Development of Ethereums PulseChain: A reminder on the origin of the value of Cryptos

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Khosrok

PulseChain is a smart contract blockchain that was launched very recently with a rather ambitious proposal. The narrative is that Ethereum (ETH-USD), the leading smart contract blockchain, needs optimization because it is unable to sufficiently service the many decentralized applications that strain the network. PulseChain means reducing transaction costs (i.e. gas) and increasing throughput as a solution.

The need for a more scalable blockchain is by no means a new story. Since 2020, many projects have launched their own implementations of smart contract blockchains. Each of these alternative chains, or “altchains”, puts a different spin on the approach to the issue of scalability.

Where PulseChain apparently stands out is that it will copy the entire state of the Ethereum network and transfer it to its own sovereign and better optimized blockchain. It is functionally a hard fork of Ethereum. All smart contracts, addresses, address private keys and assets linked to those addresses on Ethereum will be copied to PulseChain with exactly the same access conditions. Ethereum users who had assets before the launch of PulseChain would have copied assets to PulseChain. Once the full Ethereum state is copied, PulseChain will operate independently of Ethereum based on the actions of its users. PulseChain’s Twitter and other marketing materials claim it to be the “biggest airdrop” ever. An airdrop is a promotional event used by many encryption protocols in which tokens are given to users, or “airdropped”. This creates a buzz on social media and generates more interest in the project.

PulseChain’s “Biggest Airdrop” on Twitter (Twitter)

In reality, copying the state does not mean much. Most value on Ethereum comes from linking to something off-chain, in the form of an IOU. For example, a number of fungible (i.e. ERC-20) tokens are stablecoins. The two biggest are Tether (USDT-USD) and US Dollar Coin (USDC-USD). Both are tokens that can interact with smart contracts and be sent between Ethereum addresses. Both tokens are supposed to be backed 1:1 with dollars held in a reserve. Purchasing a USDC token from the USDC issuer entitles you to receive $1 from the issuer. The USDC token is then withdrawn from USDC’s supply to reflect the withdrawal of that $1 from the reserve. Another major ERC-20 token is Wrapped Bitcoin, or wBTC. wBTC is issued by BitGo, a company that holds real BTC and guarantees that wBTC can be used to claim real BTC on the Bitcoin blockchain. wBTC, like USDC and USDT, is functionally an on-chain IOU compatible for on-chain trading on Ethereum.

But it goes even further. Most of the utility on Ethereum is based on moving these IOUs on-chain. For example, the largest decentralized exchange, Uniswap (UNI-USD) is a token exchange protocol. Some of the most liquid markets on Uniswap include wBTC, USDC, USDT. Other protocols and decentralized applications tell the same story. Should any of these three issuers decide not to honor their commitments, on-chain activity on Ethereum would most likely see a dramatic decrease as users stop moving around their now worthless IOUs.

So the problem with PulseChain copying the state of Ethereum is simple: copying an “I owe you” does not copy the real thing owed. The Ethereum state is valuable because it contains many IOUs. For PulseChain Copies to have value, and for PulseChain itself to benefit from that value, IOU issuers must breach their commitments to Ethereum-based IOUs and honor PulseChain Copies as the “real ones”. “IOUs.

PulseChain’s additional value that comes from copying Ethereum’s state scales with the probability of this happening. Personally, I think the probability is extremely close to 0. And if that doesn’t happen, PulseChain’s value will rest solely on its potential as an altchain to solve the scalability problem.

Why an IOU default probably won’t happen

Let’s see why it is highly unlikely that any of the issuers will go on to honor PulseChain copies and default on their ERC-20 commitments. First, there is a big downside in the form of legal and reputational issues. Stablecoin and general scrutiny regulations are getting tougher all over the world. A decision to suddenly default will be a horrible act of public relations on the part of any IOU issuer. This would attract much more negative attention and turn many stablecoin supporters and users against the issuers. Since on-chain economies are built into the business model, issuers won’t take that risk.

