Original author: Loki
原文来源：BeWater Community
Based on the ideas of industrial development, this paper discusses the potential bottlenecks and future directions in the current L1 and L2 ecological construction process.
Let's Dive Deep into the Water🌊
1️⃣ Eternal Driver: Asset Issuance
Recently, I saw a very interesting concept - [land salinization of the public chain] to reclaim a large amount of land (L2) but not plant saplings (Dapp). If the public chain is compared to the land, the ecosystem is equivalent to the industry on the land, and then a "financial subject" can be abstracted. From this perspective, the system revenue (or distributable value) of ETH (or other public chains) can also be divided into three parts:
（1）直接收入/税收（Gas fee）
(2) Fiscal deficit (block reward)
(3) Non-tax revenue, mainly land finance (asset issuance)
According to Tokenterminal data, the current annualized fee (corresponding to taxes) of ETH is about $6.9 billion, not the tax revenue part:
(1) In May 2020 (before the DeFi Summer), the total market capitalization of ERC20 tokens was close to 100% of the market capitalization of ETH, about $100 billion, and the current total market capitalization is $449 billion, which is 103% of the total market capitalization of ETH.
(2) The total market capitalization of DeFi tokens is $115.3 billion, which is about 26% of the market value of ETH.
(3) The total amount of Top10 L2 FDV is 97.3 billion US dollars (including 30 billion+ circulating market capitalization), which is about 22% of the market value of ETH.
Data source: Coingecko
The market capitalization of ERC20 tokens, DeFi tokens, and Top10L2 is 65x, 16x, and 14x of the annualized fees, respectively, so so far, the driving force of the ETH ecosystem and even the entire Crypto is not large-scale application, but asset creation/asset issuance. The development of ETH is like this, from large-scale ICOs, to DeFi Summer, NFT Summer, to L2, and now to Restaking. The same is true for non-ETH ecosystems, RWA, Meme, Socialfi, and inscriptions all revolve around asset issuance, the difference is only [what assets are issued?] and [in what way are assets issued?]
2️⃣ ETH ecological construction from the perspective of land finance
Land finance stems from the financial shortfall of local governments caused by tax reform. It is undeniable that land finance has played a positive role in economic growth for a long time, completing the initial capital accumulation and urbanization process. Under the simplified model, land-related revenues become government revenue, which is then used for investment, transfer payments (including salaries for public health and education), and further leverages consumption and employment, while the rise in the [imaginary value] of housing prices fixes the value of the additional issuance, and everyone gains wealth (static) or income (dynamic).
The ecological development of the public chain is somewhat similar, the initial ICO is more like irregular urbanization, while DeFi Summer, Gamefi, and NFT are more like planned urbanization, while the competitive L1 and L2 are more like alleviating demand by building new districts one after another after the carrying capacity of the main urban area is saturated.
The advantage of this process is that it can continue to create new assets, especially when building new areas, not only housing needs to be built, but also supporting commerce, transportation, medical care, and schools, bringing a large-scale investment boom, which is reflected in the public chain ecology is to continuously issue new protocols and new assets, and these new assets will accelerate the prosperity of the ecology in the bull market.
If we compare Curve to a community, we will find that not only can housing be sold, but also properties, parking spaces, bottom merchants, and even kiosks at the door are securitized as assets (issued and listed). This approach is controversial, with proponents arguing that it is a reflection of a prosperous ecology and an efficient division of labor, while opponents arguing that Goose City's taxes have been received for 90 years.
Source: Mr. Block
3️⃣ Misuse of land finance leads to salinization problems
2022 was an inflection point for the development of competitive L1 and L2, against the backdrop of a 62.3-fold increase in total monthly ETH gas usage from January 2017 to November 2021. Therefore, competitive L1 and L2 essentially undertake the spillover demand of ETH. Similarly, from the perspective of land finance, the main urban area is unable to undertake the overflow of investment and residential demand, and the construction of satellite cities and new districts has begun to appear, and the land transfer funds captured in the new areas can be used for infrastructure construction, and the economic cycle has started again.
Source：Glassnode
But the cycle is not endless. The first problem is that demand spillover no longer exists after the market turns bearish in 2022. The second problem is that you can't recreate too many wheels, schools in urban areas can go to the suburbs to open points, and DeFi and Infra protocols on the ETH main chain can also be migrated to other L1 and L2. Therefore, we can see that many L2s have the phenomenon of salinization, and the essence of this phenomenon is that most of the demand for ETH is for [asset issuance], and L2 that does not have the ability to issue assets has natural defects.
One of the most intuitive examples is that the only public chains with truly meaningful and successful meme tokens (market capitalization, duration, community popularity) are ETH, BTC and Solana, and the current market capitalization of the more well-known AIdoge on L2 is only $120 million.
In addition, this ecological development process around asset creation has also derived some interesting models.
