L1s are Doomed Unless…

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by Grace Rachmany

November 22, 2022

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With Ethereum now functionally a censored network, many have been asking what L1 they should build on. With that in mind (plus an invitation from the magical Catalyst4Climate group), I attended the two-day Cardano Summit in Lausanne, and asked everyone I could the key question: “Does it work?”

Cardano Community: Less Shill, More Goodwill

Cardano has taken a slower route towards development of its solution, with more than 160 academic papers and the establishment of a line of studies at Edinburgh University to create and maintain a Decentralization Index. They eschew the philosophy of “move fast and break things” for a more methodical and reliable approach to building software.

The community surrounding Cardano reflects this philosophy. The dress was business casual rather than cypherpunk haphazard. Shilling was at a minimum, with Impact-related projects having equal weight with DeFi and technical sessions. The Cardano crowd is intentional about not speaking about other protocols as well as avoiding discussions of the ADA price. In short, compared to other crypto communities, the Cardano crowd came off as a group of mature professionals rather than revolutionaries or slick marketers.

On the one hand, the more mature feel was welcome, reflected in several serious projects with large bodies such as the UN and government institutions. On the downside, it seemed there were fewer truly cutting edge innovations. While Cardano hosts a number of delightful NFT projects, the more practical teams took the floor most often. Self Sovereign Identity projects were abundant, which gives Cardano a huge boost compared to crypto projects who assert that NFTs will somehow suffice as Verifiable Credentials. Live demos included using DID and VC for swapping business contacts and a working PoS system based on a Raspberry Pi.

What, No Elephant?

Remarkably, in the middle of the coldest crypto winter, there was no mention of any of the difficulties that have befallen the rest of the market. With Ethereum becoming a censored network, DAOs under legal scrutiny, Solana failing to live up to its promises, and centralized exchanges crashing the market, now is the perfect time to be speaking about lessons learned.

Yet, there was almost complete silence about the news in the industry and how to avoid problems such as:

  • NFTs becoming “mutable” by OpenSea.
  • Majority of Ethereum blocks censoring private transactions.
  • Prosecution of DAOs under US regulations.
  • Under-collateralization of assets on exchanges.
  • Implications of the recent ruling against LBRY, declaring their tokens to be securities.

Of course, in the decentralized world, these are sticky problems. If you aren’t a centralized entity, it’s easy to argue that it’s not up to you who opens an NFT marketplace, where and how the validators choose to manage their operations, or how the regulators treat the projects built on your Layer 1.

Whether it’s up to you or not, however, these are real threats. Ignoring them won’t make them go away.

Regulation and Validators

Like every blockchain, Cardano does have a group working with regulators. They do have consortia of their Stake Pool Operators, and Delegators can stake on the nodes they consider most reliable. Unfortunately, this seems inadequate.

While 60% of the nodes in Cardano are on bare metal, 90% of the Relayers are hosted on the major cloud provider. Plus, it’s not clear what “bare metal” means in terms of jurisdiction. If someone has a fully-owned bare metal rack in their basement, and the government of their country says you can’t run Tornado Cash through your node, what do you do? We know the answer to that one.

Today, every L1 should be thinking very carefully about the companies hosting their nodes, as well as the jurisdictions where the servers are located.

Which brings us to regulation. It should be obvious at this point that the regulatory bodies are not friends of private blockchains. It should also be obvious why that is. Nation-states have no interest in a bunch of technologists offering an alternative to the nation’s sovereign monetary system.

You Are Not an Operating System

Cardano, like the other Layer 1s, sees itself as a kind of operating system. As such, L1s don’t govern what is built on them. They don’t decide on the direction of the community, how to prioritize traffic, or what projects to encourage on the platform. Except for the fact that, over time, it’s inevitable that L1s end up prioritizing DeFi because that’s where the money is. Also, individuals inevitably end up complying with laws, no matter how unjust they are, because the consequences of civil disobedience are too high for most people.

  • Why stand up for LBRY or Ooki? You’ve got your own problems and the regulators haven’t come after you yet.
  • Why not let your nodes live on Alchemy or Infura? You’ll just annoy your community and limit who can be a host.
  • Why speak out about centralized exchanges or disappearing NFTs on OpenSea? Where else will you get that volume of transaction fees?

All of these are examples of the trap of decentralization, free markets, and an industry based on individual game theory.

For any individual in the game, it’s easiest to host a node or relayer on Alchemy or Google. For any individual in the game, it’s easiest to manage their onboarding and offboarding in whatever legitimate or illegitimate way that works for them. For any individual project it’s easiest to call their token a “utility” or “governance” token based on whatever is legal at any given moment. For any individual in the game, it’s easiest to use the popular tools even if they aren’t as decentralized.

For the industry as a whole, these individual game theoretic choices lead to illegalization, censorship, and CBDCs. These individual choices are leading to a bunch of useless L1s and Bitcoin as the last chain standing.

The Bitcoin Maxis may have been right all along, but even the Bitcoin Maxis are hurting these days. The inability of L1s to deliver on their promises damages everyone.

Decentralized Governance: Can It Get Better

Governance is how individuals do things together. From that perspective, DAOs have been another huge failing of the Web3 industry. Hard Forks and Rage Quits are the opposite of democracy. Rather than a Web3 movement, what we have is a lot of noise and competition.

In the next few blogs, I’ll be exploring how Layer 1s and the industry as a whole might approach some of these problems. I mean. Hopefully. Hopefully, I’ll have some practical and constructive ideas over the next few weeks. At this point, I have a lot more questions than answers, and I have a lot more faith than evidence that we as an industry can resolve these issues.

To be perfectly honest, I’m about as happy as a Bitcoin Maxi that I’ve been right all along about these things. Right but Rekt is not a good look. We can do better.