Dialogue with a16z Partner: The blockchain space is the best product of the 2020s

Author: Mario Gabriele, The Generalist

Original Title: “Blockspace: An Introduction with Chris Dixon”

Compilation: Old Yuppie

Actionable Insights

If you only have a few minutes, based on an interview with a16z's cryptocurrency head Chris Dixon, here are the key points that investors, operators, and founders should understand about Blockspace.

• Blockspace is exactly what it sounds like. It is space on the blockchain used for storing information and running code. The key difference is that it differs from traditional computing space because hardware is subordinate to software, namely blockchain code. These systems are more trustworthy in a fully decentralized context than those controlled by centralized parties -- because they can make stronger commitments.
• Security, performance, and community matter. When it comes to blockchains, the most important feature is security -- but it is not the only important feature. The performance of the blockchain is also crucial, as it can improve user experience and reduce costs. Finally, a vibrant community is another key advantage.
• There are different ways to scale. Blockchains must scale to meet growing demand. "Layer twos" are one solution. They sit atop "Layer one" blockchains like Ethereum, inheriting their security properties while allowing for greater throughput. Additional Layer ones are also emerging to meet market demand.
• The financialization of Blockspace may be a challenge. While Blockspace is sometimes viewed as a commodity like oil or grain, it may not easily be analogized to finance. This is because Blockspace has different characteristics depending on the chain it resides on. This non-fungibility may limit the establishment of a true Blockspace market.
• Blockchains may be on the verge of finding their killer applications. After the dot-com crash in the early 2000s, many questioned the necessity of all the bandwidth built in previous years. What was the point of making email a bit faster? In the mid-2000s, applications like YouTube became possible with greater bandwidth, unlocking further innovation. Blockchains and Blockspace may be in a similar position, poised for breakthroughs.

Bull markets are for making money; bear markets are for learning. With the collapse of the cryptocurrency market, now is the ideal time to learn the fundamentals of the industry: Blockspace. While this may seem self-evident, understanding Blockspace is foundational to understanding the world of cryptocurrency and Web3. This is also about preparing for a potential future recovery.

Just a few months ago, Chris Dixon, a general partner at a16z crypto and recently at the top of the Midas List, said, "I believe Blockspace is the best-selling product of the 2020s." I remember hearing this on the Bankless podcast, and I wasn't sure I understood what he truly meant.

So, this week, I asked him.

In fact, I asked him nearly every question I could think of on the topic. Today's article is the result of my persistent communication with Chris. Thanks to his patience, this article is also one of the clearest and most comprehensive discussions on Blockspace and its significance.

Before diving into my conversation with Chris, I want to briefly thank Alex Obadia, Tarun Chitra, Etienne Brunet, David Phelps, and Leo Zhang for sharing their perspectives on Blockspace and helping me improve my understanding. I am very grateful.

Let’s jump straight into the conversation:

Alright, Chris, maybe we can start with the basics. What is Blockspace?

Chris: Blockspace is space on the blockchain where you can run code and store data. Blockspace is different from traditional computing space, where software has always been subordinate to hardware before the advent of blockchains -- and ultimately, to the owner of that hardware. If you write software for a traditional computer, you are controlled by the hardware owner. If Facebook writes some code and says any developer can access a certain API, then Facebook's management can change their mind and revoke access later. Because Facebook controls the hardware on which the software runs, they ultimately control the software.

The architecture of blockchains is different: software controls hardware. If you write software for a blockchain, you can write code and make strong commitments; you can assure users and developers that the software will continue to run as designed. Specifically, blockchains use what are called consensus mechanisms to make these commitments. Various hardware operators running the network come together periodically to vote on the state of the blockchain's virtual computer. The game theory surrounding it ensures -- under most conditions -- that the software will continue to run as designed and that the integrity of the data will be maintained.

What we are now seeing is a wave of entrepreneurs and developers building new categories of applications that leverage this new computational property: you can write code and make strong commitments about its future behavior.

That's an interesting way to put it. I haven't seen this topic framed around the relationship between software and hardware before, but I think what we're really talking about here is the issue of "control," right?

Chris: Exactly. Let’s assume Google launches GoogleCoin. Google claims there will only ever be 21 million tokens. But the software powering GoogleCoin runs on servers controlled by Google. Because Google controls its computers, they can change the 21 million cap to whatever they want. The software is controlled by the hardware, and the hardware is controlled by Google’s management.

