Bankless: Five Major Issues Facing the Future of Cryptocurrency

Original Title: David's Take: 5 Big Questions Facing Crypto's Future

Original Author: David Hoffman, Bankless

Original Translation: 深潮 TechFlow

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

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

However, the ultimate goal of crypto still holds many mysteries. Although the fog is gradually lifting, it still exists.

For some of the major questions remaining in this field, whether as an individual or in my venture capital role making capital allocation decisions, I rely on the answers to these questions, many of which remain unresolved. All venture capitalists and developers in the crypto space are trying to answer these significant questions more accurately and quickly than their competitors.

I took some time to identify some of the biggest questions left in the field and my views on them.

1: Many Superchains or a Single Superchain?

We know how Ethereum will scale.

Rollups have expanded Ethereum's block space into rich L2 block space. In 2020 and 2021, we discussed this theoretically, and in 2022 and 2023, we saw it begin to go into production.

However, many teams are executing the same vision in their unique ways. Optimism Superchain! Arbitrum Orbits! zkSync's ZK Stack! Polygon Supernets! Eclipse! There are too many different approaches to building L2!

Each approach represents a strategy to extend Ethereum L1's block space to the farthest corners of the internet. My ultimate goal for crypto is that a single 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 in the internet.

But the question remains:

Do we need so many different Rollup standards? Or is one framework sufficient? Does my blockchain empire model naturally extend to the "empire model on Ethereum L2"?

Or does Ethereum's Rollup-centric roadmap fundamentally lower the barrier to entry for other Rollup standards, resulting in a more diverse balance of 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's Endgame suggests?

What characteristics can we predict this theoretical winner will have today?

Fewer Rollups?

Rollups come with costs, and only a few use cases can justify the costs of building and maintaining a Rollup network based solely on economic factors. These applications will have to find a more generalized domain where some generalized Rollups will compete to provide the cheapest real estate.

This perspective also covers some good momentum for composability. When more applications run on the same chain, options increase. The whole is greater than the sum of its parts; the more parts, the larger the whole. People naturally migrate to cities, and Rollup economics is no different. Who can build the largest city?

More Rollups?

As technology advances, costs will decrease! As technology matures, the fixed costs of Rollup deployment will reduce over time.

While the evolving Rollups seem hard to bear, other areas of research and innovation can help control this. Homogenized block space, abstraction layers, cross-chain execution, contract calls, shared ordering, and off-chain intent will all help end the chaos of 10,000 chains.

Having every application coexist on one chain is admirable, but there are fundamental limitations to scale for a single chain. While horizontal scaling through multiple Rollups may seem chaotic, there are many opportunities for research and development in multiple aspects.

Diverse Paths?

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

Ethereum's Rollup-centric roadmap provides a path to infinite scalability simply by allowing chains to be deployed as needed. If one L2 becomes congested, just launch another! But this strategy presents Ethereum with a new problem that the Solana community would be very eager to tell you about—primarily, the composability issue.

Rollup SDKs like OP Stack help address this issue. Shared standards and homogenized block space are a huge first step toward recombining different chains back into a single execution layer, but this time at infinite scale. Add some shared execution, cross-chain contract calls, and some UI abstractions, and our L2 Superchain has infinite scale.

There’s just one problem.

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

The Path Forward

If the Optimism Superchain is seen as 1,000 different chains, that’s great, but Arbitrum still uses a different language than Optimism, just like all other L2 SDKs.

That’s why Arbitrum’s Superchain version looks different from Optimism’s version. Arbitrum is interested in a single unified Superchain vision where a universal composability mechanism ties any and every chain together.

Arbitrum is not creating another Superchain; it is working in the space between these chains. This focus is on the interoperability layer between Ethereum L1 and Superchain settlement. Once the Superchain reaches consensus on its internal state, Arbitrum hopes to focus on research and development efforts for inter-chain settlement before publishing to L1.

This is a compelling vision, and if you look closely, you will 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 blend together, blurring into a single Superchain. Or… these technologies may not work, and the only way to achieve truly seamless composability is to have a single Rollup.

