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Future Ethereum layer-2 solutions might pay less attention to token incentives

Layer-2 networks are gaining traction as the Ethereum ecosystem develops. For example, Token Terminal statistics revealed that layer-2 scaling solution Polygon had 313,457 daily active users as of January 17, 2023 – a 30% increase in activity from October 2022.

Furthermore, the Polygon ecosystem recently announced the beta release of their Zero-Knowledge Ethereum Virtual Machine. As a result, Polygon, Polygon’s native token, maintains an optimistic narrative.

While notable, some believe layer-2 networks with token incentive structures may become outdated in the near future. For example, Jesse Pollak, head of protocols and Base core contributor at US crypto exchange Coinbase, told Cointelegraph at ETHDenver 2023 that there are currently no plans to associate a token with Base, Coinbase’s recently created Ethereum layer-2 network.

“We see tokens as a powerful incentive tool that can influence user and developer behaviour. At the same time, during the previous several years, we have seen cases where tokens have been employed as an incentive mechanism with a lack of product fit for the underlying network. In the past, tokens have also resulted in unscrupulous or hazardous circumstances.”

Pollak describes Base as a layer-2 solution that enables developers to simply design applications without the need for an incentive system. “Our product is self-contained. “It will be incredibly simple for developers to utilise to create applications and distribute them to real people,” he said.

It’s crucial to concentrate on distribution and usability because, as Pollak noted, many of today’s decentralised applications have been utilised exclusively for cryptocurrency trading. “Trade alone won’t make cryptocurrencies the economic engine of the future. With Base, we make it simple for programmers to create practical applications that users genuinely want to use,” he continued.

In contrast to existing layer-2 networks, Base’s network will be secure and inexpensive thanks to investments in fundamental infrastructure like Ethereum Improvement Proposal 4844, according to Pollak. “Transactions on layer-2s cost roughly 10 to 15 cents. We want to change it,” he said.

Although Base’s testnet went live in February, Pollak said that the mainnet launch would happen soon. Furthermore, even though Base does not currently have any plans to offer a native token, a number of ecosystem players have already showed interest in building atop Base.

For instance, Blockdaemon’s founder and chief operational officer, Konstantin Richter, told Cointelegraph at ETHDenver 2023 that Blockdaemon will be an official infrastructure partner for Base. Richter said that he feels proof-of-stake (PoS) is a completely broken system and that Base shouldn’t have a token connected with the network. Proof-of-stake only functions when token prices increase, he added, adding that Blockdaemon maintains more PoS nodes than anyone else.

Richter added that Blockdaemon intended to exploit the Basic network in order to figure out how to permit network users to run nodes while potentially earning a set U.S. dollar fee. This might lead to a different kind of PoS mechanism, possibly centred around commitment of compute rather than a staked percentage of tokens that could not be beneficial to the network, he said. According to Richter, using such a model might improve the user experience. He stated:

With the development of PoS, this may represent the biggest paradigm shift in the bitcoin ecosystem. The incentive schemes that compensate customers for using a product are becoming obsolete. Our current priorities are simple functionality and affordable prices.

Yet without a token incentive strategy, it’s still unclear how exactly Base can draw users and developers to the platform. Given Coinbase’s vast grasp of institutions and decentralised finance (DeFi), Richter doesn’t think this should be an issue: “I prefer to work with Base given Coinbase’s understanding of institutions and DeFi. It’s amazing that a Fortune 500 firm that is publicly traded is dedicated to posting transactions transparently on Base.

Future developments cannot yet be predicted, but it is significant to recognise that Arbitrum, another Ethereum layer-2 network, also operates without a native coin. Users are still communicating with the Arbitrum network despite this. Arbitrum has around $3.35 billion locked in total value, or about 54% of the whole value.

Nonetheless, there have been reports that Arbitrum would start an airdrop of tokens in the future. Whether or not this is the case, it shows that Arbitrum has the ability to assess product-market fit prior to issuing a token.

At ETHDenver 2023, Stanford Blockchain Accelerator president Gil Rosen told Cointelegraph that achieving product market fit is about ensuring that initiatives attract the proper clients whose value is additive to the ecosystem, which is frequently not the case with tokens. Early projects that introduce tokens frequently become tied into tokenomics models prior to determining the product-market fit and are thereafter unable to pivot flexibly, according to Rosen.

The goal of layer-2 tokens, according to “DeFi Dad,” a partner at the digital asset investment firm Fourth Revolution Capital, is to provide decentralised governance over layer-2 networks.

He gave the example of how zkSync token holders would be able to serve as stakers when the Zero-Knowledge Ethereum Virtual Machine was set to launch. He declared, “Layer-2 tokens are essential for constructing the decentralised future.

DeFi Dad believes that if users are prepared to give up decentralisation and censorship resistance in the short term, a layer-2 network without any ambitions to create a native token may succeed.

According to him, Base might be a viable network for cryptocurrency transactions. Never the less, Base will be a layer-2 that makes compromises (at least for the foreseeable future). Users of DeFi have a tendency to put off focusing on security and censorship resistance until they are very necessary.

In light of this, Rosen stated that many decentralised projects with sizable developer and user communities will continue to adopt token structures; however, these projects will launch in the future. “When the networks themselves are more developed and have discovered product-market fit, a project may offer a token.”

Patrick Huston
Patrick Huston
As a senior editor, Patrick is a professional who is in charge of putting out business news. As a senior editor, Patrick is likely to be in charge of the duties of junior editors and writers, make sure the content is correct and high-quality, and work with other departments to make sure the business news is published on time. Patrick knows a lot about business and the latest market trends. He uses this knowledge to choose and edit stories that are both interesting and useful to readers. He also works with reporters and analysts to come up with insightful pieces that help readers keep up with the latest business news. Patrick is a very important part of keeping the public informed and interested in important business issues. He is passionate about journalism and strives for excellence.

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