Ethereum Layer 2 solutions may be less focused on per-token incentives in the future

Ethereum Layer 2 solutions may be less focused on per-token incentives in the future

Tier 2 networks continue to gain traction as the Ethereum ecosystem evolves. For example, data from analytics provider Token Terminal showed that Polygon’s layer 2 scaling solution had 313,457 daily active users as of January 17, 2023 – a 30% increase in activity from October 2022.

In addition, the Polygon ecosystem recently announced the beta launch of its Ethereum Zero-Knowledge Virtual Machine. Therefore, Polygon’s native signal, Polygon (MATIC), maintains a bullish narrative.

Although significant, some believe that Tier 2 networks that offer signaling incentive models may soon become obsolete. For example, Jesse Pollak – chief protocol officer and Base contributor to the US cryptocurrency exchange Coinbase – told Cointelegraph during ETHDenver 2023 that there are currently no plans to attach a token to Base, the Ethereum layer 2 network recently launched by Coinbase. He said :

“We think of tokens as a powerful incentive tool that can change the behavior of users and developers. At the same time, we have seen cases in recent years where tokens have been used as an incentive mechanism where the product is not identical to the underlying blockchain. Symptoms have also led to harmful or risky situations in the past. »

According to Pollak, Base is a Tier 2 solution that allows developers to easily build applications without the need for an incentive mechanism. “Our product will be self-contained. It will be very easy for developers to create apps and distribute them to real people. “, he declared.

Moving from voucher models to user experience

Focusing on ease of use and distribution are important points, as Pollak pointed out that many decentralized applications today were used only to trade cryptocurrencies. “Trade is not enough to make cryptocurrencies the future of the economy. At Base, we make it easy for developers to create useful apps that people want to use. “, he said.

Mr. Pollak explained that Base invests in basic infrastructure, such as the Ethereum improvement proposal 4844, which will make the network secure and cheap compared to other layer 2 networks. 10 to 15 cents to make transactions on Layer 2 networks. Our goal is to reduce this cost. “, he declared.

Although Base launched its Testnet in February, Mr Pollak indicated that the launch of the Base Mainnet would take place in the coming months. Additionally, while Base has no plans to offer a native token, some ecosystem participants have already expressed interest in Base development.

For example, Konstantin Richter, CEO and Founder of Blockdaemon – a blockchain infrastructure provider – told Cointelegraph during ETHDenver 2023 that Blockdaemon will serve as an official infrastructure partner for Base. Richter said he thinks Base should not be involved in the network, as he thinks Proof-of-Stake (PoS) is a completely broken system. “Blockdaemon runs more PoS nodes than anyone else, and I can tell you that Proof of Stake only works when token prices rise. “, he declared.

Mr. Richter also explained that Blockdaemon plans to use the Base network to learn how to allow participants to operate a network of nodes, and earn a fixed fee in US dollars. “This could lead to a different kind of POS mechanism, perhaps around calculating a commitment rather than a percentage of staked tokens which may not serve the network well. “, he declared. Mr. Richter also said that such a model could improve the user experience. He said:

“This could be the biggest paradigm shift within the cryptocurrency ecosystem since the invention of PoS. We are moving away from incentive models that reward users for using a product. We are now focusing on ease of use and low fees. »

However, one can always wonder how Base will attract users and developers to the platform without token incentives. Because of Coinbase’s broad understanding of institutions and decentralized finance (DeFi), Richter doesn’t think this should be a problem: “I prefer working with Base because Coinbase has a good understanding of institutions and decentralized finance. It is noteworthy that a public Fortune 500 company is committed to making transactions transparent on Base. »

Although it is too early to predict future results, it is important to note that Arbitrum, another Ethereum layer 2 network, also operates without a native token. This certainly did not stop users from interacting with the Arbitrum network. According to data from analytics website, Arbitrum has a total locked-in value of about $3.35 billion, which is about 54% of Ethereum’s market share.

However, there are rumors that Arbitrum may start to airdrop tokens in the future. While this may or may not be the case, it demonstrates Arbitrum’s ability to determine the suitability of the product for the market before sending a signal. Gil Rosen, President of the Stanford Blockchain Accelerator, told Cointelegraph at ETHDenver 2023 that ensuring that projects get product-to-market fit is the right customers whose value is profitable to the ecosystem, which tokens often are not. “First-to-signal projects are often locked into taxonomic models before finding the right product for the market, and are then unable to pivot dynamically. said Rosen.

DeFi Dad, a partner at digital asset investment firm Fourth Revolution Capital, told Cointelegraph that he believes the main driver for Layer 2 tokens is to provide decentralized control over Layer 2 networks.

For example, he explained that the upcoming launch of Ethereum’s Zero-Knowledge Virtual Machine will use a PoS mechanism to allow holders of zkSync tokens to act as an aggregator. “Building the decentralized future requires layer 2 tokens. “, he declared.

Thank you to our community and the entire ecosystem for an energetic ETHDenver 2023. For the rest of the week, we’ll be sharing ETHDenver highlights on scaling ZK and building a future-proof zkEVM. The first topic, hyperscalability. 1/7 zkSync ∎ (@zksync) March 8, 2023

DeFi Dad thinks that a Layer 2 network with no plans to implement a native token could be successful, if users are willing to sacrifice decentralization and censorship resistance in the short term.

Also read: Crypto banks must have anti-money laundering measures

He said, “Coin could be successful as a transaction network with user cryptocurrencies. However, make no mistake, Base will be a Layer 2 (at least for the foreseeable future) that compromises. As DeFi users, we tend to ignore security and censorship resistance until we really need it. »

With that point in mind, Rosen mentioned that he thinks token models will stick with many decentralized projects with large developer and user communities, but those will launch later. “A project can send a signal when the networks themselves are more mature and suitable for the product market. “, he said.

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