Is the Era of Purpose-Built Blockchains Coming?

Key Takeaways

• Throughout the history of technological and societal advancement, the principle of division of labor has been a central driving force. This concept extends far beyond the Industrial Revolution era, permeating even today's IT landscape, where a multitude of microservices collaborate synergistically to construct unified service ecosystems.
  

• What if we were to apply this paradigm to the realms of blockchain and Web3? To realize such an approach, it's crucial to first establish a foundation of mature, specialized microservices across various domains. Historically, effective division of labor in traditional industries has always necessitated the presence of entities possessing deep expertise and capabilities in specific areas.
  

• Perhaps achieving this vision requires a fundamental reimagining of blockchain architecture, adopting a more purpose-centric design philosophy. Interestingly, we're already witnessing the emergence of purpose-driven blockchain infrastructure designs tailored to specific use cases. These innovative approaches warrant close attention as they may well shape the future landscape of decentralized technologies.

'The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgement with which it is any where directed, or applied, seem to have been the effects of the division of labour.’

-Adam Smith, [the wealth of nations] p. 13

Soruce: Adam Smith Works

The reason we study history is that history tends to repeat itself in broad strokes. This holds true even in the digital age. Therefore, I believe the answer to the question "How can blockchain and Web3 achieve explosive growth in terms of productivity?" can be found in history. When in history did humanity experience explosive growth in productivity? It was during the Industrial Revolution. So, what had the greatest impact on productivity during the Industrial Revolution? It was the Division of Labor.

Adam Smith, considered the father of modern economics, explained the correlation between division of labor and productivity in his seminal work "The Wealth of Nations," using the example of a pin factory. He noted that ten workers in a pin factory could produce 48,000 pins a day, not because each worker completed every step of the process, but because they divided tasks based on individual strengths. This division of labor established mass production systems and expanded them to an international scale, allowing humanity to enter an unprecedented period of growth.

This trend is not limited to the Industrial Revolution era but is also embedded in services we frequently use today. Netflix, for instance, widely credited with creating the OTT market, appears to users as a single service. However, behind the scenes, approximately 700 microservices (such as playback services, recommendation services, payment and billing services, search services, content encoding services, and API gateways) interact to compose the entire Netflix service.

As such, the Division of Labor has become an essential element in efficient system operations. So how are current blockchain systems applying this principle of division of labor? Are blockchain infrastructures truly following this trend of specialization?

In this article, we will examine the methodologies pursued by blockchain infrastructure in the past and present, and discuss the future direction that blockchain infrastructure should take. We will also explore which form of blockchain is most suitable for this division of labor structure. Through this analysis, we expect to gain a deeper understanding of the development process and future prospects of blockchain technology.

1. Monolithic & General Purpose

Let's first explore the monolithic & general-purpose blockchain, which was the initial form of smart contract platforms and is still prevalent today.

The concept of smart contract platforms essentially originated with Ethereum. Although Ethereum has now become the most iconic project in modular blockchain, it initially did not envision a modular blockchain framework. Instead, Ethereum had a vision of a monolithic blockchain, where all functions are processed on a single shard.

Ethereum's core objective was to create a general-purpose blockchain platform not limited to specific use cases. This meant enabling the implementation and operation of any type of application on Ethereum. This approach greatly expanded the application scope of blockchain technology and catalyzed the development of various decentralized applications (DApps).

1.1 Scalability: The Crux of the Problem

However, as time passed, Ethereum faced serious scalability issues. This led to a reconsideration of the monolithic general-purpose approach for the following reasons:

1. Transaction Processing Speed: As the network's popularity increased, transaction processing speed significantly slowed down.

2. Gas Cost Inflation: Network congestion led to a sharp increase in transaction fees (gas costs).

3. Scalability Limitations: Processing all computations on a single chain imposed fundamental constraints on network performance.

4. Developer and User Exodus: High costs and slow speeds prompted some developers and users to migrate to other platforms.

The CryptoKitties incident starkly illustrated these problems. Developed by Dapper Labs in 2017, CryptoKitties was an early NFT project that achieved rapid success, at one point accounting for 30% of all Ethereum transactions. Due to Ethereum's network characteristics, such concentration of transaction demand not only slowed processing speeds but also caused transaction fees to skyrocket. This ultimately led users to perceive Ethereum as a network that was "practically unusable".

This incident exposed the fundamental issues with networks like early Ethereum that process all transactions on a single shard. In such structures, applications become interdependent in terms of scalability. When network processing capacity is limited and heavy traffic concentrates on a particular application at a specific time, it becomes a significant obstacle to the smooth operation of other applications.

