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"Is this heaven?"

- Field of Dreams

Crypto is (finally) inducing demand

New York City is an infuriating tangle of bridges, tunnels and highways because Robert Moses was unfamiliar with the concept of induced demand.

Nearly all of the tri-state area’s current transportation infrastructure is attributable to the imperial, all-powerful Moses, whose 40-year reign as the power broker of New York was meticulously chronicled by Robert Caro.

Moses, far more powerful than any of the mayors or governors he nominally served, worked on the assumption that the way to relieve congested bridges, tunnels and highways was always to build more of them.

That seemed logical enough, but it didn’t do anything to reduce travel times — instead, they got longer. 

He kept building, though, because he never learned that adding road capacity can be self-defeating, as a later study found: “Increasing road capacity in congested conditions can make congestion worse.”

New York’s long-suffering commuters re-learn that lesson daily, and thanks to Moses, will continue to do so for decades to come.

Citizens of the crypto economy may be about to learn something similar.

Crypto EZ Pass

Like highways, blockchain networks have anti-network effects — the more people use them, the less usable they become.

Hence transaction fees, which spike with usage just like Uber fares on New Year’s Eve.

From one perspective, this can look like a good thing, as blockchain fees have come to be thought of as “revenue” for a protocol, and more revenue is always welcome.

Thinking of fees in this way is what makes ETH ultrasound money and what gives layer-1 tokens like SOL measurable value in a traditional valuation model.

The real purpose of fees, however, is to reduce spam and secure a network.

Ethereum has high fees and therefore low spam and high security — but also minimal use cases.

To enable use cases, blockchains have to strike a delicate balance in which blockspace is cheap enough to be useful and expensive enough to secure the network (and make the token valuable).

Until recently, the crypto economy has been unbalanced in favor of high fees, because most activity happens on Ethereum, which is in the business of selling slow, prohibitively expensive blockspace.

That has successfully made the ETH token valuable, but it has not succeeded in enabling much in the way of use cases.

This is changing! 

It may feel like we’ve been talking about the likes of Solana, Arbitrum and Optimism forever, but the cheaper blockspace they offer is only now becoming a viable alternative to Ethereum.

We’re still not all the way there yet: Solana still needs Firedancer, layer-2s still need EIP 4844, the modular thesis is only just developing, and a third generation of blockchains is only now being deployed.

Still, crypto transactions are becoming cheap enough that 2024 may be the year in which we find out whether blockchains are like New York City bridges.

Will new blockspace become congested with spam in the same way that new bridges get immediately congested with traffic?

Or will cheap, fast blockspace enable people to do new things — things more productive than inching along bumper-to-bumper on the Cross Bronx Expressway?

The early evidence is mixed.

Layer-2 blockchains have generated a lot of activity that would not otherwise have happened on Ethereum.

But no new use cases have emerged — it’s just more ways to trade more crypto so far.

Perhaps more worryingly, the new activity has already resulted in fee spikes that look a lot like NYC traffic backing up at the Triborough Bridge.

The brief craze for inscriptions, for example, recently spiked fees on Avalanche from 4c per transaction to $1.60 — imagine pulling up to the Holland Tunnel to find that your usual $13 commute was going to cost $520 that day (at least you don’t have to pay in nickels and dimes anymore).

This may soon be solved by “parallelization” (easy explainer here), which is partly why people have gotten so excited about Solana.

But here, too, the early evidence is mixed.

DePIN seems hopeful: Cheap Solana blockspace may allow Hivemapper to disrupt Google Maps and Helium to disrupt the mobile industry.

But the recent surge in Solana transactions (from what I understand) has mostly been spam, which raises the prospect that blockchains may have the same problem of induced demand that Robert Moses unknowingly encountered.

The difference, of course, is that crypto is trying to induce demand.

For blockchains, the question is whether anything useful will be induced.

Pricing it in

Like Robert Moses, the crypto industry always remains focused on infrastructure: The relative merits of modular vs monolithic blockchains, rollups as a service, and liquid re-staking get debated to a granular level of detail you’d never encounter in the equities market. 

It gets chippy sometimes, but the debate is always earnest. 

Crypto people believe it’s the infrastructure that matters right now and that the use cases will come — like long-dead baseball players emerging from a cornfield — when the infrastructure is ready. 

But is that why the native tokens of even unused blockchains get multi-billion dollar valuations? 

Do we think the infrastructure build-out will enable that much utility?

Or are crypto tokens valued the way they are because of memes, airdrops and unhinged speculation?

Or is it both?

Solana may be unlocking DePIN and Celestia might unlock blockchain gaming (finally), but there doesn’t seem to be much effort to determine whether those and other potential use cases can possibly justify current prices.

Maybe that’s because it’s just too hard — like trying to foresee social media and the iPhone at the advent of the World Wide Web in 1989 — so people don’t even try.

By the time the use cases are obvious, it might be too late.

So, I expect the earnest infrastructure debates and the unhinged speculation will continue in parallel right up until they come walking out from the corn fields.

Which might be soon!

Cheap, abundant, quality blockspace is nearly here, so we should soon find out what kind of demand will be induced. 

And whether it’s a heavenly field of dreams that we’re building — or a traffic jam nightmare.

― Byron Gilliam

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Today's episode explores the intersection of liquid staking and the modular money ecosystem. Mike is joined by Stride Labs co-founder Aiden Salzman and John Charbonneau general partner of DBA. The trio dives deep into the architecture of the Stride protocol, including stTIA and the liquid staking module (LSM). The discussion touches on incentive alignment between protocols, demand drivers for liquid staking adoption, using liquid staking tokens as modular money across rollups, managing validator sets, and more. We hope you enjoy!

Watch or listen to Bell Curve on Youtube, Spotify or Apple.

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Regulatory Horizons: Unraveling the Future of Crypto Compliance

Wondering how to navigate the ever-changing and oftentimes ambiguous crypto regulatory environment? Join us to hear from the experts on best practices when approaching compliance and how to stay ahead of the complicated legal requirements. We will also discuss how recent and ongoing court cases, enforcement actions and legislation can change the landscape in the US going forward.

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