Silicon Valley relies on blockchain nuts and screws

The telecommunications bubble at the end of the 1990s never found a place in the general performance that can keep up with the Dotcom bubble that was created at the same time.

Deregulation and early Internet euphoria led together to a massive superstructure of new networks. An estimated stock market value of $ 2 trillion went into smoke when the mania was over. But the newly laid fiber optic cables continued to live, which means that the infrastructure was already available as a company like Google and Facebook to show up a much larger wave of digital activities.

Could something similar in the world of cryptocurrencies take shape with a different kind of infrastructure? When the crypto madness is over, many of the currencies that have been created in the shadow of Bitcoin will be worthless. But their increasing transaction volumes have created a demand for real infrastructure, and large investments are made. If blockchains are a new architecture that will shape the future of online activities beyond crypto speculation, then the need for infrastructure will remain.

The selection of the ultimate winners in this game requires assumptions about how this world will develop. Will it lead to complementary but linked blockchains that offer space for many players? Or will this be an industry where there is only winners, in which a handful of networks dominate in a certain type of transaction? And will the software and services that are necessary to make the technology usable for lay people lead to dominant companies in various parts of a new technology "stack"?

Large investments that were made in two companies this week show where some of the most prominent risk investors place their bets. They also show how one of the ideals behind the cryptocurrency movement- that it will lead to decentralized networks that escape the control of close government or corporate interests- may not survive twice the reality of technology and capitalism.

Alchemy, which has collected $ 200 million, delivers tools that make it easier for companies to interact with blockchain. If you want to post in a network or get information from it, this often happens via the technical links of Alchemy, which means that the need for direct interaction. This puts Alchemy in a strong position to convey the data flow to blockchains and to provide the analysis and other tools that users need for operation. The advent of such companies shows that new bottlenecks can already form in the supposedly decentralized blockchain world.

The second investment-a token sale of $ 450 million through polygon-represents a bet on the Ethereum network. Ethereum, which first offered the "intelligent contracts" that form the heart of decentralized applications that build on blockchain. It processes a maximum of only 13 transactions per second and with its efforts to update its network, for years. This has driven the transaction costs up because users offer a short resource. In order to reduce the pressure, polygon and similar companies build on Ethereum, which could make the blockchain the central hub of a much larger technology ecosystem.

This underlines what has become known as a "blockchain trilemma". Ideally, the networks would combine security, decentralization and low costs. In practice, however, only two of these three conditions can be possible at the same time. Ethereum has achieved security and decentralization. Companies like polygon in turn concentrate on security and low costs, while they sacrifice a certain level of decentralization. This inevitably opens the door for the risk that new technology providers could ultimately control important parts of the value chain.

The slow network of Ethereum has also created an opportunity for newer networks that are designed to master much higher transaction volumes. This includes Solana, whose tokens now have a total value of $ 34 billion, and Avalanche, the youngest company, which is gaining in importance with a symbolic “market capitalization” of $ 21 billion. Since more and more developers are attracted to these networks and bridges are being built between them, the chances are increasing that several chains exist side by side, with Ethereum doing the greatest attraction

Ultimately, the high evaluation of this new infrastructure will only be justified if the applications that support you are the focus of online life from many millions. There is a high probability that the boom will turn into a bankruptcy before the final answer to this question is clear.

richard.waters@ft.com