Bankless Founder The Five Major Challenges Facing the Future of Cryptocurrencies

The Bankless Founder Addressing the Top Five Challenges in Shaping the Future of Cryptocurrencies

Author: David Hoffman, Founder of Bankless

Translation: Deep Tide TechFlow

Ethereum is now eight years old, and I have been with it for six years.

We now know what decentralized cryptographic networks are suitable for and how to scale them. There are still many valuable discoveries to be made in our current understanding of cryptographic networks.

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However, there are still many mysteries surrounding the ultimate goal of cryptography. Despite the fog gradually dissipating, it still remains.

For some of the remaining major questions in this field, whether as an individual or in my role as a capital allocator in venture capital, reliance on answers to these questions, many of which are still mysteries, is necessary. All venture capitalists and developers in the crypto space are trying to answer these major questions more accurately and faster than their competitors.

I’ve spent some time identifying some of the biggest questions remaining in this field and my thoughts on them.

#1: Many Super Chains or a Single Super Chain?

We know how Ethereum will scale.

Rollups have already expanded Ethereum’s block space to rich L2 block space. In 2020 and 2021, we discussed this issue theoretically, and in 2022 and 2023, we see it being put into production.

But many teams are executing the same vision in their own unique way. Optimism Super Chain! Arbitrum Orbits! zkSync’s ZK Stack! Polygon Supernets! Eclipse! There are too many different ways to build L2!

Each approach represents a strategy to extend Ethereum L1’s block space to every corner of the internet. My ultimate goal for crypto is that a blockchain can find its place in every corner of the internet, and Ethereum is generating various different blockchains, each with its unique expertise, to fill the gaps on the internet.

But the question remains:

• Do we need so many different Rollup standards? Or do we just need one framework? Does my blockchain empire model naturally extend to an “empire model on Ethereum L2”?

  • Or does Ethereum’s Rollup roadmap fundamentally lower the barriers to entry for other Rollup standards, creating a balance of multiple Rollup strategies?

• Can application-specific Rollups (roll-apps) prove their economic viability?

  • Or will economics force all applications to converge on a few dominant Rollups?

  • Will economic and composability incentives push towards a single, massive Ethereum Rollup, as one of the outcomes in Vitalik Endgame suggests?

    • Can we predict today what characteristics the theoretically winning Rollup will possess?

Less Rollups?

Rollups have costs, and only some use cases can prove that the cost of building and maintaining a Rollup network is reasonable based on economic factors alone. These applications will have to find a more generalized space, where generalized Rollups will compete to offer the cheapest real estate.

This perspective also covers some positive trends in composability. As more applications run on the same chain, the options increase. The whole is greater than the sum of its parts, and the more parts there are, the greater the whole. People naturally migrate to cities, and the economics of Rollups are no different. Who can build the biggest city?

More Rollups?

As technology advances, costs will decrease! With the maturity of technology, the fixed costs of deploying Rollups will decrease over time.

While constantly evolving Rollups may seem daunting, other areas of research and innovation can help control this. Homogeneous block spaces, abstraction layers, cross-chain execution, contract calls, shared ordering, and off-chain intentions will all contribute to ending the chaos of 10,000 chains.

It’s admirable to have every application coexist on one chain, but there are inherent limits to scaling on a single chain. Although scaling horizontally with multiple Rollups might seem chaotic, there are still many opportunities for research and development in various aspects.

A Diversified Path?

The future of the Ethereum superchain is persuasive, but it doesn’t completely solve the composability problem of L2.

The Ethereum Rollup central roadmap provides a path to unlimited scalability by simply allowing chains to be deployed as needed. If an L2 becomes congested, just launch another one! But this strategy presents new issues for Ethereum that the Solana community is more than happy to tell you about – mainly composability issues.

