How DeFi’s massive 8-fold growth brings scaling, gas fees challenges

With total value locked skyrocketing from $1 billion earlier this year to a whopping US$8 billion or more now, the DeFi ecosystem is turning heads.

But the surge in demand for decentralized finance (DeFi) protocols built on top of the Ethereum network has driven transaction costs — known as “gas fees” on Ethereum — to record highs this month, which signals growing instability.

“Gas is a huge challenge for a lot of our customers,” said Nikil Viswanathan, CEO and co-founder of Alchemy, in an interview with Forkast.News.

Alchemy provides infrastructure and developer support for companies creating DeFi projects to run or access nodes on Ethereum. According to Viswanathan, Alchemy supports more than 70% of the top Ethereum applications and more than $2.8 billion worth of assets locked in DeFi.

“One of our main focuses is solving all of the challenges that [developers] have when building these applications, and gas is at the very top of the list,” said Viswanathan.

In a previous interview with Forkast.News, Ethereum co-founder and ConsenSys founder Joseph Lubin explained that the issues with the growing transaction fees were an issue with the network’s scaling. “We’re constantly bumping against this ceiling of scalability in different forms, and we need to do that in order to find out what needs to get fixed first,” Lubin said. “So we’re going to continue to bump up against scalability.”

A variety of different methods are being developed by Ethereum developers to address the issue of scalability, including the deployment of Ethereum 2.0.

See related article: Vitalik Buterin: Ethereum 2.0 promises better privacy, scalability in 2020

According to Viswanathan, solutions that could be used on the current Ethereum network could involve saving up gas tokens when it is cheap and spending it when it is expensive. Other solutions involve optimizing smart contract usage to decrease the amount of gas used, or bundling transactions.

“It’s a pretty technical area, but we see pretty exciting new innovations there that will hopefully create a better experience for gas moving forward.”

Watch the full video interview with Viswanathan as he tells Forkast.News Editor-in-Chief Angie Lau about Alchemy’s goals, its view of the growing DeFi sector, and how it traditional companies are engaging with blockchain applications.

Highlights

• What does Alchemy do? “What Alchemy does is provide the infrastructure and developer layer for developers to build applications on the blockchain.”

• On the growth of Ethereum gas fees: “Gas is a huge challenge for a lot of our customers. Ultimately, that cost is paid by the end users, so it’s them wanting to give their users a better experience.”

• How transaction costs, like the cost of driving, depends on the vehicle’s fuel efficency: “You can buy gas from a cheaper gas station, you can optimize the car, or you can make an electric car that doesn’t need gas at all. So there’s a whole suite of possible solutions there.”

• How traditional companies regard DeFi: “It’s very early for DeFi. They’re just kind of looking at it from a little bit far away. But I think in the future, you can imagine a whole suite of different ways that they engage, whether it’s acquiring companies, whether that’s building a side product on a DeFi thing or acquiring something into their core product suite.”

Full Transcript

Angie Lau: Welcome to Word on the Block, the series that takes a deep dive into blockchain and the emerging technologies that shape our world at the intersection of business, economy, and politics — it’s what we cover right here on Forkast.News. I’m Forkast Editor-in-Chief Angie Lau. Well, one magic line of code: that is what our next guest, CEO and Co-Founder of Alchemy Nikil Viswanathan, has predicated his entire company on.

This blockchain company raised US$15 million in Series A from the likes of Pantera Capital, Stanford University, Coinbase, Mayfield, Samsung, as well as Silicon Valley giants like Reid Hoffman of LinkedIn, and Charles Schwab, and so many others. They raised that money in Series A in December 2019, and then Covid hit. But then again, so did DeFi. Lots to talk about, Nikil, welcome to the show.

Nikil Viswanathan: Thank you for having me.

Lau: Absolutely. First of all, tell us, what is Alchemy? And you are now public. What does that mean to the dev community?

Viswanathan: Absolutely. So fundamentally, what Alchemy does is provide the infrastructure and developer layer for developers to build applications on the blockchain. When you think about the big shifts in technology, there’s computers, then there’s Internet and now there’s blockchain. And for each one of those major shifts, there’s one technology, or a few companies, that created the ability for developers to create applications that everyone uses and took the industry mainstream.

