Crypto Fragmentation

By the end of 2025 there will be ~500 well-funded Layer 1 Blockchains, ~120 well-funded Layer 2/3 Blockchains, and ~100+ App-chains.

Fragmented across these hundreds of chains lies ~2,000,000+ tokens and somewhere around ~10,000 dApps.

The growth in the number of blockchains hasn’t been steady.

Rather the chart looks something like this:

Why are so many chains being launched? Why are more chains being launched than ever before?

The answer is pretty simple; the incentives to launch a new network are enormous.

• valuations for nascent networks are sky-high,

• there is clear market demand for L1/L2 tokens (32 of the top 50 tokens are L1 or L2 tokens), and;

• in the longterm, significant value should accrue to the underlying infrastructure that is expected to serve as a base-layer for the future apps that will onboard our industry’s first billion users.

These reasons combined with easyish access to funding has made the pitch for new networks pretty straightforward. Plus, the easyish access to funding also makes sense; you don’t need to displace Ethereum to score a massive exit, if you can become the 15th most valuable chain that’s still hugely valuable from an investment return perspective).

Will this trend continue?

I think that most investors (and certainly most users) would agree that there are too many competing L1s and L2s. That being said, I think that I would take the contrarian position here in that if we presume that blockchain-based applications will be massive in the future; the rails of which these applications are based on will be wildly valuable.

As a result, the enormous potential value of a winner L1 or L2 justifies intense and innumerable competition.

That does not mean that there are too few chains competing at this current moment. In reality, it could very well be that the market is overheated (from a # of new chain perspective as of August 2024) and that a lull in new chain launches should be expected; but in the longrun I think that this graph continues to exponentially unfold.

Let’s not forget that once Crypto transcends more deeply into the mainstream the competition to win parts of the stack will become even more intense as traditional non-crypto firms vie for market share - and what part of the stack is more important than the underlying blockchains enabling all on-chain activity? Probably nothing.

Even if this future does not play out and competition amongst L1s and L2s subside with clear winners emerging, the # of new chains will still only continue to increase. Why? appchains.

Over the last 24 months we’ve seen numerous examples of products with product market fit decide to launch appchains. The reasons are clear:

• having wildly fluctuating costs to interact with a dApp (as a result of fluctuating gas fees) is terrible UX

• with appchains, projects can tailor chain infrastructure to specific needs

• for projects with massive scale; their usage is so significant that it drives the costs of using the chain up for everyone thus resulting in a poor experience for their customers (and other users of the chain)

From dYdX chain being launched in order to decentralize dYdX, to the Ronin Network built to reduce network congestion, or Zora launching their own appchain when they found high gas costs on Ethereum to be “a systemic inhibitor to adoption, across the board from DeFi to gaming to NFTs, appchains have emerged as a solution to critical issues ranging from scalability to decentralization.

This trend will continue.

Even ignoring the clear functionality advantages of migrating successful operations on a general purpose blockchain to an appchain; the business incentives are obvious.

Simply, why control part of the stack (the app) when you can control most of the stack (the app+underlying chain). This becomes even more compelling when launching your own chain only takes a couple of clicks.

So how does this all intersect with custody?

In short, new chains have new tokens, and users (whether they are teams, investors, or individuals) want to securely hold and use the new tokens on the new chains.

Usually, there are a decent number of options for an individual to hold new tokens on a new chain, BUT normally there are NO good options for a group to hold new tokens on a new chain.

On large chains with significant traction (e.g. Ethereum or Solana) most groups serious about securely holding assets have two options; Multisigs or MPC custody products. But, new chains typically don’t benefit from access to either option.

Multisigs are chain specific instances and don’t automatically port over to each new chain and MPC custody products require massive amounts of manual work to add support for new networks.

Since, multisigs are chain specific, distinct multisig contracts have to be launched on every chain. This is problematic across EVM and non-EVM chains, because while EVM chains can use the Safe Contract (which is considered very secure) they will struggle from extremely poor UX.

In many cases, there will be no UI to interact with and as a result only highly-technical participants will be able to leverage the chains multisig. Or there will be a UI built by someone on top of the smart contract, but this is still lacking as you are forced to trust the creator of the front-end and the experience will be highly fragmented with teams being forced to use a seperate app just for that particular chain.

The other option is institutional custody products. But, here the technical constraints of existing platforms and business incentives disfavor expedient support for new networks.

Simply, adding support for new networks is highly complex (particularly for outdated systems) and the large institutional custody players don’t have strong incentives to undergo such rigorous technical challenges when they can just wait for a chain to emerge as successful and add support then.

Let’s double-click on the complexity of adding support for new chains:

Digital asset custody companies broadly face two technical challenges when it comes to adding support for new blockchains

1. blockchain-specific infrastructure

2. data ingestion

Virtually all custody companies and most multi-chain companies in crypto develop their infrastructure in a chain-specific manner. What does this mean? It means that these platforms develop an infrastructure to support a particular chain then launch support for that chain (e.g. Phantom Wallet building out support for Solana and then many months later building out support for Ethereum). Eventually they develop a new architecture to support another chain and then launch support for that chain…

This results in infrastructure overlap, weak reliability, and lethargic support for new networks.

