Bankless: 5 major problems facing cryptocurrencies in the future

By David Hoffman, Bankless; Compiled: Pine Snow, Golden Finance

Ethereum is now eight years old, and I've been in the business for six years.

The path forward has never been clearer – we've come a long way since we thought tweeting on L1 would change the world!

We now know what the benefits of decentralized crypto networks are and how to scale them. From our current understanding of crypto networks, there is still a lot of value to explore.

Still, there are still many open questions about how cryptocurrencies will ultimately end. Although the fog is slowly receding, it is still there.

Making capital allocation decisions, whether on an individual level or in venture capital duties, relies on addressing answers to some of the big questions left in this space, and there are many of them. All venture capitalists and builders in the crypto space are trying to answer these big questions more precisely and quickly than their competitors.

I took some time to identify some of the biggest remaining issues in the field and my thoughts on them. So, here are five big unanswered questions about the future of cryptocurrencies.

• Many hyperchains or one superchain?
• Where is the value captured in the Rollup Stack?
• Where is the LST equilibrium point?
• Will Solana be devoured?
• How do we do price discovery on-chain?

The article is a monster and full of questions - so buckle up.

First, many superchains or one superchain? **

We know how Ethereum will scale.

Rollups has expanded Ethereum's block space that is resistant to global cyberattacks into a rich Layer 2 (L2) block space. In 2020 and 2021, we discussed this in theory, and in 2022 and 2023 we have seen it in practice.

But there are many teams that achieve the same vision in their own unique ways. Optimism Superchain！ Arbitrum Orbits！ zkSync's ZK Stack！ Polygon Supernets！ Eclipse！ There are many different ways to build L2!

Each (Rollup technology) represents a strategy to expand the Ethereum Layer 1 (L1) block space to the farthest corners of the internet. I think the ultimate goal of cryptocurrencies is blockchain coming to every corner of the internet, and Ethereum is producing a variety of different blockchain variants, each with unique expertise to fill chainless gaps in the internet.

But the problem remains:

Do we need so many different Rollup standards? Or is one framework enough? Does my blockchain empire model naturally extend to the "L2 empire model on Ethereum"? Or does Ethereum's rollup-centric roadmap essentially lower the barrier to entry to replace the rollup standard, resulting in a more diverse balance of rollup strategies? Whether application-specific rollups (roll-apps) make economic sense depends on several factors? Or could economic factors cause all applications to focus on a few dominant rollups? Will economic incentives and composability force a merger into a single Ethereum Rollup, as shown in Vitalik's "Endgame"?

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

Very little Rollup? **

Rollups have a cost, and only some use cases can be economically justified by the cost of building and maintaining a Rollup network. These applications will have to find a place in the broader ecosystem, and generalized rollups will compete to provide the most resource space while at the lowest cost.

This argument also covers some of the advantages of composability. The selectivity increases when more applications exist on the same chain. The whole will be more than the sum of its parts, and the more parts, the stronger the whole. Humans naturally migrate to cities, and so does Rollup's economics. Who can build the largest cities?

A lot of rollups? **

As technology evolves, the cost will become cheaper! As the technology matures, the fixed costs of Rollup deployments will gradually decrease.

While constantly dealing with unlimited Rollups may not seem feasible, additional areas of research and innovation can help address this challenge. Homogeneity of block space, abstraction layers, cross-chain execution, contract invocation, shared ordering, and off-chain intent will all help control the chaos of 10,000 chains.

It is admirable to have every application present on one chain, but there are fundamental limitations to the scale of a single chain. While horizontal scaling through numerous rollups may seem chaotic, there is still a lot of research and development work to be done on multiple fronts.

**The path is different? **

Hyperchain is attractive to Ethereum's future vision, but it doesn't fully solve the problem of L2 composability.

Ethereum's Rollup-centric roadmap provides a path for unlimited scaling, simply deploying the chain on Ethereum on demand. If one second floor (L2) gets crowded, just start the other! But this strategy creates new problems for Ethereum, and the Solana community is happy to tell you that it's mainly composability issues.