So for the computer, that was Microsoft and Apple with the operating system. The operating system enabled developers to build applications we know today, such as Microsoft Word, Microsoft Excel, Google Chrome, and so on and so forth, and really unlock the power of the computer. We see the same thing with the Internet, right? The Web browser enabled people to build websites such as Facebook, such as Google, such as YouTube, and that’s what enabled the internet to flourish.

Similarly with blockchain, what Alchemy does is create the developer platform so people can build the future of applications that will bring blockchain to the world. And going public, what that means is slightly different from going public in a company sense, but what we’ve done is, previously we worked with a select set of developers to power about US$7.5 billion of transactions for companies around the globe.

Now we’re opening up so any developer can come to our website, sign up and make blockchain applications for people globally. So really, our mission is, how do we democratize access to building applications for the mass public? And going public, opening our doors to the public, has enabled us to do that at a much greater scale.

Lau: So what are people building with Alchemy right now?

Viswanathan: So we see a pretty broad range of applications — everything from centralized exchanges, to decentralized exchanges, to financial applications, to games, to real-world applications. So companies such as some of the largest banks in the world. We see not only traditional blockchain companies, but also companies that are based in the real world, that are moving part of their company to the blockchain, taking advantage of the Alchemy platform to build applications that currently right now, have about 4 million users in 187 countries worldwide.

Lau: So help us understand, for our enterprise audience and people in the industry, Alchemy allows businesses to focus on either code or their business case without having to worry about that middle layer. Is that what Alchemy takes care of?

Viswanathan: Absolutely. The challenge today is that whenever you have a new emerging technology, going back to the computer, the internet and the blockchain, it’s usually very difficult in the early days to build applications for that technology because the tools are very primitive. So what Alchemy has really done is enabled companies to build applications on the blockchain without having to really dig into the nitty gritty of the blockchain details.

So at a high level, what we do, you can think of us as, imagine having to build a skyscraper with a hammer and a shovel, and those are the only tools that you have. What Alchemy does is bring the construction equipment — the cranes, the forklifts, those kinds of things — to make it possible to build these massive buildings, or in the blockchain equivalent, build applications that millions of people around the world use.

Lau: But when we talk about blockchain, one of the critical problems right now is nodes. Do you create nodes, do you create your own nodes, how do you access nodes, things like that. We’ve seen a lot of businesses have to make the decision between being efficient at writing code and then also doing that extra heavy lift of then creating nodes and part of their own protocol.

How do you assist firms like this, who want to get into building their own blockchain? Who might want to create their own protocol, but then, you know, the other heavy lift of actually creating an ecosystem that supports their blockchain?

Viswanathan: So as you very correctly noticed, there are several parts in the developer lifecycle. When you’re thinking about building application, you need to build the infrastructure, you need to actually write the code, you need to deploy the application to the real world, you need to have users using that; they’ll find bugs, you need to fix those, you need to continually monitor your application to make sure it’s working, and if anything happens, you need to make sure it comes back online really quickly.

So Alchemy actually provides a comprehensive tool suite that powers all of these different areas; we have products for each of these different areas. So, for example, we have a new type of node product called Supernode, which powers all of the node infrastructure pieces. We also have the equivalent tools for Alchemy Build and Alchemy Monitor, which help you debug applications, which help you make sure that the applications that are running right now are running without any errors.

So really, our goal is to help provide a comprehensive platform that enables developers to go from idea, to deploying the application, to scaling to millions of users around the world, and provide support through all stages of that experience.

Lau: I note that you say that you’re serving about 70% of the top Ethereum apps that are operational right now. Are you tied specifically to Ethereum or do you plan to expand to different blockchains or different cryptocurrencies?

Viswanathan: That’s a great question. So today we actually support several different blockchains. Ethereum is where we see the most developer adoption and most developer activity, so that’s where a lot of our main focus is. As we see developers in other areas, we have been approached by most of the other chains to expand our platform to their chains, and we will absolutely do so.

