Ethereum Layer 2 Tokens
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April 27th, 2022

The Problem with Distribution & Decentralisation of the Node set

Ethereum Layer 2, IMO is the biggest narrative play of 2022, and actions taken today are likely to pay off in the future (2023 onward). L2 will allow Ethereum to scale to the billions of users & cement it as the largest most demanded settlement layer.

There are 4 ‘Token-less’ OG layer 2 Networks on Ethereum: Optimism, Arbitrum, zkSync & StarkNet (Optimism now has a Token-26-4-22)

These have slightly different technologies and implementations, Optimism & Arbitrum: use Optimistic Rollups, zkSync & StarkNet: use ZK Rollup, however they are all Genuine L2 Networks (not sidechains). All derive their security from Ethereum, the most secure and decentralised L1 platform by far. TVL has grown significantly over the year showing clear demand to use Ethereum on layer 2.

source L2beats
source L2beats

The node set for these networks is centralised right now, meaning the layer that writes and orders transactions to the chain is operated by one or a few entities, and for this to decentralise allowing permissionless participation it means community ownership and economic incentives in other words a native Token.

I’ve spent a lot of time thinking about this and this is a topic that gets discussed regularly with my peers, how to best qualify ‘for airdrop’. Others have done threads/articles on this worth checking out

Bankless- How to get ready for Layer 2 Tokens

However, one crucial piece is missing from all which I believe is the best direction for a fair distribution that gives ownership to the most aligned stakeholders within Ethereum.

What I have realised is this is getting gamed (by myself also) and this is why I am Making the case that Beacon chain contract depositors (Pre-Merge Ethereum Validators), are the actors within the space best suited and most likely to employ any L2 tokens for their utility, this cannot be gamed as to become a validator requires real collateral and resources.

Layer 2 Token Utility

ETH the asset’s primary purpose is to secure the Ethereum network, in proof of Stake this is achieved by staking ETH (locking 32 ETH in the Beacon chain contract), Ether serves other functions such as paying for Fees, accounting or preferred collateral. One could argue that these are secondary, for example simply holding ETH benefits from the Network and contributes nothing in return.

Utility of Layer 2 Tokens, from Bankless- Roll up tokens are coming

zkSync: This recent talk with Alex Gluchowski from Matter Labs, the whole thing is worth a watch, he talks on plans for the ‘sequencer to be fully owned by the community’ and ‘with a separate consensus layer secured by proof of stake

StarkNet:

https://starknet.io/faq/decetralization-on-starknet/
https://starknet.io/faq/decetralization-on-starknet/

There will be tokens, and a main utility is to align incentives at the execution layer/node set. Where ETH is primarily for security of the L1, security is still derived from L1 (funds can always be withdrawn from a Rollup), additional security is needed at L2 such as for the ordering of transactions.

The Node set may look different across roll-ups but in all cases, there will be a full node implementation of the L2 network pointing to an ETH1 full node, and some ‘validator/execution’ type node/s with economic incentives (PoS consensus).

Optimism: Update (27/4/22)
Now that the Optimism token is confirmed, it is currently a Governance token focusing on Public goods, however

https://community.optimism.io/docs/protocol/
https://community.optimism.io/docs/protocol/

There is no definitive answer on how OP token plays into this, but this is a good bet, if so, I will create a proposal that some of the remaining 14% go to ETH validators.

Distribution

Distribution is now a massive problem when it comes to community ownership, too many actors are gaming ‘airdrops’ based on our short history, now we have actors who spend a lot of time focusing on ‘airdrops’ as a sector to chase capital gain. The problem is how to get ownership in the hands of genuine community members, who will employ tokens for the intended utility and not simply dump and run.

Public Sale: There will not/should not be a public sale, unless you want 300k CoinList bots owning your network.

I have sat in a Que of over 350k trying to get in, yet only 10k discord members...curious
I have sat in a Que of over 350k trying to get in, yet only 10k discord members...curious

Even Public sales on permissionless DeFi have similar problems,

Contract interaction: UNI was first and was a great way to put into the hands of real community members when it was early excited Ethereum adopters looking to experiment. This is heavily gamed now, because this has now been done any application you use with potential of a Token airdrop will put your address alongside bots and serial airdrop hunters using it for this very reason.

