Bankless: The big public chains are fighting fiercely, and Ether will be built to be king
Bankless: The big public chains are fighting fiercely, and Ether will be built to be king
Use countries as an analogy so you understand why other L1s can't beat (and probably always will) Ether .
This article is from Bankless, originally written by David Hoffman, and compiled by Katie Koo, translator for Odaily Star Daily.
The crypto space is fraught with internal struggles.
Competition has been the hallmark of this industry from the beginning, not the "working together" envisioned by idealists. The top-ranked crypto assets have a "blockchain superpower": liquidity begets liquidity, capital begets capital, and network effects beget network effects. The winning public chains are able to capture all of these elements and easily hold on to the number one position.
In this article, let's look back at the foundational principles of blockchain, understand what the "blockchain empire model" is, and how investors can use this to navigate the incredibly complex L1 valuation process. Eventually, you'll realize that an ethereum empire is coming.
The key to winning L1
There is plenty of room to "make the pie bigger" in crypto, as we are still in the early stages of Crypto's long growth phase. At the beginning of the industry explosion, there is a lot of space and a lot of public chains, and it seems that the ecosystem can carry an unlimited number of L1s, but this is just an illusion. In reality, if the L1 does not compete to the first position, it will be dominated by other L1s.
Liquidity begets liquidity. Capital generates capital. Network effect generates network effect. The winning public chain will capture all the liquidity + capital + network effects.
Currency battles are a daily occurrence in the crypto industry. The "cryptocurrency premium" is the scarcest resource in cryptocurrencies. It's something that every blockchain wants, but not all of them can have. Bitcoin has most of it, ethereum has some, and other public chains have only a little bit of the soup. This is the current state of the cryptocurrency premium (more on that in Part IV).
Fighting for "money capacity
The same competition happens at the national level. When your currency is the global reserve currency, you have the most powerful asset in the world: the ability to print any currency you need. When the world uses your money, you are the number one player. Any country can print money, but without the support of global demand, it can quickly fall into hyperinflation.
When you have the number one currency in the world, the global demand for your assets greatly mitigates the negative impact of currency issuance. Thanks to the "oil-dollar peg system," any new supply of dollars is immediately absorbed by global trade. But wasteful spending and corruption also diminish confidence in the dollar. Based on Decentralization Tokens for blockchain networks are catching on just in time - jumping to the status of a global reserve currency.
The value of the chain positive cycle and the country as well
The country with the world's reserve currency also has the most powerful military in the world. Military power secures the value of the currency (the global economy is using its money) by controlling global trade.
This power is in a positive feedback loop: once it becomes the number one nation in the world, it becomes cheaper to maintain a military due to control of the world's reserve currency; the value of the major reserve currency further subsidizes the military costs, which in turn consolidates the value of the currency.
Back to the Crypto world.
Army of the Nation = Blockchain Security ; Bitcoin's army = miners, PoW erects a wall of power around the Bitcoin economy, and anyone with weak energy cannot penetrate Bitcoin's PoW force field; Ether's army = coin holders, PoS erects a wall of capital around the Ether economy, and anyone with less than the required capital cannot penetrate Ether's protective wall.
Each chain has a security cost expense. The sustainability of the blockchain is achieved by optimizing the amount of cryptocurrency issued for production security. BTC and the price of ETH are important factors that affect the security costs of these ecosystems. If the asset value of a chain increases by a factor of 10, then the security budget increases by a corresponding factor of 10. A price after 10x also means that the system can get 10x the security level for the same amount of issuance.
Currency premiums linked to security issues
As the price of BTC rises, its Algorithm power Supply will also increase. As the price of ETH rises, the interest in investing in Ether will also increase.
Bitcoin's issuance rules are hard to reprogram, so the jacking up of Bitcoin's value will increase Bitcoin's security expense (at least until it runs out of block reward subsidies), which could lead to overspending in terms of security fees.
In contrast, Ether is more flexible in terms of distribution. With ETH The increase in price and the decrease in block rewards awarded for ETH.
Block 0 - Block 4369999: 5 ETH; Block 4.37 million - Block 7.28 million: 3 ETH (2017, adjusted via EIP-649); Block 7.28 million to date: 2 ETH (2018, adjusted via EIP-1234).
