3rd generation blockchains, what are they, and how do they work?
by Alyona Shepilova
Jun 16, 2023
In this picture, you can see one of the properties of a 3rd gen blockchain. Guess the property?
Barely 13 years since Bitcoin was born, and he's already a grandpa, can you imagine? Do you remember when he waltzed in in 2009, a dashing young man, promising to change the world of traditional finances as we know it? Not tied to any currency, not controlled by any bank or government, his whole mission – allow anyone with an internet connection to make secure borderless transactions that can't be censored. What. a. hero. Well, he was generation № 1. (On par with Litecoin, Doge and Ripple. Do you remember those?)
Six years later, in rides Ethereum. Another cryptocurrency, yes, but also so much more than that. Ethereum gave us smart contracts, the basis for DeFi – an alternative financial ecosystem with nearly-endless opportunities that no bank can ever offer or even fathom. So what more can we want? Shouldn't gen 2 be the last one?
Why 3rd generation blockchains 🤔
Not so fast. Like any self-respecting youth, the new(er) generation always tries to outsmart its predecessors. And let's be honest, in some respects, Bitcoin and Ethereum are just not that groovy.
If you remember, in one of our previous articles, we mentioned a blockchain trilemma posed by Vitalik Buterin, a creator of Ethereum. It goes somewhat like this. No blockchain can give you decentralisation, scalability and security at the same time. Any time one of them tries to hog the duvet, one of the others (or both) wakes up middle of the night with his derriere freezing cold.
And you may think, 'Mkay, but do I actually care?'. Believe us, you do. Take, for example, scalability, this festering sore on the faces of papa and grandpapa.
Neither of our men was created to scale muchly. Scale, of course, means being able to process the ever-growing amount of transactions in a relatively fast and inexpensive manner. BTC and ETH are very hot right now. The problem is, the more people want them, the worse it is for those people because our blockchains simply can't with all the attention they're getting.
Imagine pushing an iceberg through a straw. That's what happens any time either plummets/skyrockets, and everyone suddenly has the brilliant idea to trade. If the processing times don't kill you, the fees surely will.
Or decentralisation. Earlier blockchains had this tendency to be a little bit too centralised, which is not comme il faut be. We're actually trying to move away from all those controlling governments and greedy banks, thank you very much. So concentrating the power in the hands of a bunch of developers instead? Just no.
And then, there are other issues, like, for example, interoperability (lack of). Typically, blockchains can't communicate between themselves, and it's starting to turn into an inconvenience. Imagine that you can only send emails to people who use the same provider. So you can freely talk to your superior posse of gmailers but cannot contact no yahoo-er. And what if they have something clever to say?
Oh yes, and also that DeFi everyone's obsessed with. Decentralised finance is not exclusive to Ethereum, no matter what it thinks. And quite frankly, Ethereum cannot handle DeFi.
So, 3rd gen blockchain entry requirements?
Extremely scalable (cheap and quick transactions)
Decentralised (power to the people)
Interoperable (can talk to other blockchains)
Supports DeFi, NFTs and all that jazz.
Care to guess how well it's going?
What 3rd generation blockchains are there?
For the purposes of keeping it short and sweet, today we're going to concentrate on just three of them. How many there are in total, we have no idea. It sure feels like at least a million. But these three are dubbed Ethereum killers because they're the cream of the crop (and because every fandom loves its drama).
Cardano vs Solana vs Polkadot
Making the world work better for all
Market cap: $17,881,216,166 (24 July 2022)
The first thing you need to know about Cardano is that it's a brainchild of a man who co-created Ethereum (Charles Hoskinson, if you're interested). And as a co-creator of Ethereum, he was well aware of its limitations, so he decided to improve on them. Spiritually, Cardano feels more like an upgrade to Ethereum rather than a brand-new blockchain generation, but we'll let you be the judge of that.
Cardano's consensus protocol Ouroboros is claimed to be the first provably secure protocol and also the first protocol to be based on peer-reviewed research. Cardano is also one of the most actively developed blockchains (the most developed on GitHub in 2021; Ethereum came 4th), showing its community's loyalty.
As for decentralisation, you generally cannot fault Cardano here either. The entry requirements to become a validator are pretty low. And since the more nodes there are in the network, the more decentralised and secure it is, Cardano is surely winning in this respect.
Now for scalability. Cardano's architecture consists of two layers. ADA transactions exist on the Cardano Settlement Layer (CSL), while smart contracts and dapps run on the Cardano Computation Layer, which allows to prevent bottlenecks (we're looking at you, one-layer Ethereum). There's also an additional scaling solution, Hydra, set to launch around the end of 2022- the start of 2023 that should further help improve scalability.
Another great thing about Cardano is that it's very transparent about how it will develop. All five stages* – called 'eras' – are laid out in Cardano's roadmap on their website.
*Foundation, decentralisation, smart contracts, scaling and governance.
So, great community, lots of plans?
So far, seems fantastic.