Volume mining: DyDx, introduced a volume mining aspect where volume of trades determines the amount of allocation, this is better, liquidity is useful and this can weed out 1000s addresses under the same owner, but you better believe there are actors with a ton of capital or resources to trade the same 1k to look like a 100mil.

I know someone who claimed on 30 addresses, and NO this person does not participate in Governance.

Community participation: recently, I have seen active participation on Discord as criteria to qualify, Lyra was the first I am aware of, I think this is a good thing to add, but hard to implement as it requires some manual filtering, more so with hyped projects with a lot of attention. Again, this can be gamed, by simply engaging daily with low value content.

I was a recipient of the Element Finance airdrop, because I was active on Discord, because I had technical problems with the UI, so spent decent time on the support channels in search of help. IMO This did not make me deserving of an allocation let alone qualified for governance.

Governance: if Governance is part of a token utility, then it would make sense to allocate to actors with on-chain history of active governance participation. Governance Apathy is a problem in DeFi, even I am guilty of this.

The next problem is what applications to include in a snapshot, there is no way to do this without some discrimination.

Do we include COMP or AAVE, maybe both, then what about CREAM or another application?

Now we must consider are governors over lending protocols the best governors for a layer 2 network?

Types of Market Participant

I’m part of several discord groups, in my circles I can divide into two types of market participant (this is very broad, but I am simply pulling from my experience in peers who are looking at L2 tokens as an opportunity)

The Larger: Investors & or Traders interested in short-long term positions, P&L rules. This is a varied group, some trade in and out of positions short term, others have investments with conviction, yield farmers & Degen’s, but most who fall into this group do not run any type of node.

The Smaller: node operators/validators interested in Testnets and network operations, prefer income, consisting of Devs or network engineers, most run validators on either ETH/Gnosis chain or both.

There is overlap here (I am part of both), both groups are excited about L2 tokens as an opportunity to look out for, both consist of very intelligent people with varying backgrounds and bring different value to the space.

However, hands down most will sell or trade these tokens, and the smaller group that already run nodes, will stake these tokens to enter the ‘validator’ set and have another income source to complement existing ETH validators.

Why Beacon Chain Depositors: Validators

Beacon chain depositors are market actors that have locked their ETH to run Validators and Nodes to secure Ethereum via proof of Stake consensus, this is the fundamental physical infrastructure layer of Ethereum, it would not exist without these actors.

This cannot be gamed! Once deposited into the contract you have committed a non-trivial amount of capital until the merge, you must be confident in the Ethereum communities’ ability to execute its roadmap and be positioned for long term success. You must provide physical infrastructure or pay for it to keep your validator active on the Network, this must be persistent which incurs electricity costs, hardware costs, internet provider costs and time/effort for maintenance, failure to do so will result in loss of capital.

Stakewise, Lido and other such custodial staking as a service/liquid staking platforms do not count, you aren’t servicing the network, somebody else is (by the way, LIDO nodes should be excluded from any token distribution for the sake of decentralisation)

As a Validator you will have:

Proven: aptitude to run node operations and service the network

Proven: long term alignment with Ethereum, especially pre-merge

Proven: Real ‘proof of work’ actual resources and effort is spent to secure the network, and this cannot be Sybil attacked.

Why would this make sense for distribution, for the reasons stated above and to filter short-term actors and mercenary capital.

It’s simple, the majority of Existing Validators are likely to stake tokens for consensus and run nodes on L2.

Majority of non-validators are unlikely to do the same, so to get these tokens into the hands of the suitable actors and filter out non-aligned actors gaming the distribution, Beacon chain depositors is the only metric/eligibility criteria that cannot be gamed and makes sense for the type of network token utility.

I believe, being a Validator (Pre-Merge), will have outsized returns in the long run, if you are long ETH, then you can earn APY without the risk of Rugs in DeFi, Custody risk or trading your ETH away on jpegs.

As on-chain activity becomes more recognised, it will be a sought-after badge of honor.

You might be thinking, oh he just wants tokens and you're damn right, I want an Airdrop, I want it to be valuable, and I want to run a node.

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