Bankless: Five major issues facing the future of cryptocurrency

Original author: David Hoffman

Original compilation: Deep Chao TechFlow

Ethereum is eight years old now, and Ive been with it for six of them.

We now know what decentralized crypto networks are suitable for, and how to scale them. There are many valuable takeaways from our current understanding of cryptographic networks.

However, there are still many unanswered questions about what the ultimate goal of encryption is. Although the fog is gradually lifting, it still exists.

For some of the big questions remaining in this space, making capital allocation decisions both personally and in my venture capital role relies on the answers to these questions, and there are many unanswered questions. All venture capitalists and developers in the crypto space are trying to answer these big questions more accurately and faster than their competitors.

I spent some time identifying some of the biggest remaining questions in the field and what I think about them.

#1: Many hyperchains or a single hyperchain?

We know how Ethereum will scale.

Rollups have expanded Ethereums block space into a rich L2 block space. In 2020 and 2021, we talked about this in theory, and in 2022 and 2023, we see it starting to go into production.

But there are many teams executing on the same vision in their own unique way. Optimism super chain! Arbitrum Orbits! ZK Stack for zkSync! Polygon Supernets! Eclipse! There are so many different ways to build L2!

Each approach represents a strategy to expand Ethereum L1’s block space to the farthest corners of the Internet. My ultimate goal for crypto is that one blockchain can find its place in every corner of the internet, and Ethereum is generating a variety of different blockchains, each with its own unique specialties, to Fill the void of the Internet.

But the problem still exists:

• Do we need so many different Rollup standards? Or is just a framework enough? Does my blockchain empire model naturally extend to the empire model on Ethereum L2?

• Or does Ethereums Rollup Center roadmap fundamentally lower the entry barrier for other Rollup standards, creating more diversified balances of Rollup strategies?

• Can application-specific rollups (roll-apps) financially justify themselves?

• What attributes can we predict today that this theoretical winner will have?

• Or will economics force all applications to roll up to a dominant few?

• Will economic and composability incentives force a move toward a single massive Ethereum rollup, as one of the outcomes in Vitalik Endgame showed?

Fewer Rollups?

Rollups have a cost, and there are only some use cases that can justify the cost of building and maintaining a Rollup network based solely on economic factors. These applications will have to find a more generalized field, and some generalized rollups will compete to offer the cheapest properties.

This perspective also covers some good momentum for 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, the greater the whole. People naturally move to cities, and so does Rollup Economics. Who can build the biggest city?

More Rollups?

As technology develops, costs will decrease! The fixed costs of a Rollup deployment decrease over time as the technology matures.

While the ever-evolving Rollup may seem unbearable, other areas of research and innovation can help control this. Homogenized block space, abstraction layers, cross-chain execution, contract invocation, shared ordering, and off-chain intent will all help end the chaos of 10,000 chains.

Having every application co-exist on a chain is admirable, but there are fundamental limits to scale for a single chain. Although horizontal scaling through multiple Rollups may seem confusing, there are many opportunities for research and development in multiple areas.

A path to diversification?

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

Ethereums Rollup Central roadmap provides a path to infinite scaling by simply allowing the chain to be deployed as needed. If one L2 becomes congested, just start another one! But this strategy raises new problems for Ethereum that the Solana community will be more than happy to tell you about—mainly composability issues.

Rollup SDKs like OP Stack help solve this problem. Shared standards and homogenized block space are a huge first step in recombining disparate chains back to a single execution layer, but this time at infinite scale. Adding some shared execution, cross-chain contract calls, and some UI abstractions, our L2 super chain has unlimited scale.

Theres just one problem.

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

way forward

It would be nice if the Optimism superchain was considered 1,000 different chains, but Arbitrum still uses a different language for Optimism, like all other L2 SDKs.

This is why Arbitrums hyperchain version doesnt look like Optimisms version. Arbitrum is interested in the vision of a single unified superchain, where a universal composability mechanism ties any and every chain together.

Arbitrum is not making another superchain, but rather working in the space between those chains. This focus is on the interoperability layer between Ethereum L1 and Hyperchain Settlement. Once the superchain agrees on its internal state, Arbitrum hopes to focus its RD efforts on inter-chain settlement before collective finality is passed to L1.

Its a compelling vision, and if you look closely, youll see that the two parts above are actually the same. There may be a future where many rollups exist and innovations in chain composability technology allow them to be mixed together and blurred into a single superchain. Or...these techniques dont work and the only way to achieve truly seamless composability is to have a single Rollup.

So, the future of Ethereum is…

Several different multi-chain economic zones? (Super chain)

A composable super chain?

A single overall rollup?

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

Every L2 team wants to spread their chain development kit in the crypto space. There are OP Stack, ZK Stack, Supernets, Orbits, etc., and there are definitely more to follow.

