Bankless: Five Issues Facing the Future of Cryptocurrency
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Bankless: Five Issues Facing the Future of Cryptocurrency
How significant is LST's threat to Ethereum, and what are the outlooks for its future?
Navigating Web3 tides with focused insightsWritten by: David Hoffman
Compiled by: TechFlow
Ethereum is now eight years old, and I’ve been part of it for six.
We now understand what decentralized crypto networks are good for and how to scale them. There have been many valuable insights gained from our current understanding of crypto networks.
Yet, the ultimate goal of crypto remains shrouded in mystery. While the fog is gradually lifting, it still persists.
For some of the remaining big questions in this space—questions that guide both my personal decisions and capital allocation in my venture capital role—many mysteries remain unsolved. All crypto VCs and developers are racing to answer these critical questions more accurately and faster than their competitors.
I’ve taken some time to identify some of the biggest open questions in the field, along with my thoughts on them.
#1: Many Superchains or One Single Superchain?
We know how Ethereum will scale.
Rollups have already expanded Ethereum's block space into abundant L2 block space. We discussed this theoretically in 2020 and 2021, and in 2022 and 2023 we began seeing it go live.
But many teams are executing the same vision in their own unique ways. Optimism Superchain! Arbitrum Orbits! zkSync’s ZK Stack! Polygon Supernets! Eclipse! There are far too many different approaches to building L2s!
Each approach represents a strategy to extend Ethereum L1’s block space to every corner of the internet. My ultimate vision for crypto is that a blockchain finds its place in every corner of the internet, and Ethereum is generating various distinct blockchains, each with unique specializations, to fill in the gaps across the digital world.
But the question remains:
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Do we need so many different rollup standards? Or would one framework suffice? Does my "empire model" for blockchains naturally extend to an “empire model on Ethereum L2”?
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Or does Ethereum’s rollup-centric roadmap fundamentally lower the entry barrier for other rollup standards, enabling a pluralistic equilibrium of multiple rollup strategies?
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Can app-specific rollups (roll-apps) economically justify themselves?
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Or will economics force all applications to consolidate onto a few dominant rollups?
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Will economic and composability incentives push us toward a single massive Ethereum rollup, as one of Vitalik’s Endgame scenarios suggests?
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Can we predict today what characteristics this theoretical winner will possess?
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Fewer Rollups?
Rollups come with costs, and only certain use cases can economically justify the cost of establishing and maintaining a rollup network. These apps will need to find a more generalized niche, while general-purpose rollups will compete to offer the cheapest real estate.
This view also includes strong momentum from composability. When more applications run on the same chain, options multiply. The whole becomes greater than the sum of its parts—and the more parts, the larger the whole. People naturally migrate to cities; rollup economics work similarly. Who can build the largest city?
More Rollups?
As technology advances, costs decrease! As the tech matures, the fixed cost of deploying rollups diminishes over time.
While the proliferation of rollups may seem chaotic, innovations in other research areas can help manage this. Homogenized blockspace, abstraction layers, cross-chain execution, contract calls, shared sequencing, and off-chain intents will all contribute to resolving the chaos of 10,000 chains.
Having every application coexist on a single chain is admirable, but there are fundamental scaling limits to any single chain. While horizontal scaling via multiple rollups may seem messy, it opens up numerous research and development opportunities across multiple dimensions.
A Pluralistic Path?
The future of Ethereum’s superchain is compelling, but it doesn’t fully solve the L2 composability problem.
Ethereum’s rollup-centric roadmap offers a path to infinite scalability simply by allowing chains to be deployed on demand. If an L2 gets congested, just launch another one! But this strategy introduces new problems—primarily around composability—that the Solana community would be happy to point out.
Rollup SDKs like OP Stack help address this. Shared standards and homogenized blockspace represent a giant first step toward reassembling different chains back into a single execution layer—but this time at infinite scale. Add shared execution, cross-chain contract calls, and some UI abstractions, and our L2 superchain achieves boundless scalability.
There’s just one problem.
Optimism, Arbitrum, Polygon, and zkSync all want to do it.
The Way Forward
If Optimism’s superchain were seen as 1,000 distinct chains, that’d be great—but Arbitrum uses a different language than Optimism, as do all other L2 SDKs.
That’s why Arbitrum’s version of a superchain looks different from Optimism’s. Arbitrum isn’t interested in creating another superchain per se, but rather working in the space between chains. Their focus is on the interoperability layer between Ethereum L1 and superchain settlement. Once superchains agree on their internal state, Arbitrum aims to focus R&D efforts on inter-chain settlement before finality is posted to L1.
It’s a compelling vision, and if you look closely, you’ll see the two parts above are actually the same. Perhaps there’s a future with many rollups, where innovations in chain composability allow them to blend together, blurring into a single superchain. Or… those technologies fail, and the only way to achieve truly seamless composability is through a single unified rollup.
So, Ethereum’s future is…
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Several distinct multi-chain economic zones? (Superchains)
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One composable superchain?
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One single monolithic rollup?