The first is the rise of Airdrop Hunter. Analogous to land finance, the method of to C airdrop is somewhat like [monetization shantytown reform], first sell land to obtain development funds to build infrastructure, and issue rewards to early residents (users), whose activities and residence attract more operators, and the prosperity of production and life will make the land more valuable. Therefore, we can see that the incentives of the public chain are becoming more and more generous, and there are also spoilers such as zkfair, Blast, and Manta, but this is also a state of gradual involution, and the sustainability of the effect of short-term incentives is becoming worse and worse, and more ruthless income cultivators are beginning to appear.
The second is the emergence of developer incentives. Analogous to land finance, the airdrop to B is more like industrial policy. The government will provide a series of preferential policies for new industrial parks, such as almost free land, low-interest loans, preferential treatment for administrative affairs, etc., the only requirement is that the enterprise needs to contribute enough tax revenue to start at a certain point in time. In the Crypto industry, the public chain can provide a series of services such as investment, incubation, market cooperation, and token incentives, but the protocol needs to contribute TVL, the number of users, and the number of transactions to the public chain. There are many typical cases, and some public chains will even set up a separate entity (such as Near's Proximity Labs) to promote the development of the ecosystem.
However, it is obvious that whether it is To C or To B, the output brought by subsidies will not be able to cover the cost for a long time, bringing some problems: 1) subsidy-oriented programming, such as the serious homogeneity of projects on Blast, 2) the number of users drops sharply after the incentive is issued, and it becomes a "ghost chain". This problem is also prevalent in industrial policy, and a friend who recently works for an electronic component unicorn told me that they have signed industrial cooperation terms with many local governments in the past few years, and have obtained a lot of land at a low price, but now the company does not have enough resources to expand production, and it is difficult to meet the tax/employment targets to be fulfilled in the next few years.
4️⃣ Find fertile ground
One of Munger's investment principles is [fishing where there are fish], in the crypto world, fish means asset creation (or issuance) ability, and only a large ecology or new asset creation ability will have big opportunities.
The Bitcoin ecosystem is the biggest and only full-track opportunity at the moment. The emergence and development of the inscription is the Bitcoin version of the "Renaissance", art does not bring direct productivity improvement, and the same is true of the inscription, but it can bring about a change in the way it is issued, and it can bring Bitcoin back to the center of Crypto attention and unite community consensus and participants. The current Bitcoin ecosystem is just like Western Europe hundreds of years ago, Bitcoin L2 represented by Merlin, Bitlayer, BSquare, RGB++, and asset-heavy DeFi represented by BitSmiley are about to launch an industrial revolution that will transform productivity.
ETH's growth may be slower in this cycle, but that doesn't change the fact that it's still on the right path. While it doesn't make sense to recreate DEXs, animal avatars, or P2E mini-games, there are still some structural opportunities that are a bit like the "new infrastructure" in the traditional world, with the first definitive opportunity being Restaking. We've talked a lot about Restaking, but LRD is just the beginning, and there are still a range of unmet needs in its downstream and derivative services space.
The second sub-track worth paying attention to is ZK hardware acceleration. The next 1-2 years are likely to be a large-scale explosion of ZK, but most projects in the actual business need to limit the generation of ZK proofs to a few seconds and minutes, and it is almost impossible to achieve it under the current situation if the CPU is completely used for computing, and the way to accelerate the generation of ZK proofs through high-performance hardware is currently the first choice.
The importance of hardware acceleration to ZK is equivalent to the importance of oracles to DeFi, and it is the most urgent and just-needed infrastructure in the ZK track, and the probability of tens of billions of projects is very high. We've seen a lot of projects moving forward so far.
Source: Coinbase Ventures
Vitalik also pointed out at this year's Hong Kong Web3 Festival that ZK-SNARK proof generation is inefficient and requires the use of hardware-accelerated proof generation.
A typical representative is Cysic (@Cysic_xyz), which will serve as the first ZK proof generation and verification layer, providing real-time proof solutions for large-scale ZK applications from both hardware and computing power network (which are also the two core requirements of ZK hardware acceleration).
Source：Cysic
In addition, we can see that some other ecosystems also show differentiated ecological structures, such as Solana's DePin and Meme ecosystems, Near's AI Memeization and DA narratives, and StarkNet's game ecosystem activity.
The last topic to watch out for is the improvement of asset efficiency and the construction of a liquidity layer (or asset reuse). When MakerDAO introduces a large number of RWA and Blast in 2023, the seeds of the liquidity layer have been planted.
At present, there are only three major types of assets in the true sense: BTC, ETH, and Stablecoins. From a broad perspective, Restaking has built the prototype of ETH's liquidity layer, and Ethena has also drawn a blueprint for the liquidity layer of stablecoins, but the largest asset, BTC, is at an earlier stage, and recently this trend has become more obvious, with projects such as Lorenzo, StakeStone, and Solv making some new progress. In particular, the upcoming launch of Babylon will have the potential to completely change the status quo of BTC's "low interest rate", bringing on-chain demand-side benefits to BTC for the first time, and on the basis of Lorenzo and other potential competitors, it will provide the possibility to release the potential of asset use, compared with ETH and Stablecoin, BTC restaking and liquidity layer construction have greater non-consensus opportunities.
Source：Babylon