The not-so-great stuff
Well, you see, Cardano positions itself as a very research-based product, an 'academic blockchain' if you will, but the truth is – it's still very much a work in progress. There are many things it's still lacking. And one of the biggest beefs people have with Cardano is its painfully slow development.
Another potential pain point is scalability (surprise, surprise). Yes, Cardano can process up to 257 transactions per second (theoretically!) which is 17 times more than Ethereum 1.0, but the catch is – it doesn't. The highest TPS of Cardano for the past two years is 3.63. This is because it doesn't need to process more; there's just no demand. And that's okay – of course it's overshadowed by BTC and ETH. They've been on the market for longer, of course people would trust them more. But.
According to this data aggregator, more than 70%* of ADA is staked. This quantity is not used as a medium of exchange; it's not moving. Compare this number to Ethereum's 10%. And that just might create artificial scarcity on the market. So if you go to an exchange and you decide to buy yourself some ADA – there are fewer sellers because two-thirds have already staked their coins. So there's scarcity, and when there's scarcity, the price goes higher, not because of the proper merits of the asset, but because there are fewer opportunities to buy.
*Feel free to compare to SOL and DOT and draw your own conclusions.
And since we're talking about scalability, 257 is not that great of a deal either. Not compared to Solana and Polkadot. Yes, it should improve in the next era (Basho's era, that is), but considering Cardano's sad history of delayed releases, one cannot help but wonder when that might happen. Cardano delivers. It did give us smart contracts (Goguen upgrade), after all. It's just that it was a long wait.
To recap, there are fears that Cardano might be overvalued. Cardano has a very supportive community, and you can't deny that it's at least partially due to the success of its marketing strategy. The team would do AMAs and hype you up while they continue stalling. Essentially, ADA's currently worth what people think it will be worth. With all its upgrades and potential...
Powerful for developers. Fast for everyone
Market cap: $14,166,233,341 (24 July 2022)
Scalability! Ethereum's got its hands on the biggest chunk of that DeFi cake, but when you try to lick the moist, chocolaty biscuit, it says: 'Yeah, not so fast, mate. TPS's 15. Wanna skip the queue, you pay $70. Deal?'
'Eww. And you, Solana, what do you offer?'
'TPS's 65,000, and you only pay, let's see, $0.00025? Would that suit you?'
'Hell yes, it suits me!' you answer, swallowing saliva in excitement. 'Only.... where's the catch?'
'No catch', answers Solana humbly. 'Ethereum's using the obsolete proof-of-work, and we've come up with something far better. Turns out, if you think a little, you will arrive at a solution that's both fast and cheap'.
'Is that right, Ethereum?'
'It's $110 now,' growls Ethereum in disgust.
If you're wondering if the point of this little roleplay was to bring your attention to the fact that Solana *can scale*, you're right. Now go on, ask us what their solution is. Pretty please?
Basically, Solana uses a hybrid consensus model that combines a proof-of-stake consensus mechanism with a proof-of history algorithm. PoS is old news, so let's look at PoH and oversimplify it.
If we look at how transactions are confirmed on Bitcoin, a miner node bundles a certain amount of unordered transactions into a block, adds a timestamp and transmits the block to the network. Other nodes (dispersed around the globe, each with their own timezone) have to check that the timestamp is valid, which takes time.
With Solana, each transaction is hashed, and the output of any transaction becomes an input for the next transaction, thus creating an orderly chain of transactions and removing the need for validating timestamps. And as it turns out, this reduces the confirmation time dramatically.
So simple yet so scalable.
Solana would make a worthy DeFi opponent for Ethereum. Does it come with a smart contract functionality?
Yes, it does. While Solana does not dominate the DeFi market yet, it shows great promise. Let's be honest: if you need a couple of million fingers to count your total value locked, you are pretty successful.
The not-so-great stuff
All the good things in life come with a price. And the price you have to pay for top-notch scalability is relatively poor decentralisation.
We get it, Solana is young, so it's normal not to have a crazy adoption at this point. However, even though anyone can become a validator on Solana, tech requirements are really rather strict. In addition, validators are also asked to vote on new blocks, which costs them up to 1.1 SOL daily. Does it come as a surprise that just 28 (of 1891 total) validators control more than 33% of the total SOL stake? Coincidentally, with Solana, you only need to hold 1/3 of the stake to take control of the network and completely shut it down.
Speaking of shutdowns, Solana has recently come under fire for yet another one. In September 2021, the network already saw a 17-hour outage after an incident coquettishly explained as resource exhaustion. Granted, we, too, would be exhausted if we had to fend off an attack of crazed bots shooting at us at 400,000 t per s. At least we now have a brief proof that Solana can indeed process that many transactions. And look, Solana is young. It's not like none of its predecessors has ever had any downtimes. Equally, if you're generous, you can also explain its tilt towards centralisation. Baby blockchains are typically centralised – that's their way of surviving infancy. So it looks like any faux pas Solana makes can be easily waved away.
Oh, wait, and they also did a thingie. Turns out that the team had a secret wallet with 13 mln SOL stashed away they didn't bother to tell the public about. They had an okay excuse of loaning the tokens to a market maker and promised to burn the 'unauthorised' SOL, but the crypto community never forgets.
