Bankless 5 Major Issues Facing the Future of Cryptocurrency

Unbanked The Top 5 Challenges Ahead for the Future of Cryptocurrency

Author: David Hoffman, Bankless; Translation: Song Xue, LianGuai

Ethereum is now eight years old, and I’ve been in the industry for six years.

The path forward has never been clearer – we’ve come a long way since we thought tweeting on L1 would change the world!

We now know the benefits and how to scale decentralized crypto networks. There is still much valuable exploration to be done, based on our current understanding of crypto networks.

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However, there are still many unanswered questions about the ultimate fate of cryptocurrencies. Despite the fog gradually dissipating, it still lingers.

When making capital allocation decisions, whether on an individual level or as part of venture capital duties, we rely on answers to some significant lingering questions in this space, and there are many. Investors and builders in the crypto space are trying to answer these crucial questions more precisely and efficiently than their competitors.

I’ve taken some time to identify some of the biggest remaining questions in this field and my thoughts on them. So here are five unresolved big questions about the future of cryptocurrencies.

• Are many superchains just one superchain?

• Where is the value captured in the Rollup Stack?

• Where is the LST equilibrium point?

• Will Solana be eaten?

• How do we achieve price discovery on-chain?

This article is a monster, filled with many questions – so buckle up.

1. Are many superchains just one superchain?

We know how Ethereum plans to scale.

Rollups have already expanded Ethereum’s block space, resistant to global network attacks, into rich Layer 2 (L2) block space. We discussed this theoretically in 2020 and 2021, and we’ve seen it in action in 2022 and 2023.

But many teams are achieving the same vision in their own unique ways. Optimism Superchain! Arbitrum Orbits! zkSync’s ZK Stack! Polygon Supernets! Eclipse! There are many different approaches to building L2!

Each (Rollup technology) represents a strategy to extend Ethereum Layer 1 (L1) block space to every corner of the internet. I believe the ultimate goal of cryptocurrencies is for blockchain to fill every blank spot on the internet, and Ethereum is producing various blockchain variants, each with unique expertise to fill those gaps.

But questions remain:

• Do we need so many different Rollup standards, or is one framework enough? Does my blockchain empire model naturally extend to an “L2 empire model on Ethereum”?

• Or does Ethereum’s Rollup-centric roadmap inherently lower the barrier to entry for alternative Rollup standards, resulting in a more diverse set of Rollup strategies?

• Are application-specific Rollups (roll-apps) economically viable depending on various factors?

• Or could economic factors lead to all apps concentrating on a few dominant Rollups?

• Will economic incentives and composability force a merger into a single Ethereum Rollup, as one possible outcome shown in Vitalik’s “endgame”?

• Can we predict the attributes that the theoretically winning one will have today?

Few Rollups?

Rollups come at a cost, and only a few use cases can justify the economics of building and maintaining a Rollup network. These applications will have to find their place in a broader ecosystem, and generalized Rollups will compete to offer the most resource space at the lowest cost.

This argument also covers some advantages of composability. With more applications existing on the same chain, selectivity increases. The whole becomes greater than the sum of its parts, and the more parts, the stronger the whole. Humans naturally migrate to cities, and so does the economics of Rollups. Who can build the biggest city?

Many Rollups?

As technology advances, costs will become cheaper! As technology matures, the fixed costs of deploying Rollups will gradually decrease.

While dealing with an infinite number of Rollups may seem impractical, additional research and innovations can help address this challenge. Homogeneity of block space, abstraction layers, cross-chain execution, contract invocation, shared ordering, and off-chain intent can all contribute to managing the chaos of 10,000 chains.

Having each application on its own chain is admirable, but there are fundamental limitations to the scale of a single chain. While scaling horizontally through numerous Rollups may seem messy, there is still a lot of research and development work needed in many aspects.

A different path?

Superchains offer an attractive vision for Ethereum’s future, but they do not fully solve the composability problem of L2.

Ethereum’s Rollup-centric roadmap provides a path for infinite scalability by deploying chains on demand. If a Layer 2 (L2) becomes congested, just launch another one! But this strategy brings new issues for Ethereum, and the Solana community is more than happy to tell you, particularly about composability.