The problem is exacerbated when the cause of this traffic doesn't positively contribute to the network. For instance, numerous bots might continuously attempt meaningless transactions, or relatively low-priority DeFi activities might excessively occupy network resources. This negatively impacts the truly necessary network traffic, ultimately trapping the entire ecosystem in a negative cycle. These situations starkly demonstrated the importance of traffic management and resource allocation in blockchain network design, presenting a crucial challenge for future blockchain projects in achieving scalability and efficiency.

As a result, Ethereum was compelled to revise its initial direction as a monolithic and general-purpose blockchain, exploring a transition to a modular blockchain where multiple rollup chains coexist on top of Ethereum. However, Ethereum's abandonment of the monolithic approach doesn't mean this approach has completely disappeared from the blockchain market. In fact, the Solana blockchain, which is currently receiving as much market attention as Ethereum, still runs all applications on a single shard. The difference is that Solana, while adopting a monolithic structure, designed its network with a focus on processing speed and scalability, setting it apart from Ethereum's initial approach. Blockchains like Solana are referred to as "performance-oriented monolithic blockchains," but what specific differences and characteristics do they have?

2. Monolithic & Performant

"Performance-centric blockchains" have emerged as one of the most influential types of blockchain infrastructure in the market since the last market cycle. Revisiting Ethereum, its network frequently experienced slowdowns and transaction fee spikes, beyond the CryptoKitties incident mentioned earlier. During these times, users and developers yearned for a more "usable" blockchain. Solana and subsequent performance chains can be seen as addressing this desire.

Performance chains, like early Ethereum, possess the characteristics of general-purpose blockchains. However, unlike Ethereum, they practically solved the 'speed problem' by providing very fast block generation times and relatively large block spaces.

At the execution level, they introduced parallel transaction processing, enabling simultaneous processing of independent transactions, greatly improving network scalability. This context explains the vigorous discussions about "EVM parallelization" in the first and second quarters of 2024.

Initially, there was much skepticism about these attempts. The question was whether providing a fast and cheap platform would be enough to attract Ethereum's users, developers, and those outside the blockchain ecosystem (non-web3). While the process wasn't smooth at first, it has ultimately achieved considerable success, contrary to many concerns.

Solana, the leading performance-centric blockchain, is a prime example. Not only has Solana built its own community, but it has consistently outperformed Ethereum in various on-chain metrics (DEX volume, NFT volume, stablecoin transfer volume, etc.).

The tangible success of these performance-centric blockchains has significantly impacted the market. As a result, it paved the way for various performance-centric chains like Sui, Monad, and Sei to emerge, and new performance blockchains continue to appear even as I write this article.

2.1 Challenges with Performance Chains

However, these performance-centric blockchains are not superior to existing blockchains in all aspects. I define the problems of performance-centric blockchains as follows:

2.1.1 Decentralization

First is decentralization. To maintain fast block generation times and large block spaces, the number of nodes verifying the network and producing blocks must realistically be fewer than Ethereum, which can raise concerns about the degree of network decentralization. In fact, Solana has fewer nodes than Ethereum, even though it's considered the most decentralized among performance-centric blockchains.

Of course, the standard for "how many nodes need to be distributed to be considered decentralized" varies from person to person, but in terms of absolute numbers and degree of distribution, it's true that they all fall short compared to Ethereum.

2.1.2 Customizability

The second issue is optimization and customization. As I mentioned earlier, most performance-centric blockchains are general-purpose blockchains. It's important for general-purpose blockchains to be designed so that any type of application can be easily onboarded. However, this also means that the infrastructure design doesn't provide an environment optimized for the purposes of specific applications.

This environment may not pose significant challenges for basic applications in each sector. However, for applications requiring highly sophisticated functionalities specific to their sector, general-purpose blockchains may not be the most suitable infrastructure. For instance, DeFi applications handling complex financial products or gaming applications processing large-scale data may require more specialized blockchain environments.

This scenario is reminiscent of the author's earlier analogy in the introduction: just as multiple specialized microservices combine to create a single service like Netflix, blockchain ecosystems might need to evolve in a similar direction to support highly specialized applications effectively.

In this context, general-purpose blockchains may ironically be difficult to use for truly general purposes. In trying to accommodate everything, they may fail to meet the advanced requirements of specific fields.

Interestingly, while it's very difficult for new blockchain infrastructure to solve the problem of decentralization, the issue of customization can be addressed. What if we built an infrastructure for just one application? This question led to the creation of two pioneering platforms: Cosmos and Avalanche. Cosmos, which claims to be the 'Internet of Blockchains,' introduced app-specific chains based on the Cosmos SDK. Similarly, Avalanche emerged with the vision to become the 'platform of platforms.' Both of these innovations opened up new possibilities for customized blockchain solutions

3. Cosmos and Avalanche: Application Specific Chains

The application-specific chains of Cosmos and Avalanche can be seen as examples of blockchain infrastructures that have effectively addressed the issues I pointed out in sections 1 and 2. This is because the Cosmos SDK and Avalanche based L1s provide extremely fast infrastructure while also offering an environment that allows for the design of customized infrastructure for sophisticated applications in specific sectors.