It’s just, for us, our goal is to power the blockchain ecosystem by enabling developers to build great applications and wherever those developers are, we will be. So, yes, the short answer is, we’re going to be expanding pretty quickly to multiple chains.

Lau: Forkast, has been in this space for about two years now, and we’ve been monitoring its lifecycle — and I do believe we’re still in our infancy — but early on there was this idea: will there be one blockchain protocol to rule them all, or will we see myriad choices of blockchain protocols in which interoperability or a middle layer or something will then allow everybody else to weave in and out of different protocols depending on what their needs are?

In your view, as you work with clients around the world, both blockchain clients and enterprise as well, what are you observing? Do you think there will be one massive protocol that dominates, or do you think there is a world in which many protocols that serve different functions will work together? What’s your view?

Viswanathan: That’s a great question. So from serving hundreds of customers across the spectrum, everyone from individual developers to the massive enterprises, what we’ve seen is that there are different blockchains that are specialized for different use cases, and we do see adoption across different types of chains.

However, for a given domain, let’s say smart contract applications, we do see clustering around one chain. For example, for the smart contract applications, that’s Ethereum. And looking forward in the future, there will definitely be several different chains for different use cases, but we do expect there to be consolidation around certain types of distinct chains.

So, for example, smart contract chains, Ethereum looks like the clear winner for now. Granted, that may change in the future, but we expect there to be the mass of developers that are attaching themselves onto the dominant platform like we’ve seen in other industries, like computers or the internet.

Lau: So you’re not the only game in town, we’ve got competitors in this space alongside Alchemy, including Infura and Bison Trails, that are also used by the industry. But as you three compete, what makes you different? What differentiates Alchemy in your view?

Viswanathan: So Alchemy is the only comprehensive blockchain developer platform. We serve customers from the ideation phase through the scaling millions of users phase, and provide the only tool suite that powers people in terms of developer infrastructure, developer tooling, monitoring and analytics, and new types of developer APIs.

So when we think about that full spectrum, we’ve been very blessed to power the majority of the top applications on Ethereum, the majority of DeFi, over $7.5 billion in transactions annually in 197 countries. So we’ve been very, very excited to power the community and are looking forward to all of the great things that they build in the future.

Lau: So part of the debugging process is also to be completely in the weeds with all of the governance and the protocol changes and the forking, and recently we just talked to Terry Culver of ETC Labs — not one, two, but three 51% attacks. These are the things that the community is fighting against: the hacks, the cybersecurity issues. How do you keep up with all of that for your clients?

Viswanathan: In a couple of ways: the first thing is, ultimately what we try to do is provide our customers, who are developers, with the tools that they need to solve the issues for themselves. So instead of us providing consulting services or an example like that, we provide them with the basic building blocks, the construction equipment, that they need to solve the problems for themselves.

Ultimately, our goal is to enable them to create great applications, and the way to do that is providing them with the tool suite that they need. In conjunction with that, we have very, very close touch with all of our customers – real time chat with every single one, and we provide them support. One of the key differentiators of Alchemy is that we provide 24/7 support to all of our customers globally, and that’s in literally every single continent on the globe.

So the team has been very dedicated, will wake up all hours in the middle of the night and provide world-class support. And I think the combination of those two things has allowed us to tackle a broad range of challenges for our customers and help them solve them and keep their applications up and running.

Lau: Kind of sounds like you’re putting back on your TA hat, when you were in Stanford with your co-founder, Joe Lau (no relation), who is your CTO. But this is a team that is, on paper and adjacent with your supporters, very strong. You’ve got Stanford pedigree, you’ve got the support from Silicon Valley, you’ve got the support from a lot of non-blockchain and more traditionalist investors. What did they see about the promise of blockchain, that they’re making a bet in alchemy?