In 2021, EIP-1559 begins to recover excess ETH through burn-in. Issuance will be further reduced by 90% when Ether is upgraded to PoS by the end of 2022.
Ethernet's security philosophy is to issue a minimum number of ETH to achieve the required security.
Again, the analogy to the nation: how do we optimize the military for maximum security at minimum cost? The answer is to reduce the number of tanks and increase the number of drones.
The reduction in ETH issuance makes ETH more scarce, increasing its value on the secondary market. Higher prices on the secondary market increase the security of Ether, creating a positive feedback loop to achieve higher security with fewer issues.
This is the currency premium.
What about L2? Can you also build an empire model?
Ether's modular design structure allows it to scale infinitely. Rather than trying to host a decentralized economy on top of a single (master) chain, Ether becomes a settlement layer for other chains. It is like the United States having the most powerful military force to secure and facilitate global trade between countries, as long as they adopt the US dollar. Ethernet now has the highest security, with ETH on L1, to secure and facilitate transactions between L2.
The strength of the dollar does not come from the domestic production part of the U.S. economy, but from the external demand for the dollar from countries in order to participate in global trade. The U.S. does not control the economies of Germany, France, Argentina, etc., but it still captures the strengths of these economies. In order to trade with other countries, these countries must convert their GDP into dollar demand to import and export.
Likewise, Ether does not control the economy of the L2 blockchain. Each L2 has full sovereignty over its own economy. But when it comes to exporting GDP from one Rollup to another, the L2 must consume ETH in order to make L1 transactions. Integrating tens of thousands of transactions into L1 transactions is how economic activity on L2 interoperates with the rest of the Ether ecosystem.
The beauty of Ether's modular design is that you can add (essentially) an unlimited number of L2s to it, making Ether as L1 the most basic scalable blockchain design, allowing it to grow from a nation to an empire.
The cost of developing a new L2 on Ether is close to zero. This is the equivalent of an empire that can easily demonstrate economic influence in new territories or foreign countries whenever it is necessary. Each additional L2 increases Ether's net GDP, and Ether is free to add L2s according to market demand.
All roads to Ether are increasing the value of ETH.
The L1 and L2 of the Ether are the federal and state of the United States
Modular Ether's L1/L2 structure mimics the federal/state structure of the United States. Simple at the center, complex at the edges.
The U.S. federal government is the L1. It determines the "laws" that all states (L2) will follow. These laws are designed to promote interoperability among the states. It provides trust for effective interstate commerce.
Ideally, the federal government would provide only a minimum of the required rules and regulations. All other laws and rules can be left to the individual states (L2) to decide for themselves.
The same pattern exists for Ether.
EVM on Ethernet L1 acts as a law to coordinate economic resources between L2s. This common standard helps the L2 share the economic benefits of each other's growth.
Sharing the same L1 protocol allows each individual chain to move from opposition to a united front. Because of the interoperability provided by the underlying L1, the success of one L2 Rollup on Ethernet has a positive impact on other Ethernet L2 Rollups and will be a "joint advantage".
The beauty of the L2/state entitlement model is that each L2/state gets to decide what works best for them.
Currently, the "states" of the Ether "federation" include.
Optimistic Rollup: e.g. Optimism or Arbitrum; Zk-Rollup L2 solutions: e.g. zkSync or Starknet; an Ethernet L2 scalability solution like Immutable X; a centralized ledger like Coinbase or Wells Fargo; a federated chain like Hyperledger ......
There are no restrictions on building L2 on Ether, as long as the EVM interoperability standard is adhered to. "Simplicity at the center" maximizes "expression at the edge". It allows everyone to build what they want and inspires creativity.
Facing L2, we have a choice
The L1/L2 structure (federal/state structure) is an individual empowerment mechanism.
If the state government is charging you more in taxes than they provide in services, the solution may be: live in a different state. States must compete with each other to keep their voters happy and retain their residency rights. The states that do a better job of this will have access to more economic resources and a larger population.
The same situation occurs in L2.
Have your usual L2 tariffs gotten higher? Has it invested enough in its infrastructure, and is it keeping up with innovation, or is it falling behind? If L2 doesn't meet your requirements, you can switch to another one. L2s will compete with each other for users and lock-in volume, and that competition is good for users.