Rollup SDKs, like OP Stack, help solve this problem. Sharing standard and homogenized block space is an important first step in recombining different chains into a single execution layer, but this time with unlimited scalability. Add some shared execution, cross-chain smart contract calls, some UI abstractions, that magical '???' Step, in an instant, we have an unlimited scalability with L2 superchain.

There is only one problem.

Optimism, Arbitrum, Polygon, and zkSync all want to do just that.

The road ahead

If Optimism superchains are considered to be 1,000 different chains, that's great, but Arbitrum still speaks a different language than Optimism and all other L2 SDKs.

That's why Arbitrum's hyperchain version doesn't look like Optimism. Arbitrum is interested in a single unified vision of Uberchain, where a universal composable mechanism ties any and every chain together.

Instead of creating another superchain again, Arbitrum is working on the space between these chains. This area of focus is the interoperability layer between Ethereum L1 and the settlement of hyperchains. Once Superchain agrees on its internal state, Arbitrum wants to focus R&D efforts on cross-chain settlement before releasing to L1 in order to achieve collective certainty by releasing on L1.

It's a compelling vision, and if you look closely, you'll see that the two parts above are actually the same. There may be a future where many rollups exist, and chain combination technology innovations enable them to mix and fuse into a single superchain. Or... These techniques don't work, and the only way to achieve truly seamless composability is to have a single rollup.

So, that's the future of Ethereum.

• Some different multi-chain economic zones? (Hyperchain!) ）
• A single composable superchain? (Hyperchain + Cross-chain Composability Innovation!) ）
• A single monolithic Rollup chain?

Ways to capture value in the Rollup Stack**

Each L2 team wants to spread their chain development kit throughout the crypto space. There's OP Stack, ZK Stack, Supernets, Orbits, and of course more to come.

Why are they making these things? How can L2 benefit from more replica-like chain deployments? Since forks are permissionless, how can L2 tokens gain value when forks are free? The process of forking forks out tokens. Why is the forked OP-Stack chain willing to pay OP Collective? What are the incentives?

• Mantle, one of the largest OP Stack forks, forked an older version of the codebase and said they currently have no plans to join the upcoming Optimism Superchain. They will keep their sequence fees. At the same time, Base donated 15% of its sequence fees to Optimism Collective, effectively contributing to OP tokens. So, as a fork of OP Stack, Base is contributing value to OP, while Mantle is not.

What makes them different? The answer is governance. Without governance, we will have different, chaotic, messy chains. With governance, we have uniform block space, code reuse, and shared upgradeability. With these properties, we have the foundation for fusing more than 10,000 chaotic chains into a chainless user experience.

That's why I'm uniquely interested in Optimism's strategy and roadmap, above all else. The Ben, Jing, Karl, and Optimism teams, who traversed the maze in the idea of Ethereum scaling, are already "on the hard road to solving distributed governance" long before the others. All other rollups are competing for technological advantage, but eventually, this will run out, and once they reach that logical conclusion, they will have to start developing long-term governance strategies.

At the same time, OP-Stack can absorb the best technology developed by others while working to build an inseparable watershed in governance before any other L2 team has access to it.

"Why is governance the logical conclusion of Rollup competition?" is a broad topic that is beyond the scope of this article. I'll have to let you dig into the Optimism to find out.

This is my argument about the development of the L2 space: the value capture of L2 tokens ultimately depends on governance effectiveness. However, here are the questions I still have questions about this:

• Can a generic, modular framework like the OP stack absorb the best L2 technologies as we absorb peripheral technologies in Ethereum L1?
• How powerful is the motivation to join Hyperchain? This question is a measure of "governance effectiveness", how effective can L2 governance be? Is it enough to make a bunch of chaotic chains coordinate with each other? If cross-chain combinatorial innovation doesn't produce what is needed to create a chainless experience, what other factors can governance leverage to increase the capture of L2 token value?

What about Rollup infrastructure providers? **

Governance is only one part of the L2 value capture equation. Even if L2 SDKs are able to find ways to capture token value, they still have to deal with "RaaS vulnerabilities" in their business models.