Contrast this with how Bitcoin works. Bitcoin promises that there will only ever be 21 million bitcoins; this scarcity is one of the factors that gives Bitcoin its value. You can trust that there will only ever be 21 million bitcoins because that rule is written into the Bitcoin blockchain -- it is embedded in the architecture of Bitcoin. Even if a large number of people running Bitcoin code -- the so-called Bitcoin miners -- try to overturn these rules, they would find it difficult to do so. In the history of Bitcoin, Ethereum, and other major blockchains, no one has been able to overturn those game-theoretic guarantees.

This is what makes the blockchain space unique. Developers and entrepreneurs looking to build on the blockchain ecosystem know what the rules are. They cannot be changed like in traditional tech companies. When it comes to blockchains, rather than "don't be evil," it’s more like "can't be evil." The rules of the system are baked into the code.

So, Blockspace is a unit of computation and storage that exists on the blockchain, and therefore, it is not controlled by hardware owners. Under this foundational definition, we’ve seen many different expressions of Blockspace and its surrounding mechanisms. What do you think are the most important design considerations?

Chris: Blockspace exists on the blockchain, and blockchains can be designed in various ways. The most important feature of a blockchain is its security properties. How reliable are the commitments it makes? Can you trust them? Can you believe that this system won’t be overturned or hacked? That is the most important feature.

Another important feature is performance. This relates to the fees you pay when transacting on the blockchain. If you can make the system perform better, you can lower those fees. For example, on a blockchain like Solana, a good feature is that fees are low due to its design. Now, some people might argue that to achieve this performance, you make trade-offs in security. But clearly, both security and performance are paramount.

Another consideration is the community surrounding the blockchain. Some blockchains are home to communities focused on software development, building new applications, and creating valuable new internet services. Ethereum is a prime example of a healthy developer community. Other blockchains are more focused on speculation and gambling, which I think are less healthy.

So, on one hand, blockchains are computers, so their security and performance properties are important; but they are also social networks, and they need to have healthy communities focused on building.

When it comes to the topic of blockchain space, much of the discussion revolves around the issue of scalability. We’ve all seen what happens to Ethereum when demand surges: transaction congestion and gas fees skyrocketing. What do you think are the most interesting and promising ways to scale blockchains and the space they provide?

Chris: You’re right; the so-called scalability issue in blockchains is a hotly debated topic. Some blockchains, like Ethereum, believe the best way to grow Blockspace is through what are called L2s (Layer Twos). L2s are systems that sit on top of "Layer one" (L1) blockchains like Ethereum. If architected correctly, L2s inherit the security properties of the lower layer, so users still benefit from Ethereum's strong security guarantees. But they provide additional Blockspace capacity on top, allowing applications to run with lower gas fees. There are now several prominent L2s: Optimism, Arbitrum, zkSync, Aztec, and Starkware. They all take different approaches and are at different stages of development.

Secondary markets are one way to grow supply; another way is through system design. For example, Solana is trying to achieve all scaling at the first layer.

I think another way to grow Blockspace is simply by using more L1 blockchains. Users now have a range of trusted first-layer blockchains in development. Users also have bridges online -- ways for blockchains to interoperate (to send assets and information back and forth). Imagine a future world where users have this structure of blockchains, all interconnected, allowing them to seamlessly move from one blockchain to another based on various technical trade-offs and community considerations.

There is philosophical and technical debate over which way is the best to grow Blockspace supply. Personally, I bet that the three major methods I just outlined will mix together.

I love this image of a "blockchain structure." Perhaps because it sounds like another reality, it reminds me of one of my favorite articles on the topic of Blockspace, “Consensus Capital Markets” by Leo Zhang. In this article, Zhang argues that Blockspace will become “the central commodity of the metaverse.” It seems that nothing indicates the demand for scale more than running a parallel reality on-chain. However, I’m curious, does this resonate with you? Is the metaverse a major player in the discussion about Blockspace?

Chris: First, let’s define the term "metaverse." The Metaverse is an umbrella term describing a range of emerging technologies. It includes web3, new user interfaces like VR, and the general development of products that include the internet as it becomes more immersive and important in our lives. Simply put, the metaverse can be seen as the next wave of the internet.

A truly important question about the next wave of the internet is: will it be controlled by a large company like Meta in a centralized way, or will it be decentralized like the early internet? In a decentralized scenario, control would be collectively owned by developers, creators, and other community participants, all working together through shared standards and systems (including blockchains). In the case that the decentralized vision wins, blockchains will be extremely important as a way to set network rules, hold assets and virtual goods, and store other shared information. Blockchains are the first way you can have "state" data on the internet -- in the sense of computer memory -- owned by the community rather than by a company.

