Bankless Co-founder’s Latest Article Five Questions on the Soul of the Cryptocurrency Future

Unbanked Co-founder's Latest Article Explores the Essence of Cryptocurrencies' Future Through Five Key Questions

Source| Bankless

Author| David Hoffman

Translation| Pzai (President of the Shenzhen University Blockchain Association)

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The road ahead has never been more clear – since we thought Layer 1 would change the world, we have come a long way! Now, we understand the usefulness of decentralized crypto networks and have found ways to scale them. From our current understanding of crypto networks, there are countless values waiting to be discovered. It’s truly exciting!

However, there are still many unresolved questions about the ultimate outcome of the crypto space. While the fog of war is dissipating, the exploration of the endgame still persists.

Whether for myself or for the responsibility of venture capital, capital allocation decisions are dependent on answers to some significant questions in the field, and there are a lot of them. All VCs and BUIDLs in the crypto space are striving to answer these crucial questions more accurately and quickly than their competitors. So, I took some time to identify these questions and elaborate on how I perceive them. Here are the five questions about the future of crypto.

1. Are many superchains just one superchain?

2. How does the Rollup Stack capture value?

3. Where is the LST balance point?

4. Will Solana be consumed?

5. How can on-chain price discovery be achieved?

Are many superchains just one superchain?

We know how Ethereum will expand. Rollups have already transformed Ethereum’s block space against the third world war into rich L2 block space.

Although we discussed this issue theoretically in 2020 and 2021, by 2022 and 2023, we have witnessed its implementation.

There are so many teams implementing this vision in their unique ways. Optimism Superchain (OP Stack)! Arbitrum Orbits! zkSync’s ZK Stack! Polygon Supernets! Eclipse! There are so many different ways to build L2.

Each one represents a strategy to extend Ethereum’s L1 block space to the farthest corners of the internet. I believe the ultimate goal of cryptocurrencies is to bring blockchain to every corner of the internet, just as Ethereum has produced various blockchain genes, each with its unique characteristics to fill the chainless gaps of the internet.

But the question remains:

●Do we need so many different Rollup standards, or is only one framework effective? Will my blockchain empire model naturally evolve into an “L2 empire model on Ethereum”?

● Or, to put it another way, does Ethereum’s Rollup-centric roadmap fundamentally lower the barriers to entry for alternative Rollup standards, resulting in a more diverse balance of Rollup strategies?

● Can Rollups tailored for specific applications (Roll-apps) economically justify themselves?

● Or, to rephrase it, will tokenized liquidity drive all DApps to concentrate on a few dominant Rollups?

● As one of the outcomes described in Vitalik’s “The Endgame,” will tokenomics and composability incentives force them to converge on a single Ethereum Rollup?

● Can we predict what characteristics today’s theoretical winner would possess?

Fewer Rollups?

Building a Rollup has costs, and only certain use cases can justify the creation and maintenance of their own Rollup purely from an economic perspective. For these applications, they must find a place within a broader ecosystem, and the more ubiquitous Rollup will strive to provide the largest space at the lowest cost.

This argument also captures some favorable factors of composability. When more applications exist 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. Just as humans naturally migrate to cities, the Rollup economy does as well. So, who can build the biggest city?

Neel Samani of the Eclipse team belongs to the “Fewer Rollups” camp and gives his reasons here:

Many Rollups?

As technology advances, costs will inevitably decrease! So, with technological maturity, the fixed costs of deploying Rollups will gradually decrease.

While we have to face the fact that an infinite number of Rollups is almost impossible, more research and innovation can help control this situation. Homogeneous block spaces, abstraction layers, cross-chain execution, contract invocations, shared sequencers, and even off-chain intentions can all contribute to controlling the chaos of “a thousand chains rushing.”

While consolidating all applications on a single chain is admirable, there are fundamental limitations to the scale of a monolithic chain. Although scaling horizontally through many Rollups may seem chaotic, it still requires a significant amount of research and development to explore from multiple angles.

Different Paths, Same Destination?

The future of the Ethereum superchain is exciting, but it does not fully solve the L2 composability problem.

Ethereum’s Rollup-centric roadmap simply allows users to deploy chains on Ethereum as needed for infinite scalability. If one L2 becomes congested, simply launch another! But this strategy presents new problems for Ethereum, primarily the composability problem – something the Solana community would love to tell you about.

