L1 Experimentation, Reflections on DeFi 2.0, Web3 Social Critique

Hello everyone! Reverting back to a style that I used to have back in the day where I’d post about a few things that interested me and some more longer form thoughts on them. Without further ado, let’s get in.

The following tweet put something that I’ve been thinking about into a coherent way of framing things. In the previous bear market of 2018, we only had major experiment — would a layer 1 like Ethereum ever be valuable and what would the use case for something like it be? Fast forward four years and we collectively learned that actually, hey, there might be some decent value to this technology. Whether it’s DeFi, NFTs or Games (dressed as Ponzis for now), we know people want blockspace for stuff.

However, the question on everyone’s minds now is how do we actually accomodate all of this demand when it comes back for these various use cases? That is the big question of the current bear market that we will find out in the next bull. So far it seems like there’s three major approaches (as outlined in the tweet below):

1. Horizontal aka let’s allow you to create your own mini-island on our chain really easily and then make it easy for our little islands to speak to each other. You’re responsible for your own island but we’ll make it easy to get started with the tooling. No guarantees around security though — do an ICO or something?

2. Vertical aka we’ll build these islands that give you less control of how things work but ensure you have our underlying security (layer 2s and roll ups). This pitch tells developers that you might sacrifice how your infrastructure works, but you don’t need to worry about that security thing. Not a bad pitch either.

3. Monolithic aka don’t worry about the scalability thing, our chain can handle anything you throw at us because our tech is far superior. Some are skeptical whether it will work but the biggest advantage here is that all your dApps can speak to each other and are composable, no bridges or other messing around to do the thing you want to do.

My personal take is that I can understand the rationale for Monolithic and Horizontal, however when it comes to vertical I have a hard time understand what class of applications would want to figure out:

1. How to build something people want

2. Figure out how to get the right amount of security for their essential pseduo-chain

Furthermore, things like Cosmos chains struggle with infrastructure such as data because things are very unstandardised and hard for developers to work with. The one argument that I do see is that the scalability that roll ups and layer 2s promise do tap out. My main piece of evidence for this is dYdX and that being the main reason they decided to go on their own Cosmos chain.

Solana is an interesting play in the monolithic field provided they can get their technical problems together. Aptos and Sui have a lot of work on their legitimacy before they can enter that race properly imo.

Keep an eye out on all these experiments since the ones that are least expected to show promise could reprice with their proper traction in the bull market…

With the recent downturn, we’ve all realised once again how expensive liquidity really is and the dangerous effects of lending crisp digital dollars to things that claim to be worth the digital dollars they claim to be.

One thing to reflect on from the bull market was the narrative that liquidity would become cheap and accessible for everyone, forever. I mean they were right about it being cheap — only in a bull market. As the bear continues to rear it’s head we once again see that liquidity isn’t something that comes easy and when you do offer it easy, you get rekt.

In the bull market there were many startups promising all sorts of funky things about how cheap they could make liquidity through some sort of circular ponzi game powering it all. What I find fascinating is how people believed that you could simply create money out of thin air that would magically fuel “liquidity”. If there’s one thing that I’d tell everyone reading this, whenever you hear the word “liquidity”, think “counter-party who will buy your stuff”. So now when we make a claim of “easy infinite liquidity for everyone” we can reframe that into “easy infinite counter-parties that