Rollup SDKs like OP Stack help tackle this problem. Shared standards and homogenized block space are key first steps in recombining different chains into a single execution layer, but this time with infinite scalability. Add some shared execution, cross-chain smart contract invocations, some UI abstractions, and that magical ‘???’ step, and voila, we have the infinite scalability of an L2 superchain.

There’s only one problem.

Optimism, Arbitrum, Polygon, and zkSync all want to do it too.

The road ahead

If Optimism’s superchain is seen as 1,000 different chains, that’s great, but Arbitrum still speaks a different language from Optimism and all the other L2 SDKs.

That’s why Arbitrum’s version of the superchain looks different from Optimism’s. Arbitrum is interested in a unified Uberchain vision where the common composability mechanisms connect every chain together.

Unlike creating another superchain again, Arbitrum is committed to handling the space between these chains. This focus area is the interoperability layer between Ethereum L1 and the settlement of superchains. Once the superchain reaches consensus on its internal state, Arbitrum hopes to focus its development efforts on cross-chain settlement before releasing to L1, in order to achieve collective determinism through publishing on L1.

This is a fascinating vision, and if you look closely, you will find that the two parts mentioned above are actually the same. There may be a future where many Rollups exist, and chain composition technology innovations allow them to mix and merge into a single superchain. Or… these technologies don’t work, and the only way to achieve true seamless composability is to have only a single Rollup.

So, this is the future of Ethereum.

• Some different multi-chain economic zones? (Superchains!)

• A single composable superchain? (Superchain + cross-chain composability innovation!)

• A single overall Rollup chain?

2. Ways to capture value in the Rollup Stack

Each L2 team wants to spread their chain development kits throughout the crypto sphere. There are also OP Stack, ZK Stack, Supernets, Orbits, and of course, much more to come.

Why do they make these? How do L2s benefit from more deployments of similar copy chains? Since forking is permissionless, how can L2 tokens gain value without forking being free? The process of forking forks out the tokens. Why would a forking OP-Stack chain be willing to pay fees to the OP Collective? What is the incentive?

• Mantle, one of the largest OP Stack forks, forked an older version of the codebase and stated that they currently have no plans to join the upcoming Optimism Superchain. They will retain their seigniorage fees.

• Meanwhile, Base donates 15% of its seigniorage fees to the Optimism Collective, effectively contributing to the OP token. So, as a fork of OP Stack, Base is contributing value to OP, while Mantle is not.

What makes them different? The answer is governance. Without governance, we will have different, chaotic, messy chains. With governance, we have uniform blockspace, code reuse, and shared upgradeability. With these properties, we have the foundation to fuse over 10,000 chaotic chains into a chainless user experience.

That’s why I have a unique interest in Optimism’s strategy and roadmap, above all else. Ben, Jing, Karl, and the Optimism team have navigated the maze of Ethereum scaling ideas much earlier than other teams, and they have “embarked on the arduous path of solving distributed governance.” All other Rollups are competing for technical advantages, but ultimately, this will run out, and once they arrive at this logical conclusion, they will have to start formulating long-term governance strategies.

Meanwhile, OP-Stack can absorb the best technologies developed by others while striving to establish an inseparable governance watershed before any other L2 team has touched it.

“Why is governance the logical conclusion of Rollup competition?” is a broad topic that goes beyond the scope of this article. I have to let you delve into the relevant information about Optimism to find the answer.

Here is my argument about the development of the L2 space: The value capture of L2 tokens ultimately depends on governance effectiveness. However, here are some questions that I still have doubts about:

• Can a general, modular framework like OP-Stack absorb the best L2 technologies as we absorbed peripheral technologies on Ethereum L1?

• How strong is the incentive to join the super chain? This question is a measure of “governance efficiency,” and how effective can L2 governance be? Is it enough to coordinate a pile of chaotic chains together?

• If cross-chain composability does not produce what is needed to create a chainless experience, what other factors can governance use to increase the capture of L2 token value?

So what about Rollup infrastructure providers?

Governance is only part of the L2 value capture equation. Even if L2 SDKs can find ways to capture token value, they still have to deal with the “RaaS loophole” in their business models.