Rollup SDKs like OP Stack help address this problem. Shared standards and homogeneous block spaces are a huge first step in recombining different chains back into a single execution layer, but this time with infinite scaling. Add in some shared execution, cross-chain contract calls, and some UI abstractions, and our L2 superchain has unlimited scalability.

There’s just one problem.

Optimism, Arbitrum, Polygon, and zkSync all want to do this.

The Path Forward

If the Optimism superchain is considered to be 1,000 different chains, that would be great, but Arbitrum still uses a different language as Optimism, just like all other L2 SDKs.

That’s why the superchain version of Arbitrum doesn’t look like the version of Optimism. Arbitrum is interested in a unified superchain vision where a general composability mechanism ties together any and every chain.

Arbitrum is not creating another superchain; it is working in the space between these chains. The focus is on the interoperability layer between Ethereum L1 and superchain settlements. Once the superchain achieves consensus on its internal state, Arbitrum aims to focus on the research effort of inter-chain settlements before publishing to L1.

This is a convincing vision, and if you look closely, you’ll see that the two parts above are actually the same. There may be a future where there are many rollups, and the innovation of chain composability technology allows them to blend together and blur into a single superchain. Or… these technologies don’t work, and the only way to achieve true seamless composability is to have a single Rollup.

So, what does the future hold for Ethereum?

• Several different multi-chain economies? (Superchains)

• A composable superchain?

• A single overall Rollup?

#2: How is value captured in the Rollup stack?

Every L2 team wants to propagate their chain development suite in the crypto space. There are OP Stack, ZK Stack, Supernets, Orbits, and surely many more to follow.

Why do they make these things? What are the benefits of L2s from their chain’s replicated deployment? Since forking is permissionless, how do L2 tokens capture value when forking is free? Tokens are forked out in the process. Why would a forked OP-Stack chain be willing to pay fees to OP Collective? What are the incentives?

• Mantle, one of the biggest 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 intend to retain their own ordering fees.

• Meanwhile, Base contributed 15% of their ordering fees to Optimism Collective, effectively becoming OP tokens. So, as a fork of OP Stack, Base contributed value to OP, but Mantle did not.

What’s the reason for this? What’s the difference between these two chains? The answer is governance. Without governance, we have different, chaotic, messy chains. With governance, we have homogeneous block space, code reuse, and shared upgradability. With these properties, we have the foundation to start merging over 10,000 messy chains into a chainless user experience.

That’s why I’m particularly attracted to Optimism’s strategy and roadmap compared to all the others. Ben, Jing, Karl, and the Optimism team have navigated the Ethereum scalability maze and arrived at the logical conclusion of governance ahead of any other team, and have been “taking the hard road” since day one, figuring out decentralized governance. All the other rollups are competing on technical superiority, but ultimately, that will run out, and they will have to start figuring out their long-term governance strategy once they reach that logical conclusion.

Meanwhile, the OP stack can absorb the best technologies developed by others while working to unearth an unforkable governance moat.

“Why governance is the logical conclusion of rollup competition” is a grand topic that goes beyond the scope of this article. It requires a deep dive into the rabbit hole of Optimism to figure it out for yourself.

However, I have the following questions about this:

• When L2 absorbs peripheral technologies, can general, modular frameworks like OP Stack absorb the best L2 technologies, just like we have seen with Ethereum L1?

• How strong is the incentive to join a superchain? This question serves as a proxy for measuring “governance effectiveness”; how effective can L2 governance become? Is it enough to connect a bunch of messy chains together?

• If cross-chain composability innovations fail to produce the desired effect of creating a chain-agnostic experience, what other factors can governance leverage to increase L2 token value capture?

What about Rollup infrastructure providers?

Governance is only half of the L2 value capture equation. Even if L2 SDKs can capture token value, they still have to deal with the “size-of-the-RaaS hole in their business models”.

If we expect there to be many L2 rollups, it means we will need infrastructure to host all these rollups.

This is why companies like Conduit and Caldera are emerging. They aim to host as many rollups as possible, capturing a portion of the fees generated by rollups.

