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Ethereum Layer-2 Solutions May Focus Less on Token Incentives in the Future

BusinessCryptoEthereum Layer-2 Solutions May Focus Less on Token Incentives in the Future
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As the Ethereum ecosystem progresses, the Layer-2 network continues to gain momentum. For example, data from analytics provider Token Terminal found that layer-2 scaling solution Polygon had 313,457 daily active users As of January 17, 2023 – 30% increase in activity since October 2022.

In addition, recently the Polygon ecosystem announced the launch of its beta version Zero-Knowledge Ethereum Virtual Machine. As a result, the parent token of the polygon, the polygon (diplomatic), keeps a fast narrative.

While notable, some believe that layer-2 networks offering a token incentive model may soon become obsolete. For example, Jesse Pollack – head of protocol at American crypto exchange Coinbase and Base core contributor – told Cointelegraph. ETHDenver 2023 that currently has no plans to link Base, a token with Ethereum Layer-2 network has been launched recently by Coinbase. They said:

“We think of tokens as a powerful incentive tool that can change user and developer behavior. At the same time, we have seen situations over the past few years where the incentive mechanism coupled with a lack of a suitable product for the underlying chain Tokens have also been used as nefarious or risky situations in the past.

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According to Pollack, Base is a layer-2 solution that allows developers to easily build applications without the need for an incentive mechanism. “Our product will stand on its own. It will be very easy for developers to use to build applications and distribute them to real humans,” he said.

Shifting focus from token model to user experience

The focus on ease of use and distribution are key points, as Pollack pointed out that many of today’s decentralized applications are only used for trading cryptocurrencies. “Business is not enough to make cryptocurrency the future of the economy. At the base, we are making it easier for developers to build useful applications that people actually want to use,” he said.

Pollack explained that Base is investing in core infrastructure, such as Ethereum Improvement Proposal 4844, which will make the network secure and low-cost compared to other Layer-2 networks. “It costs around 10-15 cents to do a transaction on Layer-2. Our goal is to bring it down.

While Base launched its testnet in February, Pollack shared that the Base mainnet launch will take place in the coming months. Furthermore, while there are no plans for Base to have a native token offering, several ecosystem participants have already expressed interest in building on Base.

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For example, Konstantin Richter, chief operating officer and founder of Blockdaemon — a blockchain infrastructure provider — told Cointelegraph at ETHDenver 2023 that Blockdaemon will serve as an official infrastructure partner for Base. Richter shared that he believes that Base should not have a token attached to the network Proof-of-Stake (PoS) Totally broken system. “Blockdaemon runs more PoS nodes than anyone else, and I can tell you that proof-of-stake only works when token prices go up,” he said.

Richter further explained that Blockdaemon plans to use the base network to determine how network participants are allowed to run nodes, while potentially earning a fixed USD fee. “This could result in a different type of PoS mechanism, one that is probably based around calculated commitment, rather than a percentage of tokens that may not serve the network well,” he added. Richter said that such a model could result in a better user experience. They 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 the product. We are now focusing on ease of functionality and low fees. are focusing on.

Yet it remains questionable how Base will attract users and developers to the platform without a token incentive model. Given Coinbase’s vast understanding of institutions and Decentralized Finance (DeFi)Richter doesn’t think this should be an issue: “I love working with Base given Coinbase’s understanding of institutions and DeFi. It is noteworthy that a public Fortune 500 company is so committed to transparently conducting transactions on Aadhaar.”

While it is too early to predict future outcomes, it is important to note that Mediation, another Ethereum layer-2 network, also operates without a native token. This of course does not prevent users from interacting with the Arbitrum network. According to the data of the analytics website L2Beat.comThe total value of Arbitrum is around $3.35 billion, which makes it around 54% market share on Ethereum.

However, rumors are circulating that Arbitrum Might start a token airdrop in the future, While this may or may not be the case, it demonstrates Arbitrum’s ability to determine product-market fit before launching a token. Gil Rosen, president of the Stanford Blockchain Accelerator, told Cointelegraph at ETHDenver 2023 that product-market fit is about ensuring projects find the right customers whose value is compatible with the ecosystem, which is often tokenization. Does not happen in the case of “Early-stage projects that launch tokens are often locked into the token model before product-market fit and then are unable to dynamically pivot,” Rosen said.

“DeFi Dad”, a partner at digital asset investment firm Fourth Revolution Capital, told Cointelegraph that he believes the main driver behind layer-2 tokens is to ensure decentralized control over the layer-2 network.

For example, he explained that the upcoming launch zkSync’s The zero-knowledge Ethereum virtual machine will use a PoS mechanism to allow zkSync token holders to act as stakeholders. “Layer-2 tokens are essential to building a decentralized future,” he said.

The DeFi dad believes that a layer-2 network without plans to implement native tokens can be successful if users are willing to sacrifice decentralization and censorship resistance in the short term.

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He added, “Aadhaar could be successful as a network for users to transact with crypto. -Dislikes. As DeFi users, we tend to put off security and censorship resistance until we really need it.

With this point in mind, Rosen noted that he believes the token model will remain for many decentralized projects with large developer and user communities, but these will launch later. “A project can launch a token when the network itself is more mature and the product has market fit.”