ultimately related to tokenization and financialization as well, these five financial apps are likely to still dominate the major general-purpose Blockchain in the long term.

But what does this mean for Blockchain more ambitious vision of being a universal application platform? The two biggest challenges facing the crypto industry over long years are 1) scalability of the Blockchain (both throughput and cost), and 2) a simple user experience without sacrificing the underlying infrastructure Decentralization and security guarantees. In terms of scalability, there are currently two approaches, a more integrated architecture and a more modular architecture, with Solana belonging to the former and Ethereum and its Layer-2 (Rollups) ecosystem demonstrating the latter. In fact, the two methods are not mutually exclusive, and there is considerable overlap and intermingling between them. But more importantly, both approaches are now mature options for scaling Blockchain, depending on whether the application in question needs to share state and maximum composability with other applications, or is less concerned with seamless interoperability but seeks to benefit from full sovereignty over its governance and economy.

In addition, we have made significant progress in improving the end-user experience of Blockchain applications. Specifically, thanks to the development of technologies such as account abstraction, chain abstraction, proof aggregation, and light client verification, there are now ways to safely remove some of the major user experience hurdles that have plagued Crypto for longing years, such as having to save private keys or mnemonic phrases, having to pay transaction fees, restrictions on account recovery, and over-reliance on third-party data providers, especially in the case of longing chains. Combined with increasingly long Decentralization data storage, verifiable off-chain computing, and other back-end services to enhance the functionality of on-chain applications, the current and upcoming application development cycles will prove whether Blockchain will become a major player in the global financial infrastructure or a more general role. Given the sheer number of use cases beyond Decentralized Finance, these use cases will benefit from greater resiliency and better user-centric master control of data and transactions, such as online identity and reputation, publishing, gaming, physical infrastructure such as wireless and internet of things (DePin), Decentralization science (DeSci), and addressing the increasingly rise question of authenticity of AI-generated content, which have been attractive in theory and are now becoming feasible in practice.