Why do they make these things? What benefits do L2s get from replicated deployments of their chains? Since forks are permissionless, how do L2 tokens capture value when forks are free? The tokens are forked during the fork process. Why is a forked OP-Stack chain willing to pay fees to OP Collective? Whats the incentive?

Mantle, one of the largest OP Stack forks, forked an older version of the codebase and said they have no current plans to join the upcoming Optimism superchain. They intend to keep their own sorting fees for themselves.

At the same time, Base contributes 15% of its sorting fees to Optimism Collective, effectively turning them into OP tokens. Therefore, as OP - a fork of Stack, Base contributes value to OP, but Mantle does not.

What is the reason? What is the difference between these two chains? The answer is: governance. Without governance, we have disparate, confusing, disjointed chains. With governance, we have homogeneous block space, code reuse, and shared upgradeability. With these attributes in place, we have the foundation to begin fusing the 10,000+ cluttered chains into a chainless user experience.

Thats why I feel particularly attracted to Optimisms strategy and roadmap above all others. Ben, Jing, Karl, and the Optimism team ran through the maze of ideas for Ethereum scaling and came to the logical conclusion of governance before any other team and have been at it since day one"take the difficult road", figure out decentralized governance. All the other rollups are competing on technical superiority, but eventually, that will run out and they will have to start figuring out their long-term governance strategy once they come to that logical conclusion.

At the same time, the OP stack can absorb the best technologies developed by others while working to mine an unforkable governance moat.

Why governance is the logical conclusion of rollup competition is a larger topic beyond the scope of this article. This requires delving very deep into the rabbit hole of Optimism and letting you figure it out for yourself.

However, I still have the following questions about this:

When L2 absorbs peripheral technologies, can a general-purpose, modular framework like the OP stack absorb the best L2 technologies, like we saw with Ethereum L1?

How strong is the incentive to join the super chain? This question is a proxy for measuring “governance effectiveness”; how effective can L2 governance become? Is it enough to tie a jumble of strands together?

If cross-chain composability innovation does not have the desired effect of creating a chainless 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 the L2 SDK is able to capture token value, they still have to deal with a RaaS-sized hole in their business model.

If we think there are going to be a lot of L2 rollups, then that means there will need to be infrastructure to host all of those rollups.

This is why companies like Conduit and Caldera emerged. They want to host as many rollups as possible to capture some of the costs incurred by rollups.

Rollups as a service like Conduit are in a thumbs battle with L2 SDKs like OP - Stack. RaaSs want to charge, and L2s want to charge. Where is the balance?

There are two results I see:

RaaS providers want to get all the fees and will try to bypass the L2 team to stop them.

RaaS providers will accept that they are beholden to the L2 team and will simply accept whatever fee they are given.

Im L2 biased here, so this reasoning may need to be checked, but this is what I see. Lets say the RaaS vendor is the greediest and wants what was mentioned in #1.

RaaS vendors: We own all the infrastructure; why do we need to pay taxes on software when it can be freely forked? So, RaaS vendors just take OP Stack and help teams deploy the OP Stack chain using their RaaS, and they Collect ordering fees for all chains they operate, and L2 tokens get nothing. They can even unlock some of the benefits of chain composability by helping all their chains share ordering.

The problem here is that we are back to the governance issue. Producing a large number of chains is not a sufficient result, and while having a single RaaS provider unlocks some of the benefits of shared ordering, it is nowhere near enough to produce the chainless results required for a successful hyperchain. If a RaaS wants to try and win the war on L2 SDKs, they... need to become their own L2 SDK. This means that they are entering the arena of L2 competition, and they will eventually find that they need to work on L2 technology innovation, business development and governance.

How do RaaSs actually decentralize their L2 technology stacks if their significant competitive advantage is that they run physical hardware in physical locations? If any RaaS creates a monopoly by running every L2 chain, all L2s are centralized into that one RaaS hosting center. To decentralize, RaaSs will need to work on the same things that all other L2s have been working on for years.

So, that pushes them into #2. RaaS will become the L2 teams service provider and will have to compete with other competing RaaSs for fees as the L2 team uses their antitrust wand to ensure that no single RaaS creates a monopoly, giving the RaaS access to the L2 SDK over Much power.

#3: Where is the balance point of LST?

Here I am somewhat conflicted. I understand the compelling argument that market forces will force convergence on a single flowing LST. I am not naive enough to ignore these factors. But I’m not so pessimistic that I’m willing to “compromise easily” when faced with forces that contradict the firmly held values ​​and beliefs of the Ethereum core community. Its not just market forces at work here.

Furthermore, the dominance of one LST is relevant to the motivation of secondary LSTs to engage in vampiric attacks. As an LST grows beyond its base, the vampires desire and power to attack increases accordingly. This, at least in the short term, could tip the balance that dominates LST.

The key questions are:

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

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

If (when?) a single LST achieves complete monopoly, to what extent will this erode Ethereums core values?

