Legacy blockchains suffer from ‘Marketing Myopia’
At one point in their lifecycles, even the most mature industries were once growth industries. Take the railroad business, for instance. In the 19th Century, barons like Vanderbilt, Hill, and Huntington amassed massive fortunes building out the railroad network in America. It was a period of intense competition, with operators haphazardly constructing parallel and overlapping lines with trains running on different widths and time clocks with no industry standard. Passengers were forced to deal with dozens of fragmented railroad operators, often changing lines multiple times for a short trip resulting in a slow and fragmented experience.
Sound familiar?
Eventually, train companies would conform to a single standard and consolidation would greatly improve the passenger/freight service. The railroad industry attracted more capital investment and resources than any other activity in America’s history until that point. Despite generating an enormous amount of wealth and economic activity, the railroad industry would eventually lose its growth industry status not for a lack of demand but for taking too narrow of a market view towards its own business.
In his Harvard Business Review article Marketing Myopia (1960), Theodore Levitt explains that for an industry to continue to grow at an accelerated rate, it must define its market broadly enough to benefit from technological advancements and growth opportunities that will otherwise disrupt and compete away its business.
In the case of the railroad industry, those behind it assumed they were in the railroad business, when in fact they were in the transportation and logistics business. They were so intently focused on the rail network, its time schedules, the locomotive tech, and passenger & freight rates that they lost sight of their core business: getting people and cargo from point A to point B.
Railroads were a means to satisfy this service, not the service itself.
But what does any of this have to do with blockchain design and onboarding the next billion users to Web3?
Like railroads, legacy blockchains such as Bitcoin and Ethereum have defined their business far too narrowly. Early supporters of these chains have perpetuated the belief that blockchains are in the decentralization business. This is a warped view that does is not consistent with the preferences of next generation users and the broader technological trend. We feel while a minimum level of decentralization is important, most users, especially incremental ones, value performance and censorship resistance above massive levels of redundancy and recoverability.
Rather than being in the decentralization business, Next Generation Blockchains are redefining the industry by aiming to instantaneously propagate large amounts of data in a censorship resistant manner.
Blockchains that are unable to broaden their core market offering to take full advantage of increasing internet speeds and modern hardware to fit this broader market definition will not be able to compete with chains that do.
Decentralization or Censorship Resistance?
Legacy blockchains like Ethereum and Bitcoin solved for decentralization by opting for low node requirements and highly redundant block propagation mechanisms. These tradeoffs reflect the desire of early blockchains to be highly robust and minimize the cost of running a node to achieve decentralization above all other features.
Of course, without a working definition and quantifiable metrics, the conversation around decentralization quickly devolves into a loosely evidenced philosophical discussion that is hand-wavy at best:
The market will decide when a blockchain is said to be decentralized, this occurs when a chain reaches a certain threshold of of full nodes.
In addition to participating in consensus, full nodes keep a copy of a blockchain’s entire ledger (all of its transactions) in real-time, allowing a single full node to recover the ledger in the case of a catastrophic event that a large number of nodes are lost or unrecoverable.
Censorship resistance, best measured using the Nakamoto Coefficient is the number of entities that would need to collude in order to start interfering with transactions on the network.
For proof of stake networks, this is determined by how staked coins are delegated (assigned) to different validators. Note, as of the time of publishing, Ethereum has a Nakamoto Coefficient of 2 because Lido Finance and Coinbase have more than 33% of stake combined (per Nakaflow.io).
Since total loss of 100% of full nodes is extremely unlikely (especially if they are distributed geographically), solving for decentralization at the expense of performance is objectively a terrible tradeoff, if you are attempting to support hundreds of millions or billions of users.
In practice, the limits of decentralization in terms of total loss of the ledger are very unlikely to ever be tested. However, we are far more likely to feel a lack of censorship resistance. If malicious parties are able to collude and control more than 33% of stake, they are able to interfere with transactions on the network. We should be more preoccupied with ensuring stake is decentralized across many validators than an apocalyptic scenario where every full node is unrecoverable. By increasing the super minority (the number of entities required to reach 1/3rd + 1 of the network stake) the Nakamoto Coefficient increases and the network becomes more censorship resistant.
Why is Censorship Resistance preferrable?
By solving for a high degree of censorship resistance, Next Generation blockchains are able to retain high throughput, and performance while displaying a high degree of resistance to attacks.
If we have learned anything from Levitt and the railroads, in order to keep adapting and respond to changes in their competitive landscape, blockchains need to broaden how they view their core business to take advantage of parabolic increases in internet speeds and hardware.
Next Generation Blockchains are able to achieve adequate levels of decentralization (thousands of full nodes that can each recover the ledger) without sacrificing performance. This is truly the standard to beat and we expect the market to conform to this approach.
Critics of this approach will insist tens of thousands of full nodes are needed and we can never have enough decentralization, however the corresponding loss in performance is too severe in practice. As you include more nodes in the network, more data needs to propagated instantaneously to all nodes, increasing latency and decreasing performance. Why solve for decentralization past the point of massive diminishing returns just because of ideology?
There is no room for ideology in the L1 race, the market will decide how much decentralization is enough.
If legacy chains like Bitcoin and Ethereum continue to double down on decentralization instead of performance and censorship resistance, they will struggle to create the right mix of features to serve next generation of users and developers, and fail to meet support mass adoption.
What was once important to the earliest blockchain adopters is no longer at the top of the list of preferences for the vast majority of users, especially if we would like to attract Web2 users accustomed to free and virtually instant applications.
Any chain that compromises on performance by solving for excessive levels of decentralization over censorship resistance will simply be out of the race for L1 supremacy. The market will ultimately decide how much decentralization is enough. User and transaction metrics are already pointing in a direction that would suggest some chains are rapidly advancing towards the same fate as the railroads.