And solutions like OP Stack’s Rollup SDK help address this problem. The shared standards and homogenized block space are crucial first steps in reassembling different chains into a single execution layer, but this time with infinite scalability. Add in some shared execution, cross-chain contract calls, some UI abstractions, and a magical “Avada Kedavra” step, and we have ourselves an infinitely scalable L2 superchain.

Just one problem: Optimism, Arbitrum, Polygon, and zkSync all want to achieve this goal.

The Road Ahead

If Optimism’s superchain sees a thousand different chains as one, that would be great, but Arbitrum and Optimism, as well as all the other L2 SDKs, follow different visions.

That’s why the Arbitrum version of the superchain is different from Optimism’s. Arbitrum is interested in a unified Uberchain vision, where a universal cross-chain composability mechanism connects all chains.

Arbitrum doesn’t produce another superchain; it operates within the space between these chains. The focus in this field is the interoperability layer between Ethereum L1 and the superchain settlement. Arbitrum aims to focus on cross-chain settlements and achieve collective settlement finality by publishing to L1 once the superchain reaches internal consensus.

It’s certainly a convincing vision, and if you look closely, you’ll see that the two parts mentioned above are actually the same thing. In the future, there may be many Rollups, and the technological innovation of chain composability can merge them into a unified Uberchain. Or… these technologies don’t work, and the only way to achieve true seamlessness in composability is through a single Rollup.

So, Ethereum’s future could be:

● A few different multi-chain economies? (Superchains!)

● A unified composable Uberchain? (Superchain + cross-chain composability innovation!)

● A single holistic Rollup?

Place your bets!

How does the Rollup Stack capture value?

Every L2 team wants to promote their blockchain development kits in the crypto space. There’s OP Stack, ZK Stack, Supernets, Orbits, and surely many more.

Why do they create these things? How does L2 benefit from deploying more instances of their chains? Since forking is permissionless, how do L2 tokens gain value in the case of free forking? After all, tokens get forked during the process. Why would the forked OP Stack chain pay OP Collective? What motivates them?

● Mantle is one of the biggest forks of OP Stack; they forked the old version of the codebase and have no plans to join the upcoming Optimism superchain. They will maintain their own sequencing fees, courtesy of OP’s code.

● Meanwhile, Base will donate 15% of the sequencing costs to OP Collective, namely OP tokens. Therefore, as a fork of OP-Stack, Base is contributing value to OP, but Mantle is not.

Why is that? What is the difference between these two chains? The answer is governance. Without governance, our chains will operate independently and in chaos. With governance, we have homogenous block space, code reuse, and shared upgradeability. With these features, we can start merging over 10,000 chaotic chains into a seamless user experience.

This is why I am particularly fascinated by Optimism’s strategy and roadmap. Ben, Jing, Karl, and the Optimism team have navigated the maze of Ethereum scaling ideas and arrived at the logical conclusion of governance earlier than other teams. From day one, they have been on the “difficult path” of exploring decentralized governance.

In their race, everyone else is competing on technical advantages, but eventually, technical advantages will run out. Once they reach this logical conclusion, they must start formulating long-term governance strategies.

Meanwhile, OP-stack can absorb excellent technologies developed by others and strive to discover an unbeatable moat of governance. Before the fortress is built, no other L2 team can comprehend such a strategy.

“Why is governance the logical conclusion of Rollup competition?” This is a grand narrative beyond the scope of this article. To understand this question, I can only point you towards the bottomless OP rabbit hole.

This is my perspective on the development of L2: The value acquisition of L2 tokens ultimately comes from the effectiveness of governance. Nevertheless, I still have some doubts:

● Can generic modular frameworks like OP Stack absorb the best L2 technologies as we have seen Ethereum L1 absorb peripheral technologies?

● How strong is the motivation to join a superchain? This question is a measure of “governance effectiveness.” How effective is L2 governance? Is it enough to bring together a bunch of chaotic chains?

● If the innovation of cross-chain composability cannot achieve the desired effect of creating a seamless experience, what other factors can governance utilize to enhance the value capture of L2 tokens?

What about Rollup infrastructure providers?

