Siloed systems could replace DeFi’s ‘Lego castles,’ Fiskante says

The utopian vision of thousands of blockchains happily running alongside and interacting with each other in an interconnected multiverse is becoming less likely, it seems.

And while the rollup thesis appears to be replacing the appchain narrative of entities like Polkadot and Cosmos, Zee Prime Capital partner Fiskantes says, “it’s still the same thing,” ultimately.

“The architecture, the structure is almost the same. It’s just, now we call it rollups, and it’s on Ethereum.”

Whether its appchains or rollups, Fiskantes says he doesn’t see a future where thousands of chains will crowd the DeFi landscape. Even if it is trivially easy to spin up a rollup or appchain for any purpose, the friction of switching between them and infrastructure costs will be too high to justify, he says.

But “the jury is still out” on how it all resolves, he admits.

On the Lightspeed podcast (Spotify/Apple), Fiskante proposes a more likely scenario that appears to be playing out right now among the industry’s leading companies. “If you own the front end…and then you own the blockchain infrastructure, of course, you can use all kinds of middleware.”

This “moat-building” approach restricts composability, he admits, but many projects don’t seem to mind the trade-off. In fact, it could be beneficial to them in the end, he says.

Unlimited composability creates an “almost unlimited attack surface” he argues, adding that the benefits are not as great as the potential risks it introduces. So many things can go wrong with components that are permissionlessly built on top of an open-ended project, he says.

Fiskante suggests a more likely scenario is one in which many “siloed” ecosystems offer competing versions of similar services.

Expanding borders

During the DeFi summer of 2020, everyone was hailing the concept of various interconnected DeFi blocks symbiotically functioning together as a sort of “Lego castle.” Now, he says, most surviving projects are competing with each other by integrating vertically or horizontally, building components that already exist elsewhere for their own ecosystems.

“A good example of this is Frax,” he says, “where they are trying to do LSDs and stablecoins and everything themselves.” Companies like Curve and Aave are also creating user moats, building their own stablecoins to compete with Maker, he adds.

“Everybody is trying to do everything at this point because they realize that they are not actually building Lego pieces,” he says. “They are building their own little empires and they want to expand their borders as fast as possible before they are saturated.”

The one possible exception to the trend is the integrated ecosystem of Solana, Fiskante says. But even there, he notes, “they will need to work really hard to maintain the performance of the chain if there are so many different things being built on it that will compete for block space.”

“Of course,” he says, “they have parallelization and other tools to deal with that.” But even with the techno-wizardry of parallelization, a phenomenon known as the Jevons paradox might hold things back anyway, he suggests.

“The more you enable new activity by scaling the infrastructure, the activity will scale with it and will always capture the free space that you enabled.”

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