Ether Empire
Ether is a modern example of the global coordination model. Over time, the basic structure of Ether is like the United States - maintaining its position by ensuring that global trade is denominated in dollars.
The Ether Empire will consolidate itself in two ways.
New L2s are created and added to the ecosystem, such as the Ethernet-native Rollup ( Arbitrum , Optimism, zkSync) left the crowded central empire and set up new subdomains outside the main citadel; other L1s with low security joined to become the new L2s of Ether.
These new branches of Ether can self-manage and generate their own economy. However, after every few blocks, they bundle the overall economic activity to transact with L1. In exchange for imposing an ETH tax on the processing of transactions, the security authority of the Ether L1 is granted to the L2.
Cottage L1s can issue more coins compared to Ether, so they can pay lower security fees. But if you want to stop the currency inflation, you can always choose to accept the protection of Ether.
Talking with data and comparing different L1
Ethernet currently provides $45 million per day in security coverage to its network.
BTC currently has an inflation rate of only 1.7%, but provides $40 million per day in security. So from a security efficiency perspective, Bitcoin is 2.7 times more efficient than Ether.
Solana's inflation rate is 7%, while the daily security spend is only $11 million. The security efficiency of Ether is 7.17 times higher than Solana.
AVAX has an inflation rate of 5.5%, while the daily security fee amounts to $5.7 million. Ether is more securely efficient than Avalanche 10.4 times higher.
This was before Ether switched to PoS (Solana and Avalanche were already PoS). In the future, ETH issuance drops 90%, while strengthening its security mechanisms.
Competitive chains that fall into the "currency premium" trap
Both Avalanche and Solana boast low fees L1, but this forces them to issue more tokens to cover security fees. Solana and Avalanche also do have much higher throughput than Ether. They generate more total block space to host more data. If you have more block space, you have to increase security expenses to protect the extra space.
The larger the kingdom, the more troops are needed to guard it. Expanding a large kingdom is like expanding a territory, not letting people leave the kingdom to build small scattered dependent territories.
To outperform ethereum, cottage L1s increase L1 throughput and lower gas fees. The consequences can be catastrophic for the long-term currency premium of these L1s. This design choice creates high issuance while also limiting fee collection. This kills the currency premium and is a trap of sorts for scaling.
In contrast, Ether's scalability on its L2 yields higher L1 fees while minimizing the need to issue ETH.
Issue less and charge more. This is how a currency premium is generated.
Since issuance has been minimized, the burn fee from EIP-1559 captures the economic energy of the Ether ecosystem and injects it into the value of ETH (by making it more scarce). The value of ETH rises and fewer ETHs need to be issued to pay for security. This reduction in issuance increases the scarcity of ETH, increasing its value and further reducing the need for issuance. This is a positive feedback loop of the currency premium.
Other chains that try to scale on L1 have negative feedback loops. Scaling L1 requires high issuance and does not allow for meaningful fee income. This forces supply inflation, reduces its scarcity, and puts downward pressure on the currency. It cannot subsidize issuance with fees, as this runs counter to the purpose of these competing chains. As more and more issuance occurs, the devaluation of the currency (due to inflation) triggers further demand for issuance.
The battle for first place in L1 always tends to be about who can issue the least amount of currency for the most security. If you manufacture security, you can have it all (users and money). If security is expensive for you, then your options are limited.
Competing chains, defect to the Ether early~
On April 13, people familiar with the matter said that Arbitrum, the Optimism The tokens will be released next month by one of zkSync and Starknet.
Optimism and Arbitrum, as already operational L2s, do not require coin issuance from an economic point of view. They generate revenue by selling blocks, and then they pay a small "tax" to the Ether economy each time they make an L1 transaction.
Avalanche, Solana, Terra, and basically any blockchain where "security efficiency is not dominant" has a vulnerability. The longer they allow inflation, the more serious the problem becomes. In the future, by becoming an Ether L2, their token issuance vulnerability could be reduced to 0, with immediate benefits, and even increased throughput.
People in the competitive chain community have described me as an "ETH maximalist". In fact, it is decentralized maximalism that has enabled this blockchain empire model to exist. Ether's commitment to L1 decentralization and limited block space has encouraged a vibrant and rich L2 ecosystem.
Eventually, you will find that all roads lead to Rome and all public chains lead to Ether.
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