Ethereum is devouring all blockchains

Article Author: Paul Brody

Article Compiler: Block unicorn

The global blockchain leader at EY (Ernst & Young) states that history shows all second-layer solutions will gradually migrate to Ethereum. Ethereum is absorbing all blockchains, and there is no doubt about it.

If history is any indication, Ethereum will consume the entire blockchain space, rather than just a part of Ethereum eventually becoming a second-layer solution. I believe the recent decision by CELO stakeholders to transition their operations to a second-layer solution on Ethereum is just the beginning of a similar integration and transformation, ultimately leading us to a state where Ethereum becomes the first-layer solution for all blockchains.

In the tech industry, there are ample precedents that illustrate this kind of integration. One of my favorite examples is how, over about 15 years, an extremely diverse network world gradually merged into a single global standard.

The story of the network is as follows: Long ago, around the dawn of human civilization (the 1970s), we had many different data networks. Various networks served different companies and governments, from the ARPANET (the precursor to the internet) to IBM's Systems Network Architecture (SNA), Xerox's Internet Datagram Protocol (IDP), and many others. The result was a jumble of incompatible networks that formed a chaotic array of networks, making it extremely difficult to connect business and government systems.

From Connection Links to Global Standards

Starting in the 1970s, efforts began to create a protocol that could work across multiple networks and smoothly handle interruptions and changes in network operations. This ultimately led to the creation of TCP/IP, which stands for Transmission Control Protocol/Internet Protocol. In its early days, TCP/IP precisely fulfilled its task: it connected all these different networks.

Initially, TCP/IP was only used to connect different network standards, a task it performed exceptionally well. However, over time, the unstoppable logic of standardization and scaling transformed TCP/IP from a connection link into a global standard. IP networks absorbed network business, and today there are almost no non-IP networks left.

Given the tech industry's love for standardization, it should not be surprising if the same situation occurs with blockchain networks. Since the value of any network grows with interconnection, this approach is likely to become a lifeline for those first-layer solutions that not long ago boasted of being "Ethereum killers."

L2 Dedicated Networks

Not all L2 (Layer 2) solutions and sidechains are the same, and I have been pondering how this second-layer ecosystem might develop in various ways. Many highly specialized sub-ecosystems may emerge. For example, at EY, we view industrial companies as users of our OpsChain solution, helping them manage inventory and track carbon emissions. When we discuss scaling plans, we talk about very high transaction volumes. For instance, one of our clients asked us to consider how to handle 500,000 units of a single product line daily (each unique and serialized).

For these 500,000 units moving daily, averaging 3 to 4 movements between production and final consumption, we can consider an average of 2 million NFT transactions per day for a single product line. For such clients, privacy (keeping detailed business operation data confidential from competitors) and scalability are top priorities—they need reliable high throughput and low transaction costs. It is no surprise that the L2 network Nightfall, developed by EY and contributed to the public domain, was designed to achieve this goal.

Say goodbye to those cool dedicated blockchains we use today.

Financial transactions will have very different second-layer solution needs. Some transactions, like swap transactions, may only be looking for high volume and low-cost rolling solutions, while complex DeFi (Decentralized Finance) smart contracts will require networks that support full Ethereum Virtual Machine (EVM) compatibility so that smart contracts can run on the blockchain.

Moreover, I wouldn't be surprised to see the emergence of highly specialized national, regional, or verification networks, where all participants are not only known but also identified and bound by the same regulatory rules. Imagine a second-layer solution open only to "persons" (citizens or residents) of the United States. This would allow for a wide variety of asset transactions among all these individuals with minimal additional verification checks, which might soon appear within the EU or other major jurisdictions.

The Value of Interconnection

With the emergence of all these specialized networks, you might wonder whether it is necessary to connect them all through Ethereum. Beyond pure EVM compatibility, the value of interconnection lies in the ability to flow products and services from one ecosystem to another. No truly modern economic system is genuinely isolated. Every business contract ends with payment, and various types of financial services support all these contracts, with financial flows between nations and ecosystems underpinning all trade and investment.

Moreover, we may never be able to build a single network capable of supporting all different types of transactions and global transaction volumes. Therefore, multiple networks will always exist, and even when connecting only between first and second layers, there will be friction between networks. Even so, using Ethereum as the first layer to connect multiple specialized networks will bring tremendous benefits. For example, industrial product tokens can leave specialized manufacturing networks, exchanging for payments from a finance-oriented second layer, but with a continuous digital record between the two second-layer networks, connected by Ethereum as the first layer, surpassing any integration that exists in today's commercial world by an order of magnitude.

One downside of Ethereum absorbing the entire world is that, similar to today's networking industry, certain available network functionalities will change little. To achieve interoperability, tokens and smart contracts must essentially be the same everywhere, and each chain must be an EVM chain. While you can have cross-chain development systems that can operate across diverse ecosystems, this is of little use because your tokens and smart contracts become unusable, and the unique and special features of specific networks may never be utilized.

An important lesson drawn from the tech field is that, time and again, general-purpose infrastructure is more successful than specialized infrastructure, even when specialized infrastructure is actually better suited for specific tasks. Before TCP/IP absorbed the entire networking world, there were dedicated networks specifically for voice calls. They were known as circuit-switched networks, which could guarantee the quality of phone calls. No delays, no interruptions, no lost packets—just a continuously connected circuit between two phones. In contrast, VoIP phone calls have significantly degraded in quality, yet they now account for over 99% of phone call traffic.

So, say goodbye to those cool dedicated blockchains we use today; I bet they will soon become history.