If we think that there will be a lot of L2 rollups, then that means that we need the infrastructure to host all of them. Consider: cloud computing, but for rollup infrastructure.

That's why companies like Conduit and Caldera came along. They want to host as many rollups as possible to capture some of the fees incurred by rollups.

There is a competition between Rollups-as-a-Service (such as Conduit) and L2 SDKs (such as OP-Stack), both of which want to get a fee. Where this balance is, it remains to be seen.

I see two possible outcomes:

1. Rollups-as-a-Service (RaaS) providers want to get all the fees and will try to bypass the L2 team. RaaS providers will accept their dependence on the L2 team and simply receive whatever fees they receive.

I'm L2 biased here, so this reasoning may need to be tested, but I see it this way. Suppose Rollups-as-a-Service (RaaS) providers are the most greedy and want to realize the first possibility.

RaaS provider: "We have all the infrastructure; Why do we need to pay taxes to software when it is free to fork? ”

So, a RaaS provider would simply take the OP-Stack and help the team deploy the OP-Stack chain using their RaaS, and they would charge a sequence fee for all the chains they operate, and the L2 token would get nothing. By helping all their chains share sequences with each other, they may even unlock some of the benefits of chain composability.

The problem is that we are back to the issue of governance. Creating a large number of chains is not enough to produce sufficient results, and while having a single RaaS provider can unlock some of the benefits of shared sequences, it is nowhere near enough to produce the output that the final game of the super chain requires. If a RaaS wants to win the L2 SDK battle, they need to be 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, BD and most importantly: governance.

If the big competitive advantage for RaaS is that they run physical hardware in a physical location, how will they truly decentralize their L2 technology stack? If any one RaaS creates a monopoly by running every L2 chain, then all L2 will be centralized in a RaaS hosting center. In order to decentralize, RaaS needs to work with all other L2 areas that have been studied for years.

So this will push them towards option 2. RaaS will become the service provider for the L2 team and will have to compete with other competitive RaaS fees, as the L2 team uses its antitrust approach to token governance to ensure that no single RaaS creates a monopoly, giving the RaaS too much power to the L2 SDK.

At least, this is what I see. So, my question is: "Am I right?" ”

3. Where is the LST equilibrium point? **

I feel ambivalent here. I understand the compelling argument that market forces will force LST to converge into a liquid LST. I'm not that naïve about these factors. But I'm also not that nihilistic and willing to "let it go" when confronted by forces that run counter to the unwavering values and beliefs of protecting the core Ethereum community. Market forces are not the only factor.

In addition, the dominance of one LST is associated with the motivation of secondary LSTs to carry out blood-sucking attacks. As an LST overcomes its base, the desire and ability to vampire attacks increases accordingly. This could upset the balance that dominates LST, at least in the short term.

The biggest questions are:

• To what extent is the Ethereum community willing to ensure diversity in LST options?
• How effective are the tools to suppress the benefits of a single LST?
• What if (when?) Individual LSTs do achieve a complete monopoly, to what extent does this erode the core of Ethereum's value? *Are you sure?

For this last question, Mike Nueder has written an excellent blog post detailing the path of thought for this particular question.

For me, the value of pluralism appeals to me, and I want to see more pluralism in as many places as possible. Danny Ryan makes the technical argument for why we should stick to pluralism.

If eventually we agree on a dominant LST, how long will it take to get there? Is slower better? In my opinion, yes. What protective fences can we build during this time?

Recently we saw a veto of an ARB token incentive vote on stETH on Arbitrum, mainly due to concerns about Lido's dominance on Ethereum. If only "market forces" had worked, this vote would have passed.

Will Solana be devoured? **

Do Solana and Ethereum evolve as separate ecosystems, or are the boundaries between them merging? If they merge, how much of Ethereum's gravity will be on Solana?

No one has been able to effectively refute my blockchain empire model, and a bunch of similar papers (Fat Protocol, L1s is Money) are aligned with it. L1 blockchains are fiercely vying for complete dominance, and over time, one blockchain will eventually swallow all the others. This is characteristic of open source systems, especially when you add financial incentives to them.