The multichain vision for Web 3 starts here
Market cap: $7,376,014,948 (24 July 2022)
Soo, what's Polkadot's deal? Is it the best for scalability? The best for DeFi? Does it finally connect Bitcoin to Ethereum in an interoperability dance? Well, sort of kind of. Polkadot is fancy. Its whole gimmick is to become a basis for the internet of the future.
Polkadot is a child of another co-creator of Ethereum (Gavin Wood), who also got tired of it. 'Well, you know what, Ethereum scales badly,' he said*. 'Any year now someone will come up with DeFi loans, and then we're screwed. So good luck with your pitiful single chain, I'm off to build my own theme park with a sharded structure.' And so he did, and the funny thing is, Ethereum 2.0 is now also moving towards the same architecture, which means that Wood had a point.
*Probably. Prove he didn't.
Much to the chagrin of their marketing team, undoubtedly, Polkadot's architecture is just as obscure as the meaning behind its logo. To simplify, Polkadot has a Relay chain (the main one) and also will have about a hundred parachains (parallel chains), all linked to each other. Not unlike dots in a polka dot pattern if you connect them. Link to each other why? First off, it really helps scalability as transactions can be spread between multiple parachains.
But second, there's this whole wondrous world of *interoperability*. The cool thing about all those parachains is that as they're interconnected, they can all freely share data and assets with each other. When you build dapps, products and services on those chains, they become united, which can potentially create a whole new financial ecosystem. And it's a great solution for developers as well. Most blockchains are not customisable, but Polkadot is. So devs can outsource their blockchain and then just pick and mix the features they want. Security (validators) will be provided by the boss Relay chain.
Okay, Polkadot will have up to 100 parachains, one for each dapp, right? And they're planning to create a whole new financial ecosystem of 100 dapps. Yeah, figures.
You see, this is where we got confused as well. A whole new financial ecosystem sounds really cool up until you stop to think about it.
But no, you don't actually need to acquire a parachain for your dapp. You can use a smart contract on an existing parachain or get a parathread... We won't bore you anymore, just know that there are ways. What's probably worth mentioning is: you can't build a dapp on the Relay chain itself as it doesn't have smart contract functionality.
Fair enough. Let's go back to interoperability. You mentioned those parachain blockchain thingies will be connected between themselves in the future. But don't we have like a million blockchains already? What about those?
Ah yes, you're probably wondering about Bitcoin and Ethereum. Well, technically speaking, those two can be connected via Polkadot's bridges (parachains). Want to send some BTC to an ETH address? No problem, Polkadot will help to burn your BTC and re-mint them as PBTC tokens (1 Polkadot BTC = 1 BTC) on Ethereum. People would do literally anything rather than trade on DEXs.
I don't like the tilt of that can...
While bridge designs are now getting to a place where they are sufficiently planned out, there have not been too many used heavily in production. For this reason, you can consider this page a work in progress. – Polkadot
Consider this epic functionality a work in progress.
Have we covered everything?
The not-so-great stuff
Polkadot is not an extreme sinner, just your average one. Just like Solana, he's a baby blockchain that suffers from centralisation (with an entry ticket for a validator being 5,000 DOT, excluding the hardware). Just like Cardano, he's a smart kid with a bright future ahead of him. Who wouldn't want to send BTC to an ETH address? Polkadot can probably make it happen, but it's not possible just now.
Even before Polkadot was born, its parent – Parity Technologies – was hacked and drained twice, to the total amount of 183 million dollars. So much for security.
And if we're being nitpicky, what's the deal with 100 parachains (not out yet) that will be sold to entrepreneurs at an auction? Plutocracy much? (We don't actually care, but everyone else always references it, so we will too).
And then some people would also tell you that Polkadot is so much better of a project than Cardano and Solana. It's just that their marketing team is not that eager. Alas, poor Polkadot, of only thou were a little bit more hyped...
How many killers does it take to solve a trilemma?
As you can see, none of our wannabe killers has quite managed to solve the trilemma. Be it scalability, decentralisation (lack of) or weird behaviour around smart contracts – there's always that last missing piece of the puzzle.
Another important thing worth mentioning: although those above are glorious first-class projects (your mileage may vary), neither enjoys the same popularity as Ethereum. This means that we haven't actually seen them working under strain. It's all fun and games boasting that you have a TPS of one gazillion if there's no gazillion to be put through every second. Unleash the people's demand for Ethereum, and then we'll talk.
Regarding Ethereum, it does breathe down the necks of its killers with its impending upgrade* to Ethereum 2.0. So, who knows, maybe he'll solve the trilemma himself. He's always been an independent boy.
*It's not fully out yet, but it is in our comparison table. Feel free to use it for comparative reasons.
As always, time will tell.
Please note that none of this is investment advice. Cryptocurrencies are volatile by nature – it's nigh impossible to predict the circumstances that will cause them to rise or fall. Additionally, you might have noticed that the 'goodness' of the project doesn't always correlate with its success. Research, always.