For me, the value of pluralism is what drew me to this field, and I hope to see more of it wherever possible.

If we do eventually converge into a dominant LST, how long will it take to get there? Wouldnt it be better to go slower? In my opinion, the answer is yes. What guardrails can we build while we still have time?

We recently saw a vote for the ARB token incentive offered to stETH on Arbitrum be rejected, primarily due to concerns about Lido’s dominance on Ethereum. If only market forces were at work here, this vote would have passed.

#4: Will Solana be annexed?

Will Solana and Ethereum evolve as separate ecosystems, or will the lines between them merge? If they merge, how much gravitational pull will Ethereum have on Solana?

No one can effectively refute my empire model of blockchain, and there are a bunch of similar papers (Fat Protocol, L1s are Currency) that are consistent with it. L1s are competing fiercely for complete dominance, and over time one blockchain will eventually swallow up all the others. This is the nature of open source systems, especially when you add in the rocket fuel of financial incentives.

Solana looks different to its competitors in my opinion. It is not an L1 fork of the EVM, where any value it creates will eventually flow back into the Ethereum ecosystem. It is not Cosmos, there is no actual settlement layer or sacred L1 currency. It is not Bitcoin, all non-BTC value has been stripped and removed.

Solana has its virtual machines, scaling policies, and L1 assets: SOL. Solana’s entire technology stack is non-Ethereum, which puts it as far away from Ethereum’s gravity as possible. This strategy makes sense to me since Ethereum seems to be gobbling up everything in its space. For any non-Ethereum L1, the best chance of survival is to stay away from Ethereums influence.

However, Solana does not live in a vacuum. Eclipse is porting Solanas virtual machine to Ethereum and settling Solanas execution on a larger settlement network: Ethereum.

I consider Eclipse to be a betrayal of the value of SOL by Solana technology and choose to join Ethereums currency network and settlement layer. Eclipse implements ETH-maxi, which is that all good technology will eventually find its way to Ethereum, especially when it is just an execution layer, one that can break away from a few settlement layers and join a more global layer.

So, what happens in the future? Can Solana maintain its boundaries?

Or, more realistically, no matter how far away an L1 is from Ethereums gravity, eventually Ethereum will swallow you up, and the sooner you switch from a minority network to a majority network, the better off you will be? How strong is the motivation to defect to Ethereum?

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

Some of the most exciting deals we look at at Bankless Ventures revolve around this question. Having price discovery on-chain, rather than through Binance, would be a huge boost to the entire industry. Price discovery represents the balance of power between decentralized and centralized systems, and so far, price discovery is the trophy firmly held by the centralized camp.

If decentralized systems are to “win,” we need that trophy. Cryptoeconomic systems are truth machines, but right now, the truth about crypto prices does not come from systems that have custody of assets. We need to achieve complete closed loop here. Cryptocurrencies create assets and need to be oracles for their prices.

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

How do we implement this on-chain?

The world of Uniswap Hooks and Intentions contains innovation that promises to tip the balance of power. Intention may be the key here. There is an area of ​​price discovery that occurs in the space between CEX and DEX. This vague, undefined space is where market makers and MEV bots make decisions and execute trades, rather than in any particular venue. Ethereum’s spatial port needs to adapt to this plane of existence. We need to build the infrastructure to support transactions between on-chain DEXs and the endless variety of ships that shuttle in the space between chains and CEXs, so that we can encourage them to move closer to us and further away from Binance.

As long as our crypto systems live in the shadow of CEX price discovery, we will always be inferior versions of ourselves. Enabling on-chain price discovery will be one of the most important signals of the maturity and sophistication of our industry.

This is non-negotiable; we need this. Without on-chain price discovery, the crypto experiment has failed in some significant way.

The mechanism that generates on-chain price discovery will surely be one of cryptocurrency’s most valuable pieces of infrastructure. It doesn’t have to be a single magic bullet, either! Uniswap and AMM are huge assets in the cryptocurrency tool belt for generating on-chain price discovery, but more mechanisms like this are needed.

Who will build it and what will it look like?

in conclusion

This article is about questions, not answers.

There will be many other “questions” people ask about cryptocurrencies in 2023; these are just the five big ones that come to mind first.

How do Ethereum’s composability and chain abstractions work in the context of its rollup-centric roadmap?

In Ethereums rollup-centric roadmap, how is value determined?

How big a threat is LST to Ethereum, and what’s its future?

What is the future relationship between Ethereum and Solana?

How do we implement price discovery on-chain?

These are grand questions and answers. The answer to each question may not be a simple answer, but a variety of strategies, mechanisms, and projects. This is why collaboration and communication among Web3 developers is so critical: no one can solve these problems alone.

Of all the issues mentioned here, implementing on-chain price discovery seems to be the most complex, as this is a problem that all crypto systems encounter, no matter which camp you find yourself in.