As the crypto market continues to find its footing in an ever-shaky climate, Andreessen Horowtiz, which launched a $4.5 billion web3 fund last year, released its second State of Crypto report. It dives into everything from blockchain activity to new technologies, but one theme that stands out is that blockchains are scaling.
The scaling momentum is up from a few years ago when tons of people were using blockchain networks, said Eddy Lazzarin, chief technology officer for a16z crypto. As a result, there was a lot of congestion, mainly on Ethereum, and gas fees were expensive.
That time period convinced a lot of people that blockchain growth will come via scalability, Lazzarin noted, resulting in developers being excited to experiment and create new products. “So the effort over the past two years or more is to get scaling solutions off the ground, and now they’re actually working and live. There’s still more to be built, but they’re much cheaper, secure and they work. The momentum is now that developers can use them.”
It’s really time to build
There are roughly 30,000 active developers in the crypto industry today, which is down from early 2022 peaks but up “well above” early 2021, according to the report.
This long-term growth indicates that developers, founders and the overall builder community alike all see promise in this space, regardless of market volatility. While the number of U.S.-based crypto developers is shrinking, the overall pie is growing globally, which is a win for the bigger ecosystem.
While adoption of crypto and blockchain technologies may be a bit more volatile, “innovation is smoother and more predictable,” Lazzarin said.
Financial cycles are unpredictable — especially in crypto markets — and are often affected by macroeconomic conditions. But product cycles, which involve builders building regardless of financial upswings and downswings, are more predictable and are often based on consumer behavior and greater technological trends, Lazzarin said. “Every upturn and downturn, some of the best companies are founded. Even if the economy is in a horrible spot.”
Blockchains scaling
While product innovation is growing, so are blockchains through a number of different paths, according to the report. There are newish layer-1 blockchains like Solana, Aptos, Avalanche and others, which are focusing on independently improving scalability, programmability, security and decentralization in order to stand out from their peers. Other blockchains — like Cosmos, Optimism and Polygon — are focused on application-specific designs to scale one specific subsector.
There’s also been growth in zero-knowledge rollups like Polygon, StarkNet and zkSync, which are layer-2 scaling solutions that move data to off-chain networks while still storing data on-chain. These rollups are scaling layer-1 blockchains like Ethereum, and about 7% of all Ethereum fees are through L2 rollups, the report showed.
In the long run, scalability will have the potential to unlock “a lot of interesting activity and experiments in the space, there’s no question about it,” Lazzarin said. Opportunity is “all over the place” as zero knowledge is scaling to new dimensions and L2s are taking off in adoption, he added.
As blockchain space frees up and the gas fees, or transaction costs, becomes cheaper, people can experiment more and “do silly things that end up being the foundation and idea progenitors of the future technology,” Lazzarin said. He compared it to what Chris Dixon, general partner at a16z, once said, “Things people experiment with on the weekends often end up being what people use during the week.”
Developer adoption of zero knowledge technology will accelerate into this year and beyond, according to the report. “It’s an incredible time,” Lazzarin said. “The tools are better than they have ever been. All these scaling solutions are working, which means it’s now time to mess around.”