Moreover, this approach has the advantage of pursuing both versatility and specialization simultaneously. Within the Cosmos and Avalanche ecosystems, each chain can build an environment optimized for its unique requirements while maintaining interoperability with other chains through the IBC (Inter-Blockchain Communication) protocol for Cosmos and Inter-Chain Messaging (ICM) for Avalanche.

Examples demonstrating these advantages in the Cosmos ecosystem include Osmosis, Stargaze, and Stride. Osmosis is an app chain specialized for DEX, Stargaze for NFT marketplaces, and Stride for liquid staking services. These are independent blockchains designed to move assets between each other and utilize each chain's infrastructure through IBC.

In the Avalanche ecosystem, examples include DeFi Kingdoms and Dexalot. DeFi Kingdoms is a GameFi project operating on the DFK Chain, an Avalanche based L1, offering in-game asset trading and DeFi functionality. Dexalot is a decentralized exchange that operates on its own Avalanche L1, providing a high-performance trading environment with low fees while maintaining interoperability with the Avalanche mainnet. These Avalanche L1s maintain interoperability with the Avalanche mainnet while building environments optimized for their specific needs.

In other words, users could seamlessly use these services by moving assets according to their purposes through protocols like IBC or ICM, despite these being separate chains. This exemplifies the harmony between interoperability and specialized functions provided by the Cosmos and Avalanche ecosystems.

Lastly, another advantage of these application-specific chains is that they have governance structures tailored to their purposes. These specialized governance structures allow for more agile responses to the requirements of the respective applications. Consequently, there is a clear benefit in that the infrastructure can evolve and upgrade in a direction optimized for the application.

3.1 Challenges with Application-Specific Chains

However, this approach also has some notable drawbacks:

3.1.1 Economic Security

Firstly, the independent operation of each chain can expose vulnerabilities in terms of security. App chains need to build and maintain their own validator networks, which can be particularly vulnerable to security threats such as 51% attacks in the early stages.

Moreover, even if an app chain successfully secures network security in its initial phase, there may be fundamental limitations to business scalability due to the nature of chains specialized for a single application. Even with a proven PMF (Product-Market Fit) like a DEX or NFT marketplace, it's challenging for these to grow to a scale that can bear the operational costs of a full Layer 1 chain.

This limits the overall usability and utilization of the network, resulting in fewer transaction fees. Consequently, to raise the necessary funds for continuous chain operation and security, tokens must be continuously issued. This situation can lead to token supply inflation, potentially causing a vicious cycle of token value decline.

3.1.2 Fragmentation

Secondly, complexity may increase from a user experience perspective. While IBC (Inter-Blockchain Communication) facilitates inter-chain interactions, users still bear the burden of managing wallets across multiple chains and understanding the characteristics of each chain. (In contrast, general-purpose chains eliminate the inconvenience of using multiple chains for various applications, but they present a trade-off: due to their generalized nature, it becomes challenging to find optimized applications for specific purposes.)

This fragmentation issue is being addressed by new interchain standards such as ICA (Inter-Chain Accounts) and ICQ (Inter-Chain Queries). However, it remains an area that requires significant development and improvement.

Can blockchain take a step further from here? Perhaps the answer lies in a new blockchain framework called Purpose-Built Blockchain.

4. Purpose-Built Blockchain — A New Paradigm?

There's a new generation of blockchains that is now quickly gaining traction and could possibly be the next dominant paradigm in Web3: purpose-built blockchains, a term popularized by Story cofounder Jason Zhao in his recent tweet, sparking vivid discussion around this new approach.

Purpose-built blockchains can be seen as a methodology that cleverly combines the unique advantages of the blockchain design frameworks discussed today. This is due to the effective integration of the following characteristics:

1. They maintain performance that far surpasses Ethereum.
   

2. The network is designed around specific use cases.
   

3. These use cases are centered on areas defined as problems in existing industries (broader domains), rather than Web3-native areas (such as exchanges or NFTs).

This approach focuses on solving real industry problems while maximizing the advantages of blockchain technology. Thus, this methodology has the potential to greatly enhance the practicality and applicability of blockchain technology.

The core of purpose-built blockchains is providing infrastructure optimized for specific use cases. To achieve this, problem-specific logic is injected into the infrastructure layer, offering superior performance for particular use cases, unlike general-purpose blockchains. This is primarily implemented through pre-compiled smart contracts containing the chain's core business logic.