Returning to the question, I believe Blockspace is an emerging, critical computational resource, on par with traditional computational resources like bandwidth, storage, and computation. If the vision of web3 is realized, Blockspace could become the most important new computational resource of the 2020s.

So far, the analogies we’ve used are based on traditional computing, but I’m curious about your thoughts on other frameworks. For instance, some people argue that Blockspace should really be viewed as a commodity, like land, oil, or grain. (Zhang's article takes this approach.) From this perspective, it opens up new avenues for analogical reasoning. For example, since other commodities have markets, will Blockspace have one? To what extent will we see this new "substance" being financialized?

Chris: In my view, most of the Blockspace on blockchains is non-fungible, which will limit the development of financialization.

While Blockspace within a blockchain may be interchangeable, there are technical trade-offs between blockchains in terms of security and performance. More importantly, different communities surround different blockchains. Therefore, the meaning of virtual goods or games on one blockchain is different from those on another blockchain, just as posting on LinkedIn is different from posting on Facebook or Twitter. Different networks, different contexts, and communities.

I hope we will see new innovations that help make the experience of bidding for Blockspace more efficient and fair. There are already gas auction systems that financialize Blockspace within single blockchains like Ethereum. But I think generally, there will be a banner for one blockchain. Different blockchains will have different communities, and there typically won’t be interchangeable assets across blockchains.

You mentioned improvements around bidding, but I imagine there are many other innovations you hope to see. I’m curious to hear what has excited you most recently. Where do you see opportunities?

Chris: We are continuously seeing innovation on core L1 blockchains. For example, several projects have spun out from our involvement in Meta, with interesting new distributed systems innovations. There are also interesting developments in programming languages. For instance, I’m excited about a new language called Move, which has some great security properties. There’s a lot happening around zero-knowledge proofs as a way to improve the performance and privacy properties of blockchains. We are actively investing there. As mentioned, there are many exciting things happening at Layer Two. Bridges are also very important for connecting everything together.

We still need to improve the onboarding experience for new users. There are a ton of friction points in user experience around wallets, custody, key recovery, and key management that need to be reduced. Additionally, security and performance need to be continually enhanced.

I expect blockchains will follow a common pattern of past waves of computing: there will be a reinforced feedback loop between infrastructure and applications. As more applications are created, there will be greater demand for infrastructure. As the infrastructure improves, it will unleash new applications. Economists call this "induced demand." That’s why when you build another lane on a highway, you often end up with more traffic; people build more stores and buildings in the area, attracting more traffic. A similar dynamic will play out in blockchains.

I believe that in the next 10 to 20 years, there will be an endless desire -- and opportunity -- for more infrastructure innovation and scaling.

This feels like a perfect pivot to discuss the statement that initially sparked my interest in this topic. In the Bankless podcast last November, you said, "I believe Blockspace is the best-selling product of the 2020s." What do you mean by that, and what should other developers and investors take away from those words?

Chris: Selling Blockspace in the 2020s will be a great business, just like selling personal computers and broadband in the 1990s and 2000s and selling phones over the past decade. Whenever there’s a breakthrough wave of computing, you get a reinforced feedback loop that drives exponential growth in market demand. When you’re in this cycle, generally, it’s very good to sell high-quality products that people are clamoring to buy. I think in the next decade, high-quality Blockspace will be just that.

In the 1990s, there was a massive investment wave in bandwidth, particularly in long-haul fiber and switching equipment. Then there was a huge crash, and all of it went underutilized. I remember very clearly in the early 2000s, there were many pessimists saying that this infrastructure would never be used. At that time, users didn’t have Netflix streaming; there was no YouTube streaming; there was no real internet video. The internet was basically email and some web pages. So people said, why would you pay $50 a month or whatever for broadband just to get faster email and websites? The pessimists underestimated that as more broadband came online, developers and entrepreneurs would invent all sorts of great things to use it.

Around 2005, when things like YouTube launched, users began to see the flywheel start to spin; applications became more usable, and broadband became faster. Then in 2007, the mobile wave of the iPhone further accelerated it. Everything changed. Cloud computing and social networks suddenly matured, driving rapid technological improvements and scaling over the next decade.

Now, it seems we are entering a financial recession -- perhaps similar to the early 2000s. If we see a lot of pessimists saying: look at all the things we’ve built that aren’t very useful, I wouldn’t be surprised. But that’s precisely when we might enter a golden age of entrepreneurship. Now is the time to figure out: what is the YouTube or Netflix of Blockspace? What are the killer applications driving this wave of computing? These applications may already exist today. They may be new things that don’t yet exist. We don’t know. That’s the fun and excitement of this period.