Rollups like Conduit are in a tug of war with L2 SDKs like OP Stack. RaaS providers want to charge fees, and L2s also want to charge fees. Where is the balance?

I see two possible outcomes:

• RaaS providers want to capture all the fees and will try to bypass L2 teams.

• RaaS providers will accept being subservient to L2 teams and simply take whatever fees they are given.

I have a bias towards L2 here, so this reasoning may need to be checked, but this is what I see. Assuming RaaS providers are the greediest and want what’s mentioned in #1.

RaaS provider: “We own all the infrastructure; why should we pay royalties to the software when it can be freely forked?” So, the RaaS provider simply takes the OP Stack and helps teams deploy OP Stack chains using their RaaS, collecting fees for all the chains they operate while L2 tokens get nothing. They can even unlock some benefits of chain composability by helping all their chains share ordering.

The problem here is that we go back to governance. Producing a plethora of chains is not enough, and though having a single RaaS provider unlocking some shared ordering benefits, it falls far short of delivering the chain-agnostic result a successful superchain requires. If a RaaS wants to try and win the war on L2 SDKs, they…need to become their own L2 SDK. That means they’re entering the stage of L2 competition, where they will eventually find the need for innovation in L2 technologies, business development, governance, and more.

RaaSs (Rentals-as-a-Service) are wondering how they can actually decentralize their L2 (layer 2) technology stack when their key competitive advantage is running physical hardware in physical locations. If any RaaS achieves a monopoly by running every L2 chain, all the L2s would be concentrated in that one RaaS hosting center. To achieve decentralization, RaaSs would need to study the same things that all other L2s have been working on for years.

So, this would push them into #2. RaaSs would become service providers to L2 teams and would have to compete on costs with other competitive RaaSs, as L2 teams use their anti-monopoly tokens to ensure that no single RaaS gains a monopoly and gives RaaS too much power over L2 SDK (Software Development Kit).

#3: Where is the balance point for LST (L1 Storage Tokens)?

Here, I am somewhat conflicted. I understand the compelling argument that market forces will converge single-flow LSTs. I am not naïve to overlook these factors. But I am also not so pessimistic that I am willing to “easily compromise” when faced with forces that contradict the values and beliefs held firmly by the Ethereum core community. Market forces are not the only things at play.

Furthermore, the motivation for a dominant LST to vampire attack subservient LSTs is relevant. When an LST surpasses its foundation, the desire and power for vampire attacks increase accordingly. This can, at least in the short term, disrupt the balance of the dominant LST.

The key questions are:

• How far is the Ethereum community willing to go to ensure diversity in LST?

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

• To what extent does a complete monopoly achieved by a single LST erode the core values of Ethereum?

For me, the value of pluralism deeply attracts me to this field, and I hope to see more of this value wherever possible.

If we ultimately converge into a dominant LST, how long will it take to get there? Is slower better? In my opinion, the answer is yes. What barricades can we build while we still have time?

We recently saw a vote on providing ARB token incentives to stETH on Arbitrum being rejected mainly due to concerns about Lido’s dominance on Ethereum. If “market forces” were the only ones at play here, then this vote should have passed.

#4: Will Solana be assimilated?

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

No one can effectively argue against my imperial model of blockchains, and there are plenty of similar papers (Fat Protocol, L1s as money) that align with it. L1s are competing fiercely for total dominance, and over time, one blockchain will eventually assimilate all others. This is the nature of open-source systems, especially when you add rocket fuel of economic incentives.

Solana is, in my opinion, different from its competitors. It is not an EVM L1 fork, where any value created will ultimately flow back into the Ethereum ecosystem. It is not Cosmos, without an actual settlement layer or sacred L1 currency. It is not Bitcoin, where all non-BTC value is stripped away and removed.