It means there needs to be infrastructure to host all these Rollups. Imagine a cloud built specifically for Rollups. This is why companies like Conduit and Caldera emerge. They aim to host as many Rollup projects as possible and collect a portion of the fees generated by these projects. RaaS (Rollups-as-a-Service) such as Conduit are engaging in a thumb war with L2 SDKs like OP-stack. RaaS wants to charge fees, and L2 also wants to charge fees. So where is the balance?

I think there are two possible outcomes:

1. The RaaS provider wants to get all the fees and tries to hinder the L2 team by bypassing them.

2. The RaaS provider will accept the commission from the L2 team and only charge them the fees they deserve.

I lean towards L2 here, so this reasoning may be validated, but this is how I understand it. Let’s assume the RaaS provider is very greedy and wants to be in first place.

RaaS provider: “We own all the infrastructure; since the software can fork freely, why should we pay taxes to the software?”

Therefore, the RaaS provider only needs to use OP-Stack and help the team deploy OP-Stack chains using their RaaS service, then charge fees for the sorters of all the chains they operate, without giving anything to L2 tokens. They can even release some chain composability advantages by helping all chains share their sorting.

The issue comes back to governance. Creating a large number of chains is not a sufficient result, although having a single RaaS provider can release some shared sorting advantages, it is not enough to achieve the chain abstraction result required for the success of the super chain finale.

If RaaS wants to win in the L2 SDK battle, they… need to become their own L2 SDK. That means they enter the arena of L2 competition and then they will eventually find themselves having to work on technological innovation, business expansion, and most importantly, governance.

If the significant competitive advantage of RaaS is running physical hardware in physical locations, how will they truly decentralize their L2 tech stack?

If any RaaS monopolizes by running every L2 chain, then all L2 will concentrate in that RaaS hosting center. To achieve decentralization, RaaS needs to do what all other L2 have been doing for years.

So, this brings us back to the initial question. RaaS will become the service provider for L2 teams and must compete with other competitive RaaS in terms of fees, as L2 teams will use token governance as an anti-monopoly tool to ensure that no RaaS dominates, preventing RaaS from having excessive control compared to L2 SDK.

At least, that’s how I see it. So, my question is, “Am I right?”

Where is the balancing point of LST?

I have some contradictions on this issue. I understand the convincing arguments that market forces will compel the overall ecosystem to converge towards a single liquid LST, and I’m not naive about these factors. But I’m also not a nihilist, and when faced with forces that contradict the core values and beliefs of the Ethereum community, I’m willing to “easily yield”. Market forces are not the sole determinant.

In addition, the dominant position of an LST is related to the motivation of the secondary dominant LST to engage in vampire attacks. When an LST surpasses its original foundation, the desire and power for vampire attacks will also increase accordingly. This will disrupt the balance of the dominant LST in the short term at least.

Here comes the important questions:

● How willing is the Ethereum community to ensure diversity in the LST options?

● How effective are the tools to suppress the dominance of a single LST?

● If (or when?) a single LST achieves complete monopoly in reality, how much will it erode Ethereum’s core value?

Is this really going to happen?

I’d like to answer the last question with an excellent blog by Mike Nueder that defines this particular issue as a thought maze:

For me, the value of diversity is deeply appealing, and I hope to see more of it whenever possible. Danny Ryan has argued for this from a technical perspective.

If we eventually converge on a single dominant LST, how fast would that happen? Is slower better? I think so. In the meantime, what safeguards can we build for this ecosystem?

An obvious example is the recent rejection of a vote on Arbitrum incentivizing stETH with the ARB token, primarily due to concerns about Lido’s dominance over Ethereum. If “market forces” were the only factor at play, this vote should have passed.

Will Solana be devoured?

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

So far, no one has effectively countered my blockchain empire model, and a series of similar arguments (fat protocols, L1 as money, etc.) aligns with it. L1s are fiercely competing and vying for dominance. Eventually, one blockchain will absorb all others. That’s the nature of open-source systems, especially when you add the fuel of token incentivization.

Compared to its competitors, Solana stands out to me. It’s not an EVM branch, where any value created ultimately flows back to the Ethereum ecosystem. It’s not Cosmos, which lacks a practical settlement layer or a sacred L1 currency. It’s not Bitcoin, where all non-Bitcoin values are stripped away and removed.