Second, there are very few benefits. Switching to PulseChain has no achievable positive impact on issuers’ results. Even if all Ethereum users have just taken and switched to PulseChain, it does not mean that more stablecoins will be issued. It’s the same number of users, using the same number of assets. One could say that if PulseChain were a much more efficient chain, it could cause capital inflows into the ecosystem. This could lead to more IOUs being issued. But the flip side is that a more efficient chain decreases the need for a higher money supply because the speed of money can be much faster. This would reduce the amount of IOUs and harm the bottom line of issuers.

Thus, the advantage of switching is quite unclear while the disadvantages are significant. Why would issuers switch to PulseChain?

PulseChain doesn’t offer much as Altchain either

It is obvious that copying the state of Ethereum probably does nothing for PulseChain. But what about PulseChain’s technology stack as a scalability solution? If it’s much better, then maybe that alone can be bullish for PulseChain.

Unfortunately, PulseChain doesn’t have much to offer in this area either. A quick glance at its website indicates that all it really offers is higher speeds, proof-of-stake (which Ethereum already is, although when PulseChain was first designed , Ethereum was proof of work) and lower fees. There is mention of scorching fees, implying a deflationary token pattern. The burn fee or tokens are basically a stock buyback. People contribute to the top line of the protocol by buying the tokens to pay the fees and that money is immediately distributed to the shareholder (in this case, the token holder) by withdrawing the tokens from the bid. Combustion and deflation are not new to altchains. Ethereum also does the same.

What is more concerning is that PulseChain does not seem to have white or light paper. Such documents are fairly standard in crypto. After all, Bitcoin started with a white paper and all major projects have something similar that describes the goal, technology, implementation, roadmap, or mathematical concepts. The lack of a PulseChain whitepaper is a bit of a red flag.

Where Does Crypto Value Come From?

PulseChain probably doesn’t make sense in the long run. Many other alternative channels are special in their own way, and they probably won’t go anywhere either. This case study is a helpful reminder of where crypto value comes from, and it’s a question people have been trying to answer for some time.

It’s not complicated. Value comes from providing utility to people. The usefulness of Crypto comes in different forms. Coins that aim to be money must excel at providing monetary utilities. Otherwise, people can and will use fiat currencies instead. Smart contract blockchains should support the creation of various useful smart contract applications. Currently, most of this utility is focused on token price speculation.

The problem with the smart contract business model is that price speculation requires a concentration of liquidity. A vast multitude of separate blockchains that each facilitate price speculation in their own way will lead to a bad trading experience for all users due to the fragmentation of total liquidity. The alternative solution for token speculation is just a centralized crypto exchange like Binance that aggregates liquidity across blockchains into a single trading venue. And today, that is exactly what we see in crypto: most people are moving away from on-chain solutions in favor of centralized ones.

Moreover, the current state reveals an incongruity between crypto today and decentralization in the strict sense. The stablecoin is paramount for smart contract blockchains because PNL speculation requires a fiat-based unit of account. For example, no one denominates their income in BTC, but many people will use USD to measure value. This requires an “on-chain USD” or stablecoin, which results in IOUs. These IOUs are actually an element of centralization, which partially undermines the decentralization narrative of crypto.

The only parts of crypto that are independent of reliance on IOUs are the coins that attempt to be money on their own. These are things like Bitcoin, Litecoin (LTC-USD), Bitcoin Cash (BCH-USD) and Monero (XMR-USD). These assets are not the responsibility of anyone else. But when moved to smart contract blockchains – usually to facilitate on-chain speculation – they usually also take the form of IOUs.

No matter how special PulseChain’s tech stack is (and it doesn’t even seem impressive regardless), it will have to compete for dispersed liquidity across major smart contract blockchains. At this point, the network effects of incumbents are probably too great to overcome for a new chain, especially one without significant scalability improvements.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these actions.

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