#2: How Is Value Captured Within the Rollup Stack?
Every L2 team wants to spread their chain development kits across crypto. There’s OP Stack, ZK Stack, Supernets, Orbits, and surely more to come.
Why do they build these? What benefits do L2s gain from replicating deployments of their chains? Since forking is permissionless, and forks are free, how can L2 tokens capture value? The fork process itself distributes tokens. Why would a forked OP-Stack chain pay fees to the OP Collective? What are the incentives?
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Mantle, one of the largest OP Stack forks, forked an older codebase and stated they currently have no plans to join the upcoming Optimism Superchain. They intend to keep their sequencing fees for themselves.
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Meanwhile, Base contributes 15% of its sequencing fees to the Optimism Collective, effectively converting into OP token value. So as an OP-Stack fork, Base contributes value to OP—but Mantle does not.
What explains this difference? The answer is: governance. Without governance, we have different, messy, disjointed chains. With governance, we get homogenized blockspace, code reuse, and shared upgradability. With these properties, we lay the foundation for merging 10,000 chaotic chains into a seamless, chain-abstracted user experience.
This is why I’m particularly drawn to Optimism’s strategy and roadmap over all others. Ben, Jing, Karl, and the Optimism team navigated the maze of Ethereum scaling ideas and reached the logical conclusion about governance before any other team, consistently taking the hard path from day one to figure out decentralized governance. All other rollups are competing on technical advantages, but eventually, that advantage will run out, and they’ll have to confront their long-term governance strategies—arriving at the same logical endpoint.
Meanwhile, the OP Stack can absorb the best technologies developed elsewhere while building an unforkable governance moat.
“Why governance is the logical endgame of rollup competition” is a vast topic beyond the scope of this article. You must dive deep down the Optimism rabbit hole to figure it out yourself.
Still, I have the following questions:
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As L2s absorb surrounding technologies, can general, modular frameworks like OP Stack absorb the best L2 tech—as we’ve seen with Ethereum L1?
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How strong are the incentives to join a superchain? This question serves as a proxy for measuring “governance effectiveness”—how effective can L2 governance become? Is it sufficient to bind a chaotic set of chains together?
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If cross-chain composability innovations fail to deliver the desired chain-abstracted 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 face a “RaaS-sized hole” in their business model.
If we assume there will be many L2 rollups, then infrastructure will be needed to host all of them.
That’s where companies like Conduit and Caldera come in. They aim to host as many rollups as possible to capture a portion of the fees generated.
Rollups-as-a-Service (RaaS) providers like Conduit are in a thumb war with L2 SDKs like OP-Stack. RaaS providers want fees, and L2s want fees too. Where’s the balance?
I see two possible outcomes:
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RaaS providers seek all fees and will try to bypass L2 teams to block them.
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RaaS providers accept subordination to L2 teams and simply take whatever fees they’re given.
I admit I have an L2 bias here, so this reasoning may need scrutiny—but this is how I see it. Assume RaaS providers are maximally greedy and want what was outlined in #1.
RaaS Provider: “We own all the infrastructure; when software can be freely forked, why should we pay taxes to the software?” So, the RaaS provider takes OP Stack and helps teams deploy OP Stack chains using their RaaS, collecting sequencing fees from all chains they operate—while the L2 token gets nothing. They could even unlock some composability benefits by enabling shared sequencing across all their chains.
The problem here is we return to the governance issue. Producing many chains isn’t enough. While a single RaaS unlocks some shared sequencing benefits, it’s far from sufficient to produce the chain-abstracted outcome required for a successful superchain. If a RaaS wants to beat L2 SDKs in this battle, they… need to become their own L2 SDK. That means entering the L2 arena, where they’ll eventually realize they must innovate in L2 tech, business development, and governance.
How can RaaS providers actually decentralize their L2 tech stack if their key competitive advantage is running physical hardware in physical locations? If any RaaS monopolizes by operating every L2 chain, all L2s centralize to that single RaaS hub. For decentralization, RaaS providers will need to tackle the same challenges other L2s have worked on for years.
Thus, they’re pushed into #2. RaaS providers become service providers for L2 teams and must compete on fees with other RaaS providers, as L2 teams use their anti-monopoly leverage to prevent any single RaaS from gaining excessive power over the L2 SDK.
#3: Where Is the Equilibrium for LSTs?
Here, I’m conflicted. I understand the compelling argument that market forces will drive convergence toward a single liquid staking token (LST). I don’t naively ignore these forces. But I’m also not so pessimistic that I’m willing to “easily concede” when confronted with forces opposing deeply held values and beliefs within the Ethereum core community. This isn’t just about market forces at play.
Moreover, dominance by one LST correlates with incentives for secondary LSTs to launch vampire attacks. When one LST surpasses its base, the desire and power to attack increase accordingly. At least in the short term, this can disrupt the equilibrium of the dominant LST.
The key questions are:
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How far is the Ethereum community willing to go to preserve LST diversity?
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How effective are tools to suppress a single LST’s dominance?