Solana has its own virtual machine, scaling strategies, and L1 asset: SOL. Solana’s entire tech stack is not Ethereum, so it distances itself as much as possible from Ethereum’s gravity. In my view, this strategy makes sense because Ethereum seems to devour everything within its orbit. Any first-line vitality outside of non-Ethereum L1 is away from Ethereum’s influence.

However, Solana does not exist in a vacuum. Eclipse is porting the Solana virtual machine to Ethereum to execute Solana on a larger settlement network: Ethereum.

Chris Burniske believes that Solana can retain its autonomy, with Eclipse serving as the “Solana embassy” on Ethereum.

I think Eclipse is the “betrayal of Solana’s value in technology” because it defected to the Ethereum monetary network and settlement layer. Eclipse satisfies the theory of Ethereum maximalists that all good technology will eventually find its way to Ethereum, especially when it is only used as an execution layer and is free to detach from the niche settlement layer and join a more global execution layer.

So, what will happen in the future? Can Solana maintain its boundaries? Can Solana’s components successfully incentivize themselves to stay within its boundaries and refrain from engaging in blockchain-style polyamory?

Or is it the case that no matter how far an L1 is from Ethereum’s gravity, Ethereum will eventually devour you, and the earlier you defect from a niche network to a majority network, the luckier you will be?

How strong is the motivation to surrender to Ethereum?

In the future, I believe we can look back and provide evidence to both sides. By then, both sides will say “we were right,” but one side will be more correct than the other.

How to achieve on-chain price discovery?

At Bankless Ventures, some of the most exciting trades we’ve seen revolve around this issue. Allowing price discovery to happen on-chain rather than on Binance will bring tremendous momentum to the entire industry. Price discovery represents the balance of power between decentralized and centralized systems, and until now, price discovery has remained a prize firmly held by the centralized camp.

If decentralized systems are to win, we need to seize this Holy Grail. I will snatch it from Binance’s cold hands. Coinbase won’t get it either. The cryptocurrency economic system is a truth machine, but currently, the truth about cryptocurrency prices does not come from the systems that custody these assets. Here, we need to go all out. Cryptocurrencies generate assets and also need to be the prophets of their own prices. We stand proudly at the forefront.

At least, that’s what we should do. Various promising mechanisms can help us tilt towards decentralized systems, but we are still uncertain about how far they can take us. Binance has the advantage of 1 millisecond block time. No decentralized system can achieve this, and price discovery will naturally converge on the most liquid and up-to-date oracle.

So how do we get it on-chain?

In the fields of Uniswap Hooks and Intents, there are countless innovative technologies that have the potential to change the balance of power. Intents may be the biggest breakthrough. There is a price discovery field between CEX and DEX. This fuzzy and undefined space is where market makers and MEV robots make decisions and execute trades, rather than any specific place.

Ethereum’s spaceport needs to be conducive to this existence. We need to build infrastructure to support trading between on-chain DEXs and transactions that shuttle between chains and CEXs, so that we can encourage them to be closer to us and further away from Binance.

As long as our cryptographic system continues to live in the shadow of CEX price discovery, we will always be inferior. Achieving on-chain price discovery will be one of the most important signals of maturity and advancement in our industry.

This is undeniable; we need it. It’s not a question of “can it be done?” but rather a question of “how do we do it?”. Without on-chain price discovery, the cryptocurrency experiment will fail in some significant aspect.

The mechanism for on-chain price discovery will undoubtedly become one of the most valuable infrastructures in the crypto space. It’s also not necessarily a single panacea! Uniswap and AMM are huge assets for on-chain price discovery in the toolkit of cryptography, but more similar mechanisms are still needed.

Who will build it and what will it look like?

| Conclusion

This article only discusses the problems and doesn’t chat about the answers.

In 2023, people will have many other “questions” about cryptocurrency; these are just the five major questions that come to my mind.

How does Ethereum’s composability and chain abstraction play a role in the Rollup-centric roadmap?

Where does the value lie in Ethereum’s Rollup-centric roadmap?

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

What is the future of the relationship between Ethereum and Solana? How do we discover prices on-chain?

These are all very big questions, and they require some very big answers. Each question may have different strategies, mechanisms, and projects, rather than a single answer for each. That’s why collaboration and communication among Web3 builders is crucial; no one can solve these problems alone.

Of all the things mentioned here, on-chain price discovery seems to be the most complex but also the most noble endeavor because it will plague all cryptographic systems, no matter which crypto tribe you belong to.

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