The secondary challenge is data ingestion. Access to fast, reliable, and reasonably priced data on very popular chains is a pain. Most providers boast two of the three characteristics (fast, reliable, or reasonably priced).

These issues are amplified 10x on emerging chains. Some new chains don’t even have any data provider options forcing organizations that want to pull chain-specific data to run their own nodes or query RPC nodes. Running nodes on all the chains a custody company wants to support is not scalable and querying RPC nodes typically requires chain-specific development which lengthens implementation timelines significantly.

As a result of the aforementioned, mainstream custody players will only add support for a new chain if that chain pays them a large fee (usually $500k-$1m) or if that chain is extremely hyped (e.g. Monad).

This leaves an ocean of underserved networks that don’t want to be gorged on exorbitant implementation fees and/or haven’t benefited from enormous attention pre-launch. Yet, would love a solution that doesn’t suffer from the devastating UX of multisigs and has the security advantages of multi-party wallets.

In Short:

There are more new networks than ever before and the # of new networks will only continue to grow. The existing suite of custody solutions can’t efficiently support these new networks. The amalgamation of these two realities leaves a wide gap in the market for a newer player to solve the network custody scalability issue and offer wide-ranging support for assets across hundreds of chains.

The solution:

Tholos ;) But before we get there, let’s talk about what a solution looks like in a bit broader of a sense…

I think that there are four vital elements to solving custody on emerging networks and multi-chain custody writ large:

1. key infrastructure

2. blockchain agnostic infrastructure

3. a solution to the data problem

4. unified design

On key infrastructure, MPC is the right solution.

Single-signer wallets don’t work (single point of failure) and multisigs don’t work (inherently limited to one chain).

MPC does not have a single point of failure AND is blockchain agnostic. Other solutions (e.g. HSMs) are overly complex and have massive barriers to entry.

So the solution must be MPC-based AND said MPC solution has to support for the two primary signing schemes in crypto; ECDSA and EdDSA.

For better or for worse; MPC is extremely complicated, and while there has been significant progress made in the creation of MPC as a service solutions, this is a small drop in the bucket. The reality is that there is a tremendous amount of highly-specialized development required to securely implement these solutions.

On blockchain agnostic infrastructure, a deeply modular architecture is necessary.

While there is immense overlap between most blockchains there are also critical differences between many chain models. As a result of this, the right solution needs to have a highly generalist infrastructure with pre-built frameworks to accommodate variations in network configurations between different blockchains.

This requires significant upfront work, but if done properly provides the payoff of being able to add support for new chains much more reliably and much more quickly.

On the data problem, a blockchain agnostic approach to data ingestion is needed.

I think this is the hardest part in solving this gap in the market. As I discussed previously, data ingestion in this context is really tough.

At Tholos, we’ve spent a-lot of time considering different solutions to this problem and our solution has been a blockchain agnostic data ingestion and transaction execution framework that enables us to directly interact with RPC nodes across any chain.

But, to put it lightly that’s not the easiest thing to build..

On unified design, an aggregated approach to multi-chain asset management is vital.

This is probably the easiest part of the problem, but might be the most critical (since it’s customer-facing).

One of the key value propositions of such a solution is being able to easily and securely manage assets on emerging chains AND across chains. Thus, it’s extremely important to be able to present a unified user experience that makes interacting across chains much more akin to a Web2 fintech company than the switching between dozens of wallets which crypto-natives have become accustomed to.

Tholos

We’ve iterated through different models and learned massive lessons. Fortunately, we made some good decisions at the inception of Tholos and adopted the right key infrastructure, built our architecture in a blockchain agnostic fashion, and designed our platform in a unified fashion.

The data problem was more of a learning lesson. At first, we implemented different data-related API solutions but struggled with inconsistent reliability and lackluster network support. We had a patchwork of half a dozen API solutions which did the job, but this made adding support for new networks highly manual.

In-line with our vision of rapid support for nascent networks, we knew we needed a better solution and this resulted in the narrowing down of our use of our external general-purpose data ingestion providers and our implementation of a network agnostic data ingestion API that enables us to ingest data and submit transactions on any chain.

This has resulted in the fulfillment of the four elements and our transformed capability to add rapid support for new chains.

Now, we can add support for EVM chains in 24 hours, Cosmos-based chains in 48 hours and non-EVM chains in two weeks.

In short, we think there’s a massive opportunity amplified by compelling network effects to shape a GTM around being the first mover on many new chains and leveraging said first-mover advantage to develop a wide array of crosschain support hitting an inflection point through our breadth of crosschain support.

As crypto continues to become more fragmented, Tholos will become the go-to multi-signer wallet for native crosschain custody across the multi-chain landscape.