Layer 2 networks continue to gain momentum as the Ethereum ecosystem advances. 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, a 30% increase in activity since October 2022.
Additionally, the Polygon ecosystem recently announced the release of its Zero-Knowledge Ethereum Virtual Machine beta. As a result, Polygon’s native token, Polygon (MATIC), maintains a bullish narrative.
While notable, some believe that Layer 2 networks offering token incentive models may soon become obsolete. For example, Jesse Pollak, head of protocols and a senior contributor to Base 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 launched Layer 2 Ethereum network. . He 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 in recent years where tokens have been used as an incentive mechanism with a lack of a suitable product for the underlying chain. Tokens have also resulted in dire or risky situations in the past.”
According to Pollak, 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 user-friendly for developers to build applications and distribute them to real human beings,” he said.
Shift the focus from token models to the user experience
Focusing on ease of use and distribution are important points, as Pollak noted that many of today’s decentralized applications have been used solely for cryptocurrency trading. “Trade is not enough to make cryptocurrencies the future of the economy. At Base, we are making it easy for developers to build useful apps that people actually want to use,” he added.
Pollak explained that Base is investing in core infrastructure, such as Ethereum Enhancement Proposal 4844, which will make the network secure and low cost compared to other Layer 2 networks. 2. Our goal is to tear that down,” he said.
While Base launched its testnet in February, Pollak shared that Base’s mainnet launch will take place in the coming months. Also, while there are no plans for Base to offer a native token, several ecosystem participants have already expressed interest in building on Base.
Recent: Next Stop Shanghai: Ethereum’s Latest Milestone Approaches
For example, Konstantin Richter, COO and founder of Blockdaemon, a blockchain infrastructure provider, told Cointelegraph at ETHDenver 2023 that Blockdaemon will serve as the official infrastructure partner for Base. Richter shared that he believes that Base should not have a token associated with the network, as he believes that Proof of Stake (PoS) is a completely broken system. “Blockdaemon runs more PoS nodes than anyone, 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 to allow network participants to run nodes while possibly earning a flat fee in US dollars. “This may result in a different type of PoS mechanism, possibly around compromise of compute rather than a staked percentage of tokens that may not serve the network well,” she said. Richter added that such a model could result in a better 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. Now we focus on ease of functionality and low fees.”
However, it remains questionable how exactly Base will attract users and developers to the platform without a token incentive model. Given Coinbase’s broad understanding of institutions and decentralized 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 is remarkable that a public Fortune 500 company would commit to transacting transparently on Base.”
While it is too early to predict future results, it is important to note that Arbitrum, another Ethereum layer 2 network, also works without a native token. This certainly has not stopped users from interacting with the Arbitrum network. According to data from the analytics website. L2Beat.comArbitrum has a total value locked up of about $3.35 billion, representing about 54% of the market share in Ethereum.
However, rumors have been circulating that Arbitrum may initiate 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 prior to launching a token. Gil Rosen, president of the Stanford Blockchain Accelerator, told Cointelegraph at ETHDenver 2023 that finding a product that is right for the market is about ensuring projects acquire the right customers whose value is cumulative to the ecosystem, which is often not the case. with the tokens. “Early token-launching projects often get locked into tokenomics models before finding the right product for the market and then fail to pivot dynamically,” 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 ensuring decentralized control over Layer 2 networks.
For example, he explained that the upcoming release of zkSync’s Zero-Knowledge Ethereum virtual machine would use a PoS mechanism to allow zkSync token holders to act as takers. “Layer 2 tokens are necessary to build the decentralized future,” he said.
Thank you to our community and the entire ecosystem for an energizing ETHDenver 2023. Throughout the rest of the week, we’ll be sharing ETHDenver’s highlights on scaling ZK and building a future-proof zkEVM. First topic, hyperscalability.
1/7 pic.twitter.com/qOVSQ475a2
—zkSync ∎ (@zksync) March 8, 2023
DeFi Dad believes that a Layer 2 network with no plans to implement a native token could succeed if users are willing to sacrifice decentralization and censorship resistance in the short term.
Recent: Banks with crypto services require new anti-money laundering capabilities
He said: “Base could be successful as a network for transacting with a user’s crypto. Don’t be mistaken though; The base will be a layer 2 (at least for the foreseeable future) that makes allowances. As DeFi users, we tend to de-prioritize security and censorship resistance until we really need it.”
With this point in mind, Rosen mentioned that he believes the token models will remain for many decentralized projects with large developer and user communities, but will be released later. “A project can launch a token when the networks themselves are more mature and have found the product to be a good fit for the market.”