So, Ethereum's future is…

• Several different multi-chain economic zones? (Superchains)
• A composable Superchain?
• A single holistic Rollup?

2: How is Value Captured in the Rollup Stack?

Every L2 team wants to spread their chain development kits in the crypto space. With OP Stack, ZK Stack, Supernets, Orbits, and surely more to follow.

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

• Mantle, one of the largest OP Stack forks, forked an older version of the codebase and stated they currently have no plans to join the upcoming Optimism Superchain. They intend to keep their sorting fees for themselves.
• Meanwhile, Base contributes 15% of its sorting fees to the Optimism Collective, effectively turning into OP tokens. So, as a fork of OP------Stack, Base contributes value to OP, but Mantle does 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, and messy chains. With governance, we have homogenized block space, code reuse, and shared upgradability. With these attributes, we have the foundation to begin merging over 10,000 messy chains into a cohesive user experience.

That’s why I find Optimism’s strategy and roadmap particularly compelling compared to all others. Ben, Jing, Karl, and the Optimism team have navigated the maze of Ethereum scaling ideas and reached the logical conclusion of governance before any other team, and they have been "taking the hard road" from day one, figuring out decentralized governance. All other rollups are competing on technical advantages, but ultimately, that will run out, and they will have to start figuring out their long-term governance strategies once they reach that logical conclusion.

Meanwhile, the OP stack can absorb the best technologies developed by others while working to dig a non-forkable governance moat.

"Why governance is the logical conclusion of rollup competition" is a grand theme that goes beyond the scope of this article. It requires a very deep dive into Optimism’s rabbit hole for you to figure it out.

However, I still have the following questions:

• As L2 absorbs surrounding technologies, can a universal, modular framework like OP Stack absorb the best L2 technologies, just as we see with Ethereum L1?
• How strong are the incentives to join the Superchain? This question is 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 do not yield the desired effect of creating a seamless 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 gap in RaaS size in their business model."

If we assume there will be many L2 rollups, then this means there will need to be infrastructure to host all these rollups.

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

Rollups as a Service (RaaS) like Conduit are in a thumb war with L2 SDKs like OP------Stack. RaaS wants to charge fees, and L2s also want to charge fees. Where is the balance point?

I see two possible outcomes:

• RaaS providers will want to capture all fees and will try to bypass L2 teams to prevent them.
• RaaS providers will accept that they are subject to L2 teams and will simply accept any fees they are given.

I have an L2 bias here, so this reasoning may need to be checked, but this is what I see. Assuming RaaS providers are the most greedy and want what was mentioned in #1.

RaaS providers: "We have all the infrastructure; why do we need to tax the software when it can be freely forked?" So, RaaS providers just take the OP Stack and help teams deploy OP Stack chains using their RaaS, collecting sorting fees from all the chains they operate, while L2 tokens get nothing. They might even unlock some benefits of chain composability by helping all their chains share sorting.

The issue here is that we return to the governance question. Producing a large number of chains is not a sufficient outcome; while a single RaaS provider unlocking some shared sorting benefits is far from enough to produce the seamless outcome needed for a successful Superchain. If a RaaS wants to try to win the battle on L2 SDKs, they… need to become their own L2 SDK. This means they are entering the competitive stage of L2, and they will eventually find they need to work on L2 technological innovation, business development, governance, and more.

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

So, this pushes them into #2. RaaS will become service providers for L2 teams and will have to compete with other competitive RaaSs for fees, as L2 teams use their antitrust scepters to ensure no single RaaS creates a monopoly, giving RaaS too much power over L2 SDKs.

3: Where is the Balance Point for LSTs?

Here, I have some contradictions. I understand the compelling argument that market forces will force a single liquid LST to converge. I am not naively ignoring 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 steadfastly held by the Ethereum core community. It’s not just market forces at play here.

Moreover, the dominance of a single LST is related to the motivation for secondary LSTs to engage in vampire attacks. When one LST surpasses its base, the desire and power for vampire attacks correspondingly increase. This can break the balance of the dominant LST, at least in the short term.