If we assume that there will be a large number of L2 rollups, it means that infrastructure is needed to host all these rollups. Consider: cloud computing, but for rollup infrastructure.

This is why companies like Conduit and Caldera have emerged. They hope to host as many rollups as possible to gain some fees generated by rollups.

Rollups-as-a-Service (like Conduit) and L2 SDKs (like OP-Stack) are competing for fees. The balance point and further observations are yet to be determined.

I see two possible outcomes:

1. Rollups-as-a-Service (RaaS) providers want to get all the fees and will try to bypass L2 teams.

2. RaaS providers will accept their dependence on L2 teams and only receive any fees they obtain.

I am biased towards L2 here, so this reasoning may need to be tested, but that’s how I see it. Assuming the greediest scenario, Rollups-as-a-Service (RaaS) providers would aim for the first possibility.

RaaS providers: “We own all the infrastructure; why should we pay taxes to the software when it can fork freely?”

Therefore, RaaS providers just need to acquire OP-Stack and help teams deploy OP-Stack chains using their RaaS, and they will collect fees for all the chains they operate, leaving L2 tokens with nothing. By helping all their chains share transaction sequencing, they may even unlock some benefits of chain composition.

The problem here is that we’re back to governance. Creating a large number of chains isn’t enough to generate sufficient results, and while having a single RaaS provider can unlock some benefits of shared sequences, it’s far from enough to produce the output that a superchain game ultimately requires. If an RaaS wants to win in the L2 SDK competition, they need to become their own L2 SDK. This means they’re stepping into the arena of L2 competition, where they’ll ultimately find themselves needing to work on L2 technological innovation, business development, and most importantly: governance.

If the major competitive advantage for RaaS lies in running physical hardware in physical locations, how will they truly decentralize their L2 tech stack? If any one RaaS monopolizes by running every L2 chain, then all L2 would be concentrated in one RaaS’s hosting center. To achieve decentralization, RaaS needs to work in areas that all other L2 have been researching for years.

So this would push them towards the second option. RaaS becomes a service provider for L2 teams and must compete on costs with other competitive RaaS, as L2 teams use their token governance as an anti-monopoly measure to ensure no one RaaS monopolizes and gives RaaS too much power over the L2 SDK.

At least, that’s what I see happening. So my question is, am I right?

Three, where is the balance point for LST?

I’m conflicted here. I understand the argument that market forces will force LST to converge into one fluid LST. I’m not so naive about these factors. But I’m also not so nihilistic as to just let go when faced with forces that contradict the core values and beliefs of the Ethereum community that we’re here to protect. Market forces aren’t the only factor.

Furthermore, the motivation for a dominant LST to attack the sub-LST is related. As a dominant LST overcomes its base, the desire and ability to leech attack increase accordingly. This can disrupt the balance of the dominant LST, at least in the short term.

The biggest questions are:

• To what extent is the Ethereum community willing to ensure diversity of LST options?

• How effective are the tools to constrain the advantage of a single LST?

• If and when a single LST does achieve complete monopoly, to what extent does it erode the core value of Ethereum?

• Really?

For the last question, Mike Nueder wrote an excellent blog post outlining the thought process for this particular issue.

For me, the value of pluralism is appealing, and I hope to see more pluralism in as many places as possible. Danny Ryan presents the technical argument for why we should stick to pluralism.

If we are eventually going to reach consensus on a dominant LST, how long will it take to get there? Is slower better? In my opinion, yes. In the meantime, what barriers can we build?

Recently, we saw a veto on the ARB token incentive voting for stETH on Arbitrum, mainly due to concerns about Lido’s dominance on Ethereum. If only “market forces” were at play, this vote should have passed.

Four, will Solana be devoured?

Will Solana and Ethereum develop as independent ecosystems, or will their boundaries merge? If they merge, how strong is Ethereum’s attraction to Solana?

No one can effectively refute my blockchain empire model, and a bunch of similar papers (Fat Protocol, L1s is Money) are consistent with it. L1 blockchains are fiercely vying for complete dominance, and over time, one blockchain will eventually devour all others. This is the nature of open-source systems, especially when you add economic incentives to them.