Solana has its own virtual machine, scaling strategy, and L1 asset: SOL. Solana’s entire tech stack is not Ethereum, which keeps it as far away from Ethereum’s gravity as possible. This strategy makes sense to me because Ethereum seems to devour everything in its domain. For any non-Ethereum L1, the best survival chance is to stay away from Ethereum’s influence.

However, Solana does not live in a vacuum. Eclipse is porting Solana’s virtual machine to Ethereum, bringing Solana’s execution settlement onto a larger settlement network: Ethereum.

I see Eclipse as a “betrayal of Solana’s tech to the value of SOL,” choosing to join Ethereum’s monetary network and settlement layer. Eclipse is essentially implementing ETH-maxi, the idea that all good tech will eventually find its way to Ethereum, especially when it’s just an execution layer, a layer that can detach from a few settlement layers and join a more globalized one.

So, what will the future hold? Can Solana maintain its boundaries?

Or, more realistically, no matter how far an L1 is from Ethereum’s gravity, Ethereum will eventually devour you. The sooner you transition from a minority network to a majority network, the better off you’ll be. How strong is the drive to flock to Ethereum?

#5: How do we achieve on-chain price discovery?

Some of the most exciting transactions we focus on at Bankless Ventures revolve around this question. On-chain price discovery, rather than through Binance, will bring tremendous momentum to the entire industry. Price discovery represents a balance of power between decentralized and centralized systems, and so far, it’s been firmly in the realm of the centralized camp.

If decentralized systems are to “win,” we need that trophy. The crypto-economic system is a truth machine, but currently, the truth about crypto prices does not come from the systems that custody the assets. We need a complete closed loop here. Cryptocurrencies generate assets and need to become oracles for their own prices.

At least, that’s where we need to get to. There are various promising mechanisms that can help us lean towards decentralized systems, but it’s unclear how far they will take us. Binance has a 1 millisecond advantage in block time. No decentralized system will be able to keep up with that speed, and price discovery will naturally trend towards the most liquid and fastest-updating oracles.

How do we achieve this on-chain?

Uniswap Hooks and the intent domain hold innovative potential for breaking the balance of power. Intent might be the key here. A domain of price discovery happens in the space between CEX and DEX. This fuzzy, undefined space is where market makers and MEV bots make decisions and execute trades, rather than in any specific place. Ethereum’s spaceport needs to accommodate this existing layer. We need infrastructure that supports trading between an endless variety of ships moving between on-chain DEXs and the space between on-chain and CEXs, so we can encourage them to come closer to us and move away from Binance.

As long as our encryption system lives in the shadow of CEX price discovery, we will always be inferior versions of ourselves. Achieving on-chain price discovery will be one of the most important signals of maturity and complexity in our industry.

There’s no room for negotiation; we need this. Without on-chain price discovery, the crypto experiment has already failed in some significant way.

The mechanism that generates on-chain price discovery will surely be one of the most valuable infrastructures in cryptocurrency. It’s not necessarily a silver bullet! Uniswap and AMMs are huge assets in the cryptocurrency toolkit for generating on-chain price discovery, but more similar mechanisms are needed.

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

Conclusion

This article is about questions, not answers.

In 2023, there will still be many other “questions” about cryptocurrencies; these are just the first five big questions that come to mind.

1. Given Ethereum’s rollup-centric roadmap, how does composability and chain abstraction work?

2. In Ethereum’s rollup-centric roadmap, how is value determined?

3. How big of a threat is LST to Ethereum, and what does its future look like?

4. What is the future relationship between Ethereum and Solana?

5. How do we achieve on-chain price discovery?

These are grand questions with answers. Each answer may not be a simple one but consists of various strategies, mechanisms, and projects. That’s why collaboration and communication between Web3 developers is so crucial: no one can solve these problems alone.

Among all the questions mentioned here, achieving on-chain price discovery seems to be the most complex because it is a problem that all cryptographic systems will encounter, regardless of which camp you find yourself in.

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