The key questions are:

• How far is the Ethereum community willing to go to ensure the diversity of LSTs?
• How effective are the tools to suppress the advantages of a single LST?
• If (when?) a single LST achieves complete monopoly, to what extent will this erode Ethereum's core values?

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

Recently, we saw a vote against the ARB token incentives provided for stETH on Arbitrum, primarily due to concerns about Lido's dominance on Ethereum. If only "market forces" were 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 much gravitational pull does Ethereum have on Solana?

No one can effectively refute my empire model of blockchains, and a slew of similar papers (Fat Protocol, L1s as Currency) align with it. L1s are fiercely competing for complete dominance, and over time, one blockchain will ultimately assimilate all others. This is the nature of open-source systems, especially when you add the rocket fuel of economic incentives.

Solana, in my view, is different from its competitors. It is not an L1 fork of EVM, where any value it creates will ultimately flow back to the Ethereum ecosystem. It is not Cosmos, which lacks a real settlement layer or sacred L1 currency. It is not Bitcoin, where all non-BTC value is stripped away and removed.

Solana has its virtual machine, scaling strategy, and L1 asset: SOL. The entire tech stack of Solana is not Ethereum, which keeps it as far away from Ethereum's gravitational pull as possible. This strategy makes sense to me, as Ethereum seems to consume everything in its domain. For any non-Ethereum L1, the best chance of survival 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, executing Solana's settlement in a larger settlement network: Ethereum.

I see Eclipse as "the betrayal of Solana technology for SOL value," choosing to join Ethereum's monetary network and settlement layer. Eclipse embodies ETH-maxi, where all good technologies ultimately find their way to Ethereum, especially when it is just an execution layer, one that can detach from a few settlement layers and join a more global layer.

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

Or, more realistically, no matter how far an L1 is from Ethereum's gravitational pull, will Ethereum ultimately consume you? The sooner you transition from a minority network to a majority network, the better your situation, right? How strong is the incentive to flock to Ethereum?

5: How Do We Achieve On-Chain Price Discovery?

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

If decentralized systems are to "win," we need that trophy. The crypto economic system is a truth machine, but right now, the truth about crypto prices does not come from systems that hold assets. We need to achieve a complete closed loop here. Cryptocurrencies generate assets and need to become the oracles of their prices.

At the very least, this is where we need to get to. There are various promising mechanisms that can help us lean toward decentralized systems, but it is 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 that speed, and price discovery will naturally gravitate toward the most liquid and fastest updating oracle.

How do we achieve this on-chain?

Uniswap Hooks and innovations in the realm of intent hold the potential to disrupt the balance of power. Intent may be key here. A price discovery realm occurs in the space between CEX and DEX. This ambiguous, undefined space is where market makers and MEV bots make decisions and execute trades, rather than in any specific location. Ethereum's spaceports need to adapt to this layer of existence. We need to build infrastructure that supports trading between endless varieties of ships navigating between on-chain DEXs and the space between chains and CEXs, so we can encourage them to come closer to us, away from Binance.

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

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

The mechanisms that generate on-chain price discovery will undoubtedly be among the most valuable infrastructures in cryptocurrency. It doesn’t necessarily have to be a single panacea! Uniswap and AMM are huge assets in the crypto 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 addresses questions, not answers.

In 2023, many other "questions" about cryptocurrency will be raised; these are just five big questions that came to my mind first.

• How do Ethereum's composability and chain abstraction work in the context of its rollup-centric roadmap?
• How is value determined in Ethereum's rollup-centric roadmap?
• How much of a threat does LST pose to Ethereum, and what does its future look like?
• What will the future relationship between Ethereum and Solana be like?
• How do we achieve price discovery on-chain?

These are grand questions and answers. The answers to each question may not be simple but rather involve multiple strategies, mechanisms, and projects. This is why collaboration and communication among Web3 developers are 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, as it is a challenge all crypto systems will face, regardless of which camp you find yourself in.