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We’ve given you our market thoughts over the last couple of posts. No major change, you can check that out here.
While market insights are critical, we also aim to give our readers industry scoop and insider intel. The dynamics, incentives, and trends occurring at a small scale today are what become the mega trends a few quarters from now.
Today’s post will focus on how you should think about building in crypto. We put on a critical lens so you can decide for yourself, but all the ecosystems we discuss today are workable. Jesse Pollak from Base said it best:
The pie is still too small, and building something onchain imperfectly is better than building nothing at all!
The Big Realizations
Crypto is many things at once. It lives at the intersection of tech, finance, politics, and the broader economy. There are few limits to what you can build. However, there aren’t that many builders. According to Electric Capital’s Developer Report there are only 7,661 full-time developers in the entire crypto industry as of July 2024. There are another ~14,000 part-time developers (which, given crypto’s vibrant gig economy can be counted). For context there are 4.4 million software engineers in the U.S. and an estimated ~26 million worldwide. Of these ~7,600 developers, only a portion of them are founders. If we assume 10% that’s about 760 founder engineers.
The entire crypto industry is being built by less than ten thousand people. That means every single person who builds is an instrumental part of the direction of crypto. Every team of founders, and especially teams that achieve product market fit, are rare. Mindshare, narratives, and general crypto sentiment matter a lot for anything outside of the majors because the crypto community is so small.
What you build, which ecosystem you build in, and who you build with are important.
Ecosystem Considerations
The big debate today is around Ethereum vs. Solana from the perspective of users, traders, investors, and builders. There are tradeoffs to each, some of which we’ll cover here.
Why Not Cover “X” Ecosystem: Although Bitcoin has the highest market cap of any chain, attempts to unlock Bitcoin DeFi haven’t found PMF. The most successful projects have simply tokenized BTC as an ERC-20 token to use as collateral in Ethereum DeFi. The Cosmos ecosystem has interesting tech which has been forked for appchain projects like Hyperliquid, but it’s DeFi ecosystem is small (leading DEX Osmosis has less than $100mm TVL). EVM compatible L1s like Avalanche, BSC, Polygon, and Fantom don’t inherit the security of Ethereum L1, so it would be a special case to choose to build on those rather than L2.
We’ll provide an objective view based on our experience in those two ecosystems.
Ethereum
Ethereum has historically been the main target of attacks publicly due to its market leading position among smart contract chains. In other words, you will always see public criticisms of Ethereum because it is profitable to do so by competing chains.
Last cycle the focus was on excessive gas fees which allowed many competing chains like BNB Chain, Avalanche, Solana, and more to gain funding and mindshare. Over the course of the last two years, Solana and Ethereum L2s have eaten away at the remaining L1 competition. This has reduced the activity on Ethereum mainnet and significantly driven down gas fees. Ethereum has scaled — but not without cost.
In our opinion the Ethereum experience has suffered significantly driven by the proliferation of L2s and liquidity fragmentation across the board. From a dev standpoint, you can no longer bet on Ethereum, you also have to bet on the winning L2(s). If you hook yourself to the wrong L2 ecosystem and they don’t achieve lasting traction in your product vertical you have to consider moving or staying put in a declining ecosystem. In simple terms, the ecosystem you choose to participate in is a critical part of crypto going forward. We believe this is a net negative to the Ethereum ecosystem for a multitude of reasons.
L2s are centralized, and they are incentivized to stay centralized. L2s run like typical corporate organizations and they earn profits from their sequencers. Decentralized sequencers would eat into their profits, which creates a disincentive. As much as we’d like to believe in a world where people are purely in it for the tech and would not let profits get in the way of progress, we believe if L2s wanted to decentralize they would have done so already.
L2s are highly territorial and competitive with each other at the expense of app developers.
The L2 dynamic requires builders to deploy on multiple L2s to reach users (which has maintenance costs and requires additional dev time). Users have to be comfortable moving between L2s, or the L2s need to have a sufficient built-in userbase.
Some of this can be resolved with better cross-chain infrastructure, but it adds a significant degree of complexity compared to deploying on one chain and focusing on the things that matter: your product.
It’s not all bad though. Leading L2s are cheap, fast, and good tech. They can adapt and change more quickly than Ethereum mainnet, and are incentivized to do so by the existence of a competitive marketplace. Solving liquidity fragmentation is a multi-billion dollar opportunity and we’re hopeful a crypto autist will inevitably crack the code from both an incentives and tech standpoint. The current approach requires that one or two L2s win the majority of capital and users, which results in liquidity being sufficient to meet user needs. That means betting on the winner is key!