Viswanathan: Yeah. So I know I speak for my co-founder, Joe, when I say we’ve been very fortunate to be surrounded by the best and brightest, both on our team and in our investors. And I think one of the greatest, one of the things that have been most exciting and such an honor actually, is getting to learn from the people who have defined the shifts for the previous two industries that we talked about before, so computers and the Internet, whether that’s the Chairman of the Board of Google, or the Founder of Yahoo!, or Charles Schwab, who created part of the financial revolution.

So they have been the kind of titans that have ushered in the shift of pre-computer to post-computer, or pre-Internet to post-Internet. And seeing how they’ve done that has been very, very helpful for us. In addition, one of the reasons that they’re really excited about this is that blockchain is that third generational shift that we’ve had in the last 50 years. So they get to play a part in that shift through Alchemy, and that’s been one of the things that they’ve been very excited about.

Lau: Ok, well, we’ve got to talk about DeFi here. You support the infrastructure for 70% of the top Ethereum projects, like I said, and US$2.8 billion of the $4.7 billion locked in DeFi right now. One problem with DeFi, one of the major criticisms, has been gas fees — the affordability of being able to fuel some of these projects. Certainly it’s getting to really stratospheric levels. Is that something that impacts your companies that you serve? How does the actual financing affect how you are operating for your clients?

Viswanathan: As you very clearly stated, gas is a huge challenge for a lot of our customers. Ultimately, that cost is paid by the end users, so it’s them wanting to give their users a better experience. So that’s definitely an area of focus that we have right now, solving those challenges for developers, and as of right now, we power more than 50%, the majority of DeFi.

One of our main focuses is solving all of the challenges that they have when building these applications, and gas is at the very top of the list. So that’s something we’re very actively investigating right now — we have a few different areas we’re exploring and hopefully see some solutions there.

Lau: Like what? Give me some high level concepts here.

Viswanathan: So I think right now when you think about gas, there’s a few different strategies that people take. One is around gas tokens, which is saving up gas when it’s cheap and spending it when it’s expensive. There’s obviously different types of scaling solutions in terms of side chains and things like that.

And then there’s also more technical ways of optimizing smart contract usage to decrease the amount of gas used or bundling transactions. So it’s a pretty technical area, but we see pretty exciting new innovations there that will hopefully create a better experience for gas moving forward.

Lau: Ok, I hear you. It’s like trying to figure out the fuel efficiency of the vehicle, so it doesn’t matter how much gas you use, it’s how far you can go with that gas.

Viswanathan: Exactly. And that analogy, that’s spot on: you can buy gas from a cheaper gas station, you can optimize the car, or you can make an electric car which doesn’t need gas at all. So there’s a whole suite of possible solutions there.

Lau: Is that something the DeFi community is excited about? I note that when you were in beta for two years before launching to developers publicly, MakerDAO was one of your beta clients. What did you learn through them, and what in the community are they excited to see from you guys?

Viswanathan: Right, MakerDAO obviously is one of the hallmark customers, our hallmark champions of the DeFi community, and I think what we’ve seen from the DeFi community overall is just an incredible ability to innovate and build on top of other people in the space, and we see DeFi as several building blocks where one company will build something, and then other people will innovate on that, and someone will innovate on that. And one of the coolest things about DeFi is the pace of innovation is so fast.

Since we launched a month ago, the amount of money locked in DeFi has 8x’d or something like that. So one of the really, really exciting things about the pace of innovation is the ability for it to be such an open source and open-minded space where people can create applications standing on the shoulders of other companies.

And one of the things that makes us most excited about the space is that that trend only accelerates; the more companies you have, the more we have to build on top of, the more building blocks we have. And our goal with Alchemy is to provide the substrate layer that powers all those building blocks. So DeFi is one of the areas that we’re absolutely most excited about.

Lau: In terms of enterprise, you have Charles Schwab as one of your key investors there, your single investors. This really disrupts the entire financial industry, if you think about it, it could either support it or disrupt it. Are people, are firms, from the traditional financial industry starting to pay attention to DeFi, and are you talking to any of them?

