In this post, Kyle Samani (Managing Partner at Multicoin Capital) offers a persuasive argument for how value will be accrued at the protocol layer for both layer 1 and layer 2 blockchain systems. In sum, Kyle argues that layer 1's greatest economic value will be derived from securing a chain against a 51% attack. He uses a chain's security budget (SB), which takes into account a chain's aggregate network value that accounts for inflation and transaction costs, in coming up with a metric to judge how costly it would be for an adversary to launch a 51% attack. He notes that "security is primarily a function of network value because there is unlikely to be high inflation in the largest blockchain networks". He goes on to make the economic argument for layer 2 protocols which he argues will capture value if the blockchain stores some sort of external and valuable state. Although this is a pretty abstract concept, he uses practical examples for how this works in layer 2 protocols like 0x and Augur. Layer 2 assets ultimately build network effects through the value of the state they contain.
Kyle assumes a strong correlation between a chain's inherent network security and network effects (adoption). Over the long-term, he argues that value will consolidate around chains that can ensure some measure of price stability (> 5% annual inflation in the long run). For blockchains that are already running in the wild (Ethereum, Bitcoin), what events would have to occur for price to stabilize, when the markets are already known to be so volatile? Historically, even post 51% attack events, prices have gone up and users still continue to store their funds with these protocols. What are some contrarian perspectives to this argument?
Kyle argues that state stored by layer 2 protocols must have demonstrable and measurable market value for them to capture value and remain economically viable services in the long-term. He uses Augur as the more interesting example of a protocol that stores valuables state (1. capital is locked into Augur contracts and 2. decentralized oracles call data which runs the global censorship-resistant prediction market). What are some other examples of valuable state in layer 2 projects?
Kyle's post brings up a host of interesting discussion points. I've only brought up a couple which come to mind. What are your thoughts?
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