The leading L2s are Base, Arbitrum, and to a lesser extent Blast. Each of these ecosystems have some unique benefits and tradeoffs for building an onchain business.
L2s have taken in VC money and have multi-billion dollar token valuations, so they’re not going away any time soon. It’s also unlikely that Ethereum pivots its roadmap to refocus on Ethereum L1. This all means application UX, wallet UX and interoperability are going to be the primary levers Ethereum has to pull to remain long-term competitive.
There are ~70 Ethereum L2s now, and only a small handful are even pretending to be decentralized. (There’s a privileged proposer server run by the company and if this fails, users cannot withdraw except Arbitrum and Optimism).
Solana
Solana has been home to this year’s best (and worst - depending on which side of the trade you were on) performing “asset class” — memecoins. With the number of “make it” plays the ecosystem has presented, it’s no wonder the onchain trading population of crypto has been drawn in.
Sidenote: Our near-term view is that Solana microcap memecoin traders are likely to underperform due to the dispersion across coins and bearish sentiment on majors. This has already been taking place over the last few weeks.
From a DeFi ecosystem perspective Solana is still far behind Ethereum. Swapping tokens via a normal browser wallet is a poor user experience during times of high load, leading to a proliferation of trading platforms which are expensive and potentially veryinsecure. Solana has ~$4 billion in TVL compared to Ethereum’s $50+ billion. ~80% of Solana’s TVL consists of stablecoins.
There are two benefits to Solana we have enjoyed:
All capital and users are on a single chain. You just have to bridge to Solana and you can access every protocol across the entire ecosystem without further friction.
Phantom wallet is a faster and simpler experience than Metamask
The extent to which Solana can be considered “cheaper” is vastly overstated, however. Between fees, slippage and MEV, users are significantly worse off trading onchain on Solana than an Ethereum L2. Once you factor in the near-requirement to have Telegram trading bots when trading small cap memecoins, the cost can be up to 5% of transaction value roundtrip to get a trade through for an unsophisticated user. This is no better than paying high gas fees in 2021 Ethereum era. The fees are simply hidden better, passed off to the protocols that have monopolized the activity rather than the underlying chain.
From a developer perspective, we don’t have as much direct experience on Solana beyond integrating Jupiter into Memecoin Monitor. Ethereum developers we have spoken to find the dev experience on Solana to be worse than Ethereum, but we’re cognizant of the natural bias there. If you’re a Solana developer and you’d like to share your thoughts on the developer experience let us know (you can comment here or DM us on Twitter if you prefer to stay private).
So Where Should You Focus?
The answer is.. it depends! Ethereum is the obvious winner for DeFi. For everything else, you’re making a bet. The Solana ecosystem has developed a strong community, particularly for the more degen side of crypto. This community leans more mercenary (will go wherever they can speculate to make money) but Solana has enough of a UX advantage for certain use cases that we believe they’ll retain users unless SOL price completely craters.
For DeFi, Ethereum mainnet and Arbitrum offer the most liquidity. For memecoins, Solana and Base offer the most activity. Blast offers some economic advantages (native yield and gas rebates) so if you have a built-in userbase it could be a better starting point. However, we are not fans of the concept of Gold as it creates a number of unwanted behaviors that distract from real use cases and attracts a mercenary crowd (fine if you’re creating a pure farming app).
The “who” is as important as the “what” if you’re building an onchain product. Anticipating an influx of Coinbase users to Base is a reasonable bet (“normies”), as is anticipating continued CT mind share on Solana.
Ethereum mainnet still has the largest amount of capital on-chain by far, so if your focus is on HNWI or institutions and you are not concerned with higher operating costs, it continues to be a good place to build.
Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are opinions from an anonymous group of cartoon animals with Wall Street and Software backgrounds.
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Oh no, there is no SOLANA devs around ? :')
Anyway, the EVM dispersion is really boring as you end up having 100$ here an there just to give it a try but in the end most of the apps looks the same.
Now I don't know what to do with coins on BSC, Polygon or Fantom and after DAO coins mutation with short time to migrate, these "last bull market leading chains" themselves will mutate in a near future to try a new beginning... Quite exhausting in the end.