(0) I keep getting asked about how I feel about layer 1 and defi within the crypto space; so here’s a long thread detailing my currently still nascent thoughts. If I were smarter and had more time, I’d make this thread shorter and more coherent.
(1) I view the layer 1s as commodities – if it’s ETH, XTZ, DOT, EOS, etc that we are talking about, they are quite similar to crude oil, solar, wind, and other energy sources that power our economy, only in this context it’s commodities that secures entry on a digital ledger.
(2) There are some very interesting differentiation though – such digital commodity like ETH, unlike oil, gets neither burned nor perish (with some intricate exceptions), so they may act more like renewable resources (like water) and harvest more store-of-value characteristics.
(3) Oil also doesn’t get “less safe / worthy” when it’s cheap, but given the incentive / security mechanism of blockchains, the more valuable a layer-1 protocol is, the safer and thus more valuable it becomes (network effect). The offsetting factor makes it a bit nuanced …
(4) … it’s the stronger the SoV characteristic, the more damage it does to the utility use-case. Similar to how when oil is 150 / barrel people drive less and look for solar power, ETH being congested and hyper-expensive to transact does dampen the utility use-case.
(5) The middleware and infrastructure built on top of such commodities – such as KNC, SNX, LINK, Uniswap, MakerDao, etc – are very much akin to the refiners, pipelines, storage facilities, and gas stations; they bend and transfer the commodity into various readily usable forms.
(6) One immediate point is some of such infrastructure can be layer-1 agnostic, similar to how various types of commodity infrastructures can process / utilize any feedstock (refiners + pipelines for example); so we could see these middleware/infra adopt other layer-1 commodities
(7) …but for the meantime, given the still nascency of crypto dev activity, it does make sense for infrastructure build-out to amalgamate for max efficiency gain (i.e. Defi stack on ETH). Sometimes it’s just easy to manipulate oil / build on ETH.
(8) Re:Defi, it should be of no surprise that the growth is finance-centric; until we have governmental buy-in where they exchange violence + law enforcement for tax-dollars, crypto bridging 2-way digital-reality use cases (like decentralized Uber) still makes no sense.
(9) Immediate real use cases need to be digital-only, and for digital-only use-cases, the only real business today I see is investment & speculation. Defi today almost only serves such businesses – mainly via over-collateralized loans & liquidity pools to facilitate trades.
(10) It bears repeating that finance at its core facilitates transfer of value through space and time – if there is no value worthy of transfer, finance sector is a mere nuisance. If there is no real digital-native crypto biz outside of speculation, defi is nothing but an imp.
(11) That is not to say, of course, this is all for naught. A nice talent bench is being nurtured alongside some cool experiments, building the foundation for in case real digital-native businesses that emerge in the app layer. It’s also good to make mistakes early.
(12) Once the Stablecoin business is enabled via juggernauts like FB, emerging countries could rapidly dollarize, leadingly to interesting opportunities for cross-border dollar-based financial funnel on identified people previously inaccessible to credit.
(13) In short, we are too early for layer-2 apps to be multi-platform given talent and resource constraints, but I suspect they eventually will be. Defi exists today to support the “speculation” business – and will remain malnourished until real digital-native businesses emerge.
