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Economics of L1 Blockchains: Deploying on Public Permissionless Chains vs. Your Custom L1 Blockchain |
Discover the economic factors that influence the decision to deploy blockchain applications on public permissionless blockchains like Ethereum versus creating your own custom Layer 1 (L1) blockchain on Avalanche. This article explores the impact of transaction fees, validator incentives, and decentralization models, offering insights for developers to determine when launching a dedicated L1 makes sense. Ideal for developers and blockchain enthusiasts looking to optimize cost efficiency and user experience in decentralized applications. |
2024-08-30 |
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When considering the deployment of a blockchain application, developers often face a critical decision: Should the application be launched on an existing public permissionless blockchain like Ethereum, or should it operate on a specialized Layer 1 (L1) blockchain? The answer to this question depends on various factors, with transaction fees being among the most significant. Understanding the economic implications of each option is essential for making an informed choice that aligns with your project's goals and long-term success.
Public permissionless blockchains like Ethereum or Avalanche's C-Chain have an inherent structure where users pay transaction fees — commonly known as gas fees — in a token that holds real value (e.g., ETH or AVAX). These fees compensate the network validators for securing and processing transactions on the blockchain. The fee is determined by supply and demand dynamics, with users bidding on the limited block space available to include their transactions.
The challenge with this model is that gas fees can fluctuate wildly based on network activity. During periods of high demand—such as NFT drops, DeFi protocol launches, or bull markets—transaction fees can spike to levels that deter users from interacting with your application. For applications with many low-value transactions, these high fees can become prohibitive, leading to decreased user adoption and engagement. This is particularly problematic if your users are not even aware that they are interacting with a blockchain, as is often the case with mainstream applications.
To mitigate this, developers might implement gas sponsoring and account abstraction, where the application absorbs the cost of the transaction fees. However, this introduces a continuous cost for every interaction, which can become unsustainable, especially if the underlying asset's value (e.g., AVAX) increases significantly. For instance, if AVAX appreciates from $20 to $60, your gas sponsoring costs could triple, drastically altering your application’s economics.
When considering the deployment of a blockchain application, the option to spin up your own L1 blockchain on Avalanche offers a compelling alternative. With your own L1, you have complete control over the transaction fee structure. This flexibility is invaluable, especially for applications with a high volume of low-value transactions. By setting transaction fees according to your specific economic model, you can ensure that fees remain low, predictable, and aligned with your users' needs.
For example, in a gaming application where users frequently make micro-transactions, high transaction fees on a public blockchain could be a significant barrier to user retention. By deploying your own L1, you can minimize or even eliminate these fees, thereby enhancing the user experience and driving higher engagement. This is particularly relevant for applications that target mainstream audiences, where a seamless and cost-effective user experience is paramount.
When launching your own L1, it's crucial to consider how you will secure and govern the network. Some use cases might opt for a Proof of Authority (PoA) model with a permissioned validator set, where validators are pre-approved and known entities. This approach offers a higher degree of control but at the expense of decentralization.
On the other hand, if you choose a permissionless validator set using Proof of Stake (PoS), you need to ensure that your transaction fee structure sufficiently compensates the independent validators for their running costs and provides additional incentives. This is essential for maintaining a healthy and secure network, as validators need to be motivated to participate and uphold the integrity of the blockchain. Striking the right balance between validator incentives and user costs is key to the long-term success of your custom L1.
Deciding whether to deploy on a public blockchain or create your own L1 is ultimately about determining your breakeven point. Here are some key considerations:
If your application processes a high volume of low-value transactions, a custom L1 may be more cost-effective in the long run. Conversely, if your application handles only a few high-value transactions, the cost savings may not justify the complexity of running a separate L1.
On a public blockchain, you are at the mercy of network-wide fee fluctuations. With a custom L1, you can ensure fee stability, which is crucial for budgeting and long-term planning.
The primary cost of running an L1 is the infrastructure required to support the validator set. Once you establish an appropriate number of validators based on your security requirements, the operational costs become mostly fixed. These costs are independent of the number and complexity of the transactions processed on your chain, providing predictable financial outlays as your application scales.
Launching a blockchain application on a public permissionless blockchain or spinning up your own L1 on Avalanche is a decision that depends heavily on your application's transaction profile and economic model. If you anticipate high transaction volumes with low individual values, a custom L1 could offer significant economical advantages in terms of fee management and user adoption. However, for applications with fewer, high-value transactions, the convenience and existing infrastructure of a public blockchain might be more appropriate.
Ultimately, the decision should be driven by a careful analysis of your transaction patterns, user experience goals, and the potential for fee volatility in public networks. By weighing these factors, you can make an informed decision that aligns with your application's long-term success.