Crypto’s multichain future

This article is part of Crypto Insights, a segment by major crypto exchange Bybit that dives into the latest and most pertinent issues in the crypto space.

As the crypto market matures, visionaries are seeing a future where different blockchains specialize and interact with each other. If this happens, then multichain infrastructure could be the next big thing.

Image credit: Timmy Loen

2021 saw the rise of new blockchains classified as Layer 1 (L1), which emerged as an alternative to the congested Ethereum network. Today, six out of the top 10 crypto tokens are L1s, including Solana, Terra, and Cardano.

Ethereum is still the top dog with higher revenue, along with more decentralized applications (DApps) and developers building on the blockchain. But it started to lose ground last year: While over 90% of all the money invested in decentralized finance (DeFi) was locked on Ethereum at the beginning of 2021, that figure is down to 60% today among the smart contract platforms, with Terra, Binance Smart Chain, and Fantom taking large slices of the market.

How all this will pan out is hotly debated. At one end of the spectrum are those who think that Ethereum will solve its scaling woes and become the base layer for the entire crypto ecosystem. At the other end are those who believe that an egalitarian community of different blockchains will prevail instead.

An easy way to think about it comes from investor and author Haseeb Qureshi, who came up with the idea that blockchains might function more like cities in the future. Most countries in the world have two or three major cities. In the U.S., for example, New York is the financial hub while Los Angeles is the entertainment capital, thanks to Hollywood. In China, Shanghai is the center of innovation while Beijing is the political heart of the country.

Qureshi supposes that the future is multichain, with different blockchains acting like cities. Perhaps Ethereum will become the home of institutional investment, while Solana will be the leading blockchain for gaming. Smaller blockchains would take up a second tier: Polkadot, for instance, could innovate the best tech, while Terra could capture the Asian market for non-fungible tokens.

A streamlined flow of capital will be crucial. Even if Ethereum thoroughly dominates, it will still need to communicate with Layer 2 blockchains like Arbitrum and sidechains such as Polygon that help ease congestion on the Ethereum Mainnet.

At present, cross-chain capital flows via bridges or routers like Wormhole and Multichain. Unfortunately, these protocols are vulnerable to hackers because they rely on many more layers of code to operate. This creates a much larger attack area than other crypto protocols.

Much havoc has already been wreaked. On Feb. 2, hackers attacked Wormhole, making off with the equivalent of US$300 million. It was “the second-largest smart contract hack in history, trailing only the US$600 million Poly Network hack of 2021,” according to crypto-focused platform Bankless. Multichain, a cross-chain liquidity router, lost US$3 million in a similar attack a few weeks earlier.

To expound on this, let’s expand Qureshi’s analogy. In the late 19th century, the US built thousands of miles of railroads to connect its burgeoning cities. These trains, however, were slow and an easy target for bandits seeking plunder.

Nowadays, train heists don’t happen – you can’t exactly leap onto a modern bullet train and wave around a six-shooter, can you? The attacks now happen online instead, and while such thievery is monstrous to the people who have lost money, one can also opt to take the long view. In the greater scheme of things, this could simply be the growing pains of a new technology.

Clearly, these bridges are in their infancy. “Routing transactions between different blockchains remains a difficult problem,” writes multichain solution Composable in its white paper. “Natively, blockchains have no concept of networking, DNS, or other temporal data; and storing this on-chain is both prohibitively expensive, as well as a bad idea.”