For me, Solana performs admirably compared to its competitors. It is not a fork of Ethereum’s Virtual Machine (EVM), where any value created ultimately flows back into the Ethereum ecosystem. It is also not like Cosmos, with no actual settlement layer or formal L1 currency. It is also not like Bitcoin, where all non-Bitcoin value is stripped away and removed.

Solana has its own virtual machine, scaling strategies, and L1 asset: SOL. Solana’s entire tech stack is different from Ethereum, distancing it as much as possible from Ethereum’s allure. This strategy makes sense to me because Ethereum seems to devour everything in its domain. For any non-Ethereum L1, the best chance of survival is to stay away from Ethereum’s influence.

However, Solana is not existentially separate. Eclipse is porting the Solana Virtual Machine to Ethereum, enabling Solana’s execution functionality to settle on the larger-scale settlement network of Ethereum.

Chris Burniske believes Solana can maintain its autonomy while Eclipse acts as the “Solana embassy” on Ethereum.

I think Eclipse is a “betrayal” of the value of SOL to “Solana technology” by joining Ethereum’s monetary network and settlement layer. Eclipse embodies the ETH-maxi theory, that eventually all outstanding technologies will find their way into Ethereum, especially when it is just an execution layer – it can detach from a smaller settlement layer and join a broader settlement layer.

So, what does the future hold? Can Solana maintain its autonomy? Can the various components of Solana successfully incentivize themselves to stay within their own territory and not participate in network pluralism?

Or, more accurately, no matter how far an L1 is from Ethereum, Ethereum will eventually devour you, and if you can defect from a minority network to a majority network early on, you will be luckier.

How big is the incentive to defect to Ethereum?

In the future, I believe we will be able to look back and find evidence that both sides have valid arguments. Both sides will be able to say, “We were right.” But one side will be more correct than the other, and anyone who has listened to Bankless knows which side I am on in this debate.

5. How to achieve price discovery on the blockchain?

Bankless Ventures is exploring some of the most exciting trades, and one key question is how to achieve price discovery on the blockchain instead of relying on centralized exchanges, which would provide a huge boost to the entire industry. Price discovery represents a balance of power between decentralized and centralized systems, and so far, price discovery has been firmly controlled by centralized systems.

If decentralized systems are to “win,” we need to take back that control. I want to snatch it away from the cold hands of Binance. And Coinbase, you can’t have it either. The crypto economic system is a truth machine, but right now, the true source of crypto prices does not come from custodial asset systems. We need to fully be self-contained. Cryptocurrencies produce these assets, so they need to be the oracles of these asset prices. We have the upper hand now.

At least, that’s the goal we need to achieve. Various promising mechanisms can help lean toward decentralized systems, but it is still unclear how far they will take us. Binance’s advantage lies in 1 millisecond block time. No decentralized system could ever keep up with that speed, and price discovery naturally concentrates on the most liquid and fastest-updating oracles.

How do we put it on-chain?

Promising areas that lean towards a balance of power lie in Uniswap Hooks and intent. Intent may be key in this area. Price discovery happens in the realm between centralized exchanges (CEX) and decentralized exchanges (DEX). This amorphous, undefined area is where liquidity providers and MEV bots make decisions and execute trades, not in specific places. Ethereum’s space needs infrastructure that supports this level of existence. We need to build an infrastructure that encourages on-chain DEX and various spacecraft that shuttle between on-chain and CEX for trading to bring them closer to us and away from Binance.

As long as our crypto system lives in the shadow of CEX price discovery, we will forever be a poorer version of ourselves. Achieving on-chain price discovery will be one of the most important signs of maturity and complexity in our industry.

This is non-negotiable; we need this. It’s not a “can we do it?” question, but a “how do we do it?” question. If there is no on-chain price discovery, then the crypto experiment has already failed to some extent.

The mechanism that generates price discovery on-chain is certain to become the most valuable part of the cryptocurrency infrastructure. It doesn’t necessarily have to be a single lifesaver! Mechanisms like Uniswap and AMM are important tools in the crypto toolbox for generating on-chain price discovery, but more similar mechanisms are still needed.

Who will build it, and what will it look like?

We will continue to update Blocking; if you have any questions or suggestions, please contact us!