Background & Industry State

This page is designed to give you the background to how we got to where we are today.

The First Blockchain

In 2009, Bitcoin created the first blockchain that implemented a peer-to-peer digital payment network. This system was foundational and marked the beginning of the "web3" industry. While revolutionary, implementing blockchain technology has high barriers in practice:

1. It must be prohibitively expensive to take control of the network, which often requires significant capital to be raised to

2. The tech is complex and requires a deep understanding to avoid execution failures

3. Adoption requires a rich ecosystem with developer tooling and liquidity paths

4. The operation requires diverse, experienced Validators to avoid centralization

5. The chain needs interoperability features to avoid community isolation

To read more about the challenges of building an L1 - checkout: The cost of independence

Defining a Blockchain

A blockchain is a shared digital state that is maintained by a group of independent participants called Validators. Transactions that update this state are grouped into blocks and chained together sequentially.

To determine the next block, Validators participate in Consensus, where they validate and finalize transactions together without trust. This process repeats every block time, ensuring the blockchain continues to grow in a secure and fraud-proof way.

Click here for a comprehensive definition of a blockchain

Why build a blockchain?

Since no single party controls the network, a blockchain is decentralized; its rules and operation are enforced by the stakeholders rather than a central authority.

Key properties of decentralization include:

1. It cannot be censored or controlled by non-stakeholders

2. It self-governs and operates autonomously

3. It has no single point of failure

These properties are ideal for applications that need to be trusted by the public and tamper-proof, like payment systems, media platforms, and governance applications.

The distinction between a Web2 app and a blockchain app is decentralization, along with its inherent benefits. Without decentralization, a blockchain app offers no significant advantages over a centralized web app.

Dependent Applications

In 2013, Ethereum attempted to solve the difficulties of building a blockchain by introducing a network that could support digital accounts capable of executing 'code' and storing 'state'. This innovation enabled the creation of apps hosted on blockchain, commonly known as dApps or Smart Contracts.

Ethereum was able to make blockchain technology more accessible to developers by abstracting away the challenges involved with launching an L1. In doing so, it became the first Security Root: a chain that provides consensus, security, and communication for Nested apps.

For a more comprehensive history, check out the history section in our paper

Problematic Impact

However, Ethereum's success had some unintended consequences for the industry:

• Dependent apps were accepted as decentralized 'enough' - despite reliance on host chains

• Security is greatly centralized, as Ethereum is one of the few security roots

• Innovation was directed at dependent apps instead of independent networks

• Sovereign blockchains became increasingly rare

• Layered architecture became the default paradigm

• Host protocols trapping projects in their ecosystem became the norm

Because Ethereum exists as one of the few security roots for Web3, it quickly ran into scalability issues. These issues exploded in 2017 when a game about digital cats overwhelmed the network, bringing Ethereum and its apps to a halt.

⚠ CryptoKitties was not an isolated incident! Check out the full story in the Canopy whitepaper

The critical failure of 2017 ultimately led to the creation of layered technology (L2s/Rollups), which are dependent frameworks that host dApps to offload the weight of new applications.

However, dApps and layered technology are not acceptable choices for a builder because:

Aspect	Consequence	Notes
Censorship	Can be censored by the host protocol	Non-aligned validator introduce potential censorship
Sovereignty	Lack true autonomy	Dependent on the host
Centralization	Have single points of failure	The host protocol and/or sequencer introduces points of failure/censorship
Value Loss	Lose value to the host protocols	Value leakage comes in the form of forever fees, lack of value accrual to native tokens, etc.
Interoperability	Lack native interoperability with external ecosystems	Recent protocols have mitigated this, but few do it well.
Lock-in	Are trapped	Escape requires a ground-up rebuild.
Scalability	Limited scalability	Scalability is constrained by the host. Apps are in constant competition for scalability.
Governance	Are controlled by the host	Lack complete governance independence

These weaknesses are not just theoretical: Read about the Ethereum censorship of Tornado Cash in 2022

These flaws expose a fundamental question: What makes a dApp or Rollup better than a Web2 application? The industry overlooks the fact that dApps, Rollups, and L2s lack meaningful decentralization and autonomy, making them not significantly different from Web2 in practice.