Block space:The Most Competitive Scarce Resource of the Next 10 Years, the Starting Point of the Next Bull Market

#557

GM,

Last week, I used the analogy of bus operators to describe the second-layer networks on the market, such as Optimism or Arbitrum, in an article. Bus operators sell seats on their buses, and each transaction sent by people is like a passenger getting ready to board. Passengers, in order to reach their destination, which is the Ethereum blockchain, choose different bus operators based on ticket prices and timing. As the number of bus operators in the market continues to increase, their competition will become fiercer.

At the time I used this analogy, it was to explain the technical term "blockspace." Talking about "blockspace" may only be understood by professionals, but using the analogy of bus seats can relate to people's everyday experiences. However, the meaning of blockspace varies on different blockchains. Chris Dixon, a partner at the well-known venture capital firm a16z, has likened the blockspace of Bitcoin and Ethereum to internet bandwidth and referred to it as the most valuable internet product of the next 10 years. This article discusses what blockspace is and where its value lies.

Induced Demand

First, please listen to the following audio clip.

People of my generation are likely familiar with the sound of a modem connecting to the internet, especially around the year 2000 when the internet began to become widespread in Taiwan. At that time, most households shared their internet connection with their telephone line. The advantage was that if you had a landline, you didn't need to lay a separate network cable. However, the downside was that you couldn't use the internet and make calls simultaneously. As long as someone was online, the phone line would be occupied. I remember having to inform my family not to pick up the phone during certain times when I wanted to play online games; otherwise, my game would be disconnected.

Internet access back then wasn't like today's "unlimited" plans; it was billed by the second, and the internet was considered a precious resource used for specific purposes like doing homework or playing games. Moreover, the internet speed was slow, and every action, such as loading images or downloading games, incurred expenses. It wasn't until broadband internet became available, significantly improving internet speed and reducing costs, that telecom companies began to offer unlimited plans, allowing people to finally use the internet without worrying about usage limits.

Internet bandwidth is a critical digital scarce resource that allows people to connect to the "internet of information" without constraints. Similarly, blockchain networks led by Bitcoin have established a new "internet of assets." If everyone needs to be "on-chain" in the future, blockspace will be the most fiercely contested scarce resource in the market.

30 years ago, many questioned the necessity of going online. Today, people also question whether putting assets on a blockchain is really that important. Back then, people might have felt they didn't need the internet because bandwidth was limited, and there were only a few things you could do online. If you were just sending and receiving emails, you didn't necessarily need a high-speed internet connection. Chris Dixon believes that people may not yet see the significance of going on-chain, possibly due to insufficient infrastructure:

In the 1990s, many people invested in broadband internet, especially in technologies like fiber optics and switching equipment. However, this was followed by the bursting of the dot-com bubble, leading to the collapse of the market. These investments were seemingly underutilized, and many pessimists believed that this infrastructure might never find a purpose. At that time, there was no Netflix or YouTube, and the internet was primarily used for email and a few web pages. People questioned why they should pay a monthly $50 broadband fee for faster email and web browsing. What the pessimists underestimated, though, was that with the rollout of broadband internet, developers and entrepreneurs would create many more innovative uses for it.

I believe that blockchain will follow a common pattern seen in previous waves of computing—there will be a mutually reinforcing feedback loop between infrastructure and applications. As more applications are created, there will be a greater demand for infrastructure. As the infrastructure gradually improves, it will attract even more new applications. Economists refer to this as "induced demand." It's similar to adding an extra lane to a highway, which paradoxically leads to more traffic; blockchain will experience a similar cycle.

The value of a highway is something that most people can easily grasp, but not everyone understands the relevance of blockspace to their own lives.

Blockspace

Chris Dixon provides a concise explanation of blockspace:

Blockspace is exactly what it sounds like—it is the space on a blockchain where information and code can be stored.

Before the advent of blockchain, it was software serving hardware, and hardware serving its owner. If you were developing software for a traditional computer, control over that software rested with the owner of the hardware... But blockchain operates in a fundamentally different way; it is hardware serving software. If you're a developer on the blockchain, the global network of computer hardware periodically votes to maintain the virtual computer state created by the software. The underlying game theory ensures that, in most cases, the software will operate as designed, and the data will be preserved intact.

