Thread by @0xdoug

1/ This is good analysis and the most plausible bull case for DA. But I think the part that will definitely not come true is DA ever getting close to 50% of L2 fees.

There are structural economic reasons why sequencing will always accrue way more value than DA...

https://twitter.com/ryanberckmans/status/1829869611140932035

2/ Blockchains are basically in the business of selling blockspace. And because blockspace is not easily fungible between chains, they are close to monopolies.

But not all monopolies earn excess profits. The key is the ability to price discriminate between your consumers.

3/ Without price discrimination, monopoly profits are barely above commodities

Think how airlines segment price insensitive business flyers from bargain seeking consumers. Or how the same SUV car model is sold under VW, Audi, and Lamborghini labels at very different prices.

4/ Priority fees are an incredible price discrimination mechanism for blockchains. The highest priority transactions pay literally orders of magnitude more than the median.

5/ Both L2s and Solana achieve high throughput combined with high revenues by using sequencer priority as a form of price discrimination

The marginal tx pays very low fees, allowing for huge TPS. But price insensitive txs get juiced, and pay the bulk of network revenue

6/ Below is the distribution of a random 5 blocks taken from the Base L2. This is a clear Pareto distribution, which makes price discrimination extremely effective.

The top 10% of txs pay 30% of revenue. The bottom 10% pay less than 1%.

7/ The problem is while the sequencer makes a fortune off this, the DA layer does not participate because it has zero price discrimination power.

That super high value arb pays the same for Ethereum DA as the 1 wei spam transaction, because they're settled in a single batch

8/ Because the marginal tx is very low value, you can only get high TPS when the median tx can land on chain at near zero cost. But with DA basically every tx pays the same.

A DA layer can either have high throughput or it can have high revenues. But it can't have both.

9/ This makes it basically impossible for rollups to scale without Ethereum network revenue crashing

The rollup centric roadmap is fundamentally flawed because it gave away the valuable part of the network (sequencing), thinking it would make it back on the worthless part (DA)

10/ I originally was bullish on the rollup centric roadmap, because I thought any reasonable person would recognize the price discrimination economics and it would operate in parallel with scaling the L1.

11/ High value price insensitive users would use the L1 for its lindyness, security finality, and provenance. While L2s would specialize in marginal low dollar users, that were priced out by L1 fees. Thus Ethereum would still capture significant sequencer rents.

12/ But Ethereum leadership repeatedly emphasized that the L1 was effectively dead as an app layer and it would never scale. So very rationally users and builders responded, and the L1 app ecosystem is now dying, along with Ethereum network revenue.

13/ If you think the long-term valuation proposition for ETH is a monetary asset, this is probably still okay. Get ETH into more hands with it to make it lindy as a form of money. And subsidizing the L2s with zero value accrual to the base layer should help with that.

14/ But if you think the long-term valuation proposition for ETH is network equity in a widely used protocol (which *I* think is more likely than ETH as money), then you need value accrual

And it's clear we really screwed that up based on bad economic assumptions.