Viswanathan: Yeah, so the answer is, the finance firms are very smart. For example, Chuck – very, very sharp guy, 81 years old, around 80, I think, and goes into the office every single day. Clearly does not have to, but very, very sharp, very on it. And one of the things honestly, personally, on a side note, that I’ve been very impressed about is interacting with a lot of these legends of Silicon Valley and of finance, we’ve gotten to see that age is just a number, it really is.

You see some of these people who are so sharp, so on it, and one of the reasons they’re so successful is because they have this attitude of always thinking about what’s next, what could disrupt us, how do we make sure that we’re on top of it. And I think while it may sound crazy that some of them are thinking about blockchain and Bitcoin and Ethereum, it’s that level of being able to see what’s coming in the future that has gotten them to this stage, and they still have that. So the answer is, yes, we are engaged with — we can’t name names, but engaged with several of these firms, and they are all very excited about this space. 

Lau: Do they want to build their own financial product in DeFi? Is that what they’re thinking about?

Viswanathan: So, I think it’s very early for DeFi. They’re just kind of looking at it from a little bit far away. But I think in the future, you can imagine a whole suite of different ways that they engage, whether it’s acquiring companies, whether that’s building a side product on a DeFi thing or acquiring something into their core product suite.

So I think depending on the type of firm, we’ll see a different strategy taken by them to integrate new technologies in. It’s the same way that they would think about any other type of new technology: you acquire, you have something as an auxiliary service, or you bring it into your core business. And I think as we see the space evolve, we’ll see all three play out.

Lau: Last two questions here: what’s the ratio of blockchain companies that you serve to traditional companies that you serve? What’s the ratio right now?

Viswanathan: That’s a good question. So we have a pretty broad index. You can think of our index as pretty similar to the global index of companies interested in blockchain. As a result, the majority of companies in the world that are interested in blockchain are blockchain-native companies.

That being said, we do see a pretty incredible spectrum of companies that are non-blockchain companies that are excited about it, and I think as we see the future play out over the next several years, the more and more it becomes kind of mainstream, we’ll see faster and faster adoption. A lot of companies are in the “hey, let’s explore this in our R&D lab” [stage], and then as they’re moving more and more into production, we’ll see a domino effect there. Once we see a few big names piling on, we’ll see it go really fast.

Lau: Well, one thing that I’ve said time and time again, I think that every company that exists today is a startup. But I think if I were to ask you, you might paraphrase that and say that every company that exists in the future is probably going to be a blockchain company — at least blockchain-integrated. And certainly with the hopes of being the Microsoft of blockchain, where do you see yourself fitting in?

Viswanathan: One of the things that we think about a lot internally is, we will know that blockchain is incredibly successful once we no longer use the word blockchain. And what I mean by that is, when you go to dinner, you didn’t think, “oh, I used an internet app on my phone, that was a phone app, to get me there, and then I used an Internet app to pay,” right? You’re just like, “no, I just took an Uber to the restaurant and then swiped my credit card.”

So once the word blockchain has actually exited the lexicon, then we will know that blockchain is truly successful, because fundamentally, we believe that it’s a technology like the internet, like the computer that people aren’t even aware of. It’s almost like the air we breathe. The internet is around us, but no one ever thinks about it until it’s gone. And I think the same thing will happen to blockchain.

Once blockchain is so native to the fabric of every product suite that we use, from waking up in the morning to going to bed, we’ll be using blockchain in every single application, every single interaction between people or money. Then we will know it’s truly successful. And our goal and our vision of Alchemy is to enable the builders of today to create that future. Ultimately, we are so excited to help power that new ecosystem and provide the building blocks for people to build those applications.

Lau: When’s your series B, and what valuation?

Viswanathan: If I knew that I would, that would be great.

Lau: Well, Nikil, thank you so much. I appreciate it, and it was a pleasure to speak and understand a little bit more about the insights that you’re providing on the financial industry and the thinking in Silicon Valley as it pertains to blockchain and the rise of DeFi. Thanks for joining us on the show.

Viswanathan: Thank you for having me.

Lau: And thank you, everyone, for joining us on this latest episode of Word on the Block. I’m Angie Lau, Editor-in-Chief of Forkast.News. Until the next time.