Blockspace is precisely what it sounds like – it is the space on a blockchain where information and code can be stored.

Let's take Google Drive as an example of the traditional model, where "software serves hardware." If I upload a file to Google Drive, even though I have access to that file, I don't truly own it. Google controls the hardware, and if they decide to delete that file, I have no choice but to accept it.

On the other hand, IPFS (InterPlanetary File System) represents an innovative approach where "hardware serves software." People store their files on the IPFS storage network, and computers worldwide act as nodes in service of this network. Only those who possess the IPFS software protocol can access the files on the network. However, IPFS employs mechanisms to distribute, back up, and encrypt files, ensuring their long-term preservation and protection against arbitrary deletion. Consequently, the files stored on IPFS seem more like possessions, rather than being under someone else's control.

The autonomy of assets is a crucial characteristic of blockspace. Those who have experienced posts disappearing, online accounts being deleted, or bank accounts being frozen understand the value of blockspace. They use blockspace to record assets, identities, and files, thus creating applications like encrypted cryptocurrencies, decentralized identities, and decentralized storage in the Web3 realm. Conversely, individuals who adhere more to government regulations or commercial logic find it challenging to understand the significance of going on-chain. They may even view it as a realm of "rule-breakers."

However, the reality is quite the opposite. Those in the blockchain space are often the ones most willing to abide by rules because the rules are embedded in the code, and even governments, platforms, or banks cannot exercise undue privilege. This was the original intention behind Satoshi Nakamoto's Bitcoin whitepaper in 2008.

From a different perspective, blockchain is essentially a business of networks. Blockchain systems and miners are essentially "selling" blockspace, while application developers create demand for blockspace in the market, enticing people to "buy" blockspace by spending money.

With market supply and demand come price fluctuations. If demand exceeds supply, the price of blockspace goes up. Events like the ICO frenzy in 2017 and the DeFi and NFT boom in 2020 created new value for Ethereum's blockspace, subsequently driving up the price of ETH. However, if Ethereum's blockspace becomes too expensive, "Ethereum killers" emerge as challengers. Examples include BNB Chain led by Binance, or (formerly) Solana, backed by many venture capitalists, which offer blockspace at a lower cost.

But it's important to note that cheaper blockspace isn't always better.

The Starting Point of the Bull Market

Individuals with some technical knowledge can copy the code of Bitcoin or Ethereum, tweak a few parameters, and create another blockchain, starting to sell blockspace. However, if a blockchain has only one or a few computers as operational nodes (miners), isn't independently distributed, and lacks decentralization, it's essentially just a private database, like the Forestry Bureau's blockchain mentioned.

The true value of blockspace is not captured unless it is controlled by hardware rather than software, as it embodies the principles of consensus and immutability.

One of the reasons blockspace is scarce is that there cannot be excessively high hardware requirements for every blockchain node; otherwise, only a few people could participate in validation (or mining) and become nodes. For instance, BNB Chain's lower mining fees are due to its relative centralization, but it can be criticized as "undemocratic" under extreme circumstances.

In essence, the operation of blockchain is akin to a democratic society, based on the rule of law rather than the rule of individuals. While the latter may be more efficient, the former ensures that the rights of the few are not sacrificed. Taiwan doesn't hold frequent referendums because people's attention is limited. The more people participate, the more complex the consensus-building process becomes. Certainly, sacrificing the rights of the few for the sake of efficiency can make society operate more smoothly. But who wants to be the one sacrificed? Blockchain emphasizes decentralization, much like a nation emphasizes democratic values. While democracy may not always be the most efficient, its absence could result in sudden upheaval.

Looking at it from another angle, Ethereum's Layer2 can also be seen as a form of representative democracy. People communicate with their representatives (Layer2), who then communicate with the system (Ethereum). As long as representatives faithfully reflect grassroots opinion, society can strike a balance between efficiency and democracy. The operation of blockchain itself is a form of democracy, and the scarcity of blockspace in Bitcoin and Ethereum precisely reflects the values of democracy. If people don't want their assets, identities, and data to be sacrificed as the minority, then high-quality blockspace will be the most fiercely contested scarce resource in the next 10 years.

If blockspace becomes as affordable as internet bandwidth, or if service providers introduce "unlimited" on-chain services, I believe this will mark the beginning of the next bull market.

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