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Silicon Valley bets on blockchain nuts and bolts

The telecommunications bubble of the late 1990s never took a place in the popular imagination to rival the dotcom bubble that occurred around the same time.

Deregulation and the euphoria of the early Internet combined to create a vast array of new networks. One estimated 2 million dollars The telecom industry’s stock market value rose in the air as the manic period passed. But new fiber lines have been laid, meaning the infrastructure is already in place as companies like Google and Facebook emerge to drive a much larger wave of digital activism.

In the crypto world, could something similar happen with a different kind of infrastructure? When the crypto craze is over, many of the currencies that flourished in the shadow of bitcoin will become worthless. But their skyrocketing trading volume has created a need for real infrastructure and massive investments are being made. If blockchains represent a new architecture that will shape the future of online activity beyond cryptocurrency speculation, the need for the infrastructure will remain.

Picking the ultimate winners in this game requires making assumptions about how this world will develop. It will lead to additional blockchains, but linked, with room for multiplayer? Or will this be a win-win industry where a handful of networks each become dominant in a particular type of transaction? And will the software and services needed to make technology usable by non-experts create dominant companies in different parts of a new technology “stack”?

Large investments are made in two companies This week highlights where some of the most prominent venture capitalists are placing their bets. They also suggest that one of the ideals behind the cryptocurrency movement – that it will lead to decentralized networks outside the control of narrow government or corporate interests – may not exist in the future. The twin realities of technology and capitalism.

Alchemy, which has raised $200 million, offers tools to make it easier for businesses to interact with blockchain. When they want to post to a network or call in information from it, they usually go through Alchemy’s technical links, eliminating the need for face-to-face interaction. That puts Alchemy in a strong position in orchestrating data flows to blockchains, providing analytics and other tools users will need to operate. The emergence of companies like this suggests that new bottlenecks may have formed in the supposedly decentralized blockchain world.

The second investment – a $450 million Polygon token sale – represents a bet on Ethereum Network. Ethereum, the first company to offer “smart contracts” at the heart of decentralized applications built on blockchain, is severely limited. It processes a maximum of just 13 transactions per second and has been years behind in efforts to upgrade its network. That has increased transaction costs, as users bid for a scarce resource. To ease the pressure, Polygon and companies like it are building on top of Ethereum, which could make blockchain the center of a much larger tech ecosystem.

This highlights what has been called “blockchain trio“. Ideally, networks would combine security, decentralization, and low cost. But in reality, there can only be two of these three conditions at the same time. Ethereum has achieved security and decentralization. For their part, companies like Polygon focus on security and low costs, while sacrificing a degree of decentralization. Inevitably, this opens the door to the risk that new technology providers could end up controlling critical parts of the value chain.

Meanwhile, Ethereum’s slow network has also created opportunities for newer networks designed to handle much higher transaction volumes. They include Solana, whose tokens are now worth a total of $34 billion, and Avalanche, the newest to rise to fame, with a $21 billion “market cap” token. With more and more developers being attracted to these networks, and with bridges being built between them, the odds are increasing that multiple chains will coexist, with Ethereum making the biggest pull.

Ultimately, the high valuations already applied to this new infrastructure will only be justified if the applications they support become central to the online lives of millions. There is a high probability that the boom will go bust before the final answer to that question becomes clear.

richard.waters@ft.com

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