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If (when?) a single LST achieves full monopoly, how severely would that erode Ethereum’s core values?
To me, the value of pluralism is deeply attractive and something I hope to see preserved wherever possible.
If we ultimately consolidate around one dominant LST, how long should that take? Isn’t slower better? In my view, yes. While we still have time, what guardrails can we build?
We recently saw a vote rejected on Arbitrum to incentivize stETH with ARB tokens, primarily due to concerns about Lido’s dominance on Ethereum. If only “market forces” were at play, this vote should have passed.
#4: Will Solana Be Absorbed?
Will Solana and Ethereum evolve as independent ecosystems, or will the boundary between them blur? If they converge, how strong is Ethereum’s gravitational pull on Solana?
No one has effectively refuted my empire model of blockchains, nor a series of similar essays (Fat Protocol, L1s as money) that align with it. L1s are locked in fierce competition for total dominance, and over time, one blockchain will ultimately absorb all others. That’s the nature of open-source systems, especially when fueled by economic incentives.
Solana seems different from its competitors to me. It’s not an EVM L1 fork, where any value created eventually flows back to Ethereum. It’s not Cosmos, lacking a real settlement layer or sacred L1 currency. It’s not Bitcoin, where all non-BTC value is stripped away.
Solana owns its VM, scaling strategy, and L1 asset: SOL. Its entire tech stack is non-Ethereum, placing it as far as possible from Ethereum’s gravity. This strategy makes sense to me because Ethereum appears to consume everything within its domain. For any non-Ethereum L1, the best survival strategy is to stay far from Ethereum’s influence.
Yet, Solana doesn’t exist in a vacuum. Eclipse is porting Solana’s VM onto Ethereum, settling Solana’s execution on a larger settlement network: Ethereum.
I view Eclipse as a “betrayal of Solana tech to SOL’s value,” choosing instead to join Ethereum’s monetary network and settlement layer. Eclipse fulfills the ETH-maxi prophecy: all good tech will eventually find its way to Ethereum—especially when execution is just a layer detachable from a few settlement layers and attachable to a more global one.
So, what happens next? Can Solana maintain its boundaries?
Or more realistically, no matter how far an L1 strays from Ethereum’s gravity, will Ethereum eventually consume you—and the earlier you defect from a minority network to the majority network, the better off you’ll be? How strong is the incentive to defect 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 massive boost to the entire industry. Price discovery represents the balance of power between decentralized and centralized systems, and so far, this trophy firmly remains in the hands of the centralized camp.
If decentralized systems are to “win,” we need that trophy. Crypto-economic systems are truth machines, but right now, the truth about crypto prices doesn’t originate from the systems holding the assets. We need full closure here. Cryptocurrencies generate assets and must become the oracles of their own prices.
At minimum, that’s where we need to arrive. There are various promising mechanisms pushing us toward decentralized systems, but it’s unclear how far they’ll take us. Binance enjoys a 1-millisecond block time advantage. No decentralized system can match that speed—price discovery naturally gravitates toward the most liquid and fastest-updating oracle.
How do we achieve this on-chain?
Innovations in Uniswap Hooks and the intent ecosystem hold promise to shift this balance of power. Intent might be the key. A layer of price discovery exists in the space between CEXs and DEXs—a fuzzy, undefined realm where market makers and MEV bots make decisions and execute trades, not tied to any single venue. Ethereum’s spatial ports need to adapt to this existing plane. We need infrastructure that supports transactions among endless varieties of spacecraft shuttling between on-chain DEXs and the space bridging chains and CEXs, encouraging them to move closer to us and farther from Binance.
As long as our crypto systems live in the shadow of CEX-driven price discovery, we’ll always be inferior versions of ourselves. Achieving on-chain price discovery will be one of the most significant signals of maturity and sophistication in our industry.
This isn’t negotiable; we need this. Without on-chain price discovery, the crypto experiment has failed in a meaningful way.
The mechanism enabling on-chain price discovery will undoubtedly be one of crypto’s most valuable infrastructures. And it doesn’t have to be a single silver bullet! Uniswap and AMMs are tremendous assets in crypto’s toolkit for generating on-chain price discovery, but we need many more such mechanisms.
Who will build it, and what will it look like?
Conclusion
This article focuses on questions, not answers.
In 2023, people will raise many other “questions” about crypto; these are simply the five biggest ones that came to my mind first.
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Within the context of Ethereum’s rollup-centric roadmap, how do composability and chain abstraction work?
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Within Ethereum’s rollup-centric roadmap, how is value determined?
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How threatening are LSTs to Ethereum, and what does their future look like?
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What will the future relationship between Ethereum and Solana be?
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How do we achieve on-chain price discovery?
These are grand questions and answers. Each question likely doesn’t have a single simple answer, but rather a mix of strategies, mechanisms, and projects. That’s why collaboration and communication among Web3 developers are so critical: no one can solve these alone.
Among all the issues mentioned here, achieving on-chain price discovery seems the most complex, as it’s a challenge every crypto system faces, regardless of which camp you find yourself in.
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