For me, Solana excels when compared to its competitors. It is not a Layer 1 (L1) fork of the Ethereum Virtual Machine (EVM), where any value it creates will eventually flow back into the Ethereum ecosystem. It's also not like Cosmos, which doesn't have an actual settlement layer or an official tier 1 currency. It's also not like Bitcoin, where all non-Bitcoin value is stripped and removed.

Solana has its own VMs, scaling policies, and Tier 1 asset: SOL. Solana's entire technology stack is not different from Ethereum, making it as far away from Ethereum's appeal as possible. This strategy makes sense to me, as Ethereum seems to gobble up everything in its space. For any non-Ethereum Tier 1, the best chance of survival is to stay away from Ethereum's influence.

However, Solana does not exist on its own. Eclipse is porting the Solana virtual machine to Ethereum, taking Solana's executive functions and completing settlements on the larger settlement network, Ethereum.

Chris Burniske believes Solana can maintain autonomy, while Eclipse is the "embassy of Solana" on Ethereum.

I think Eclipse is the "Solana technology" that "betrays" the value of SOL, joining Ethereum's currency network and settlement layer. Eclipse implements the ETH-maxi theory that all good technology will eventually find its way into Ethereum, especially when it's just an execution layer — one that can break away from the smaller settlement layer and join the broader settlement layer.

So, what awaits in the future? Will Solana be able to maintain autonomy? Can the various components of Solana succeed in motivating themselves to stay within their territory and not participate in cyber pluralism?

Or, more accurately, no matter how far an L1 is from Ethereum, eventually Ethereum will also devour you, and you will be more fortunate if you can defect from a few networks to a majority network early.

What are the incentives to defect to Ethereum?

I think in the future, we will be able to look back and find evidence that both views make sense. Both sides will be able to say, "We are right. But one side will be more correct than the other, and anyone who has heard of Bankless knows which side I am on in this debate.

How to conduct price discovery on the blockchain? **

Bankless Ventures is working on some of the most exciting transactions, and one of the key issues is how to enable price discovery on the blockchain, rather than relying on centralized exchanges, which will be a huge boost to the entire industry. Price discovery represents the balance of power between decentralized and centralized systems, and until now, price discovery has been the grip of centralized systems firmly in their hands.

If decentralized systems are to "win," we need to take back that control. I want to take it away from Binance's cold hands. Coinbase, you can't have it either. The cryptoeconomic system is the machine of truth, but for now, the real source of the price of crypto does not come from the system of custodial assets. We need to fully self-encompass. Cryptocurrencies produce these assets and therefore need to be oracles for the price of these assets. We now have the situation in our hands.

At the very least, that's what we need to achieve. Various promising mechanisms could help lean toward decentralized systems, but it's unclear how far this will take us. Binance's strength lies in its 1ms block time. No decentralized system can ever keep up with this, and price discovery is naturally focused on the most fluid and fastest-updating oracles.

How can we put it on-chain?

Promising areas of innovation that tend to balance power are in Uniswap Hooks and Intent. Intent can be key in this area. Price discovery takes place in the realm between centralized exchanges (CEX) and decentralized exchanges (DEXs). This vague, undefined area is where market makers and MEV robots make decisions and trade, not in a specific venue. Ethereum's space needs infrastructure that contributes to this existential layer. We need to build the infrastructure to support transactions between on-chain DEXs and various spaceships shuttling between on-chain and CEX in order to encourage them to move closer to us and away from Binance.

As long as our crypto system lives in the shadow of CEX price discovery, we will always be an inferior version of ourselves. Achieving on-chain price discovery will be one of the most important signs of maturity and sophistication in our industry.

This is non-negotiable; We need this. It's not "Can we?" It's "What do we do?" "If there is no price discovery on the chain, then the crypto experiment has failed in some way.

The mechanism that generates on-chain price discoveries will certainly become the most valuable part of the crypto infrastructure. It doesn't have to be a single lifesaver! Mechanisms like Uniswap and AMM are important tools in the crypto toolbox that generates on-chain price discovery, but more similar mechanisms are needed.

Who will build it and what will it look like?