It's important to note that purpose-built blockchains, poised to become the next dominant paradigm in Web3, don't require entirely new infrastructure technology. Instead, they cleverly build upon the groundwork laid by pioneers like Cosmos and Avalanche. These purpose-built blockchains repurpose existing technologies, originally developed for application-specific chains, to address more targeted and well-defined markets. By leveraging established technological foundations, developers can create specialized blockchain solutions without having to master new infrastructure, making this approach both innovative and accessible. This strategic combination of tailored functionality and familiar technology enables purpose-built blockchains to offer optimized solutions for specific use cases. As a result, they are rapidly gaining traction and are well-positioned to shape the future landscape of decentralized applications and services in the Web3 ecosystem.

To aid understanding, let's consider some examples. Story is a purpose-built blockchain focused on onramping intellectual property. Unlike financial assets, intellectual property forms complex networks of countless parent-child relationships and is thus notoriously hard to fit on existing general-purpose blockchains due to ballooning gas costs when traversing IP graphs. Story addresses this by directly implementing a 'Proof-of-Creativity' protocol at Layer 1, enabling fast and cost-effective processing of relational data structures like intellectual property rights. Notably, while Story is built on the Cosmos SDK (Comet BFT), it has customized its infrastructure to suit the vast IP market sector.

The Injective network, a blockchain created for finance, can also be considered a purpose-built blockchain based on the Cosmos SDK. Injective has internalized various modules (Exchange Module, RWA Module, etc.) in its infrastructure and optimized block time and transaction fees to ensure that financial applications can be optimized on the network, designing the blockchain to handle complex financial transactions efficiently.

Similar cases exist in the Avalanche ecosystem where purpose-built L1s have been developed for a wide range of applications, from gaming to financial services. Avalanche Evergreens, for example, are out-of-the-box L1 configurations for regulated Institutions and Enterprises; customizations include permissioning at the validator, smart contract deployer, and transactor levels, default network privacy, and custom gas tokens. Furthermore, Ava Labs more recently introduced HyperSDK, which gives developers the tools to program their logic directly at the VM layer, enabling both greater customization and enhanced performance.

Lastly, although it doesn't use Cosmos or Avalanche (but their technology has been inspired by HotStuff BFT), Hyperliquid, a purpose-built blockchain specialized for DEX, is another good example. Hyperliquid aims to provide an experience similar to centralized exchanges (CEX) on a decentralized platform. To achieve this, they built their own Layer 1 blockchain to maximize performance for specific use cases.

Purpose-built blockchains have already begun to emerge in the market and are gaining market attention as their value is acknowledged. However, being purpose-built doesn't mean everything is perfect. While these blockchains have many advantages, they still face the challenge of balancing the benefits of use cases with operational overhead. Building a custom Layer 1 blockchain requires substantial effort, and as mentioned earlier, additional work is needed to ensure sufficient decentralization, inter-chain communication, and liquidity.

Therefore, purpose-built blockchains face the difficult task of simultaneously meeting two conflicting requirements: First, the use case must be broad enough to justify the additional infrastructure overhead. This is to prevent inflation issues like those seen with app chains, as mentioned earlier. Second, the use case must be narrow enough to drive performance improvements in a specific area. As such, when evaluating purpose-built blockchains, it is crucial to consider these criteria.

5. Pay Attention to Purpose-Built Blockchains

We have examined the past and present of blockchain. Can we then assess that the blockchain industry is following the trend of division of labor well, like traditional industries? To answer this question, we need to revisit the concept of division of labor.

Division of labor began as cooperation between individuals, gradually expanding to division between companies and even nations, bringing prosperity to human society. Ultimately, the core of division of labor lies in the collaboration of entities with specialized skills and capabilities in specific fields, in a free environment, pursuing higher quality and productivity. From this perspective, when we look at blockchain, we can see the possibility of blockchains optimized for specific sectors emerging and interacting with each other to create better use cases.

If purpose-built blockchains can provide optimized infrastructure for specific sectors and prove their sustainability, the future blockchain ecosystem might achieve a structure of division of labor where multiple purpose-built blockchains with various purposes communicate with each other. This direction of development suggests that blockchain technology can contribute not only to technological innovation but also to the evolution of industrial structures. If blockchains specialized for each sector cooperate by leveraging their strengths, we will witness a more efficient and innovative blockchain ecosystem.

Of course, for this to be possible, the development of messaging protocols that facilitate seamless communication between chains is essential (messaging protocols like LayerZero could also be considered purpose-built blockchains, as they focus solely on inter-chain messaging). Also, to elevate the UI/UX to the next level, the chain abstraction work that is currently emerging might be necessary. However, in my view, the protocols performing these tasks are also purpose-built blockchains. Ultimately, isn't a future where multiple purpose-built blockchains interact to operate a single application an example of division of labor applied to blockchain and an opportunity for the Web3 industry to take a step forward?

Just as the division of labor was the foundation for the industrial revolution and human prosperity, I hope that the emergence of purpose-built blockchains and their seamless collaboration will bring a productivity revolution to the blockchain industry.