The LSD Liquidity Wars Are Here | 2023 Outlook

Transcript

let's say a curve does flip uni swap for CBE liquidity and that trading volume starts getting sucked into curve well then now they have like almost 90 percent of trading volume with lsds and that's going to be a massive Money Maker for them welcome back to another episode of zero X research this show is made possible thanks to our incredible sponsors chain analysis and Flipside we're recording this episode on January 3rd so happy New Year everyone and this episode is going to kind of go hand in hand with our last episode so we did a 2022 in review last year and our last episode and then this one is going to be uh kind of our thoughts on some of the major themes we're going to see throughout 2023 so no interview today it's just a block Works

analysts gonna Rift on a couple different topics so we're joined by Xerox pibbles and Westy today uh and guys how we doing I'm excited to get into this one we've got a lot of good discussions uh lined up for the day so I can kind of kick things off and get into you know one of my my ideas of what we're gonna something we can expect to kind of unfold throughout 2023 and it's really just the the broader topic around liquid liquid staking derivatives it's been a pretty hot topic on CT over the last couple days and I think a lot of that has to do with Shanghai upgrade coming soon and of course the Shanghai upgrade enables withdrawals so users that have staked eth have the ability to now unstake in the current state that's just not possible that they're kind of

like rolling out the tech gradually and this is kind of like one of the next major pieces that gets added into ethereum proof of stake and really kind of builds out the entire staking side of of the of the equation here and you know with drawals enabled there's kind of like this question around okay well how many people that have staked are now going to unstake an ethereum asset profile on Dune actually has a really cool chart that lays out it like at what price did each depositor deposit stake their ethat and there's like only like 20 percent of depositors are actually like in the money or they uh you know uh have essentially deposited at a lower east price than the current price today so 80 of the people are like underwater on their staking

deposits and I kind of like think there's an interesting Dynamic thinking about well okay well which side of the equation is is going to be the one to unstake when this happens or maybe is one side more likely to just withdraw rewards that are now free floating and they can like leave their 32 East staked but sell off the rewards to kind of lock in some of the profits that they've made and try to fight back towards even uh so kind of like an interesting thought experiment there's really no right answer right it comes down to like every depositor is going to have a different opinion on how they want to how they want to interact with these unlocked rewards but I do think it's just this interesting uh kind of thought experiment to walk through especially because you know after withdrawals are enabled I personally believe you know

the broader theme here is really that liquid staking derivatives are really going to take off they have improved Capital efficiency given that they can be used composably throughout D5 while still earning the staking rewards and they also provide immediate liquidity so if I want to exit my position all I have to do is swap it through a decks and I don't have to wait through a withdrawal fuel with a withdrawal q and so you know ethereum kind of has this interesting Dynamic where it kind of the proof of stake proof of stake ethereum grew up with liquid staking and that just really hasn't kind of been something that we've seen on other major proof of stake blockchains like you think about something like the cosmos Hub like the atom token it's very heavily staked but they have a different implementation of proof of stick right

so you can just delegate tokens like I can have two atom and stake them through another validator whereas with ethereum I need a full 32 each to solo stake and liquid staking really just kind of removes that right like I can have a very small sum of it ether and stake that directly into the network and you know a crucial rewards and participate in network security uh so it kind of brings about this this new way of getting involved and because ethereum essentially grew up with liquid staking existing I think it's going to see a very high percentage of usage in adoption throughout 2023 and so right now this eats steak rates around 14 which is very low relative to other proof of stake chains if you look at something like the cosmos ecosystem Chains It's they uh have a like a system

rewards to be around 66 percent or two-thirds of the token staked and that just helps like participate with network security right and if you look at something like Avalanche that's in the 60s I think around 64-65. uh Salon is a bit of a tricky one just because locked tokens can also be staked but depending on how you calculate it that's around 60 or 70 percent as well um and so we're definitely going to see ethereum's stake rate jump significantly I think throughout 2023 again with Shanghai going live that's like kind of this last piece uh in Iran in what staking really is for proof of stake and I think that's going to give people a little more confidence around okay now if I stick my assets I can immediately unstake them if I so choose to do so and that just kind of like you know you're

not really like freezing assets they're just be fully liquid if you want a solo stake um so I think we're going to see a massive boom in the state great and then a large portion of that being driven by liquid staking itself so in the liquid staking landscape we have a pretty interesting breakdown of kind of who's dominant and who's not right now lydo's got about 60 percent of the liquid staked eth market share rocket pool is in that as well as well as coinbase East so it's like two decentralized options leading the way and more recently we've seen a large push from coinbase kind of pushing their their users into this and so I think like the way but we're going to be thinking about this is like we're really a trade-off spectrum between yield uh

and convenience right so if you think about coinbase you can stake on coinbase with two clicks literally you buy eth and then stake it and agree to the terms of service and you're locked and loaded um and because of that convenience you know they take a 25 fee so their yield is going to be noticeably lower than something like uh Lido or frax eth or something of that nature that takes usually around 10 percent is pretty much industry standard for the decentralized options um so I think this is like going to be an interesting Dynamic of where we see this value flow um and yeah I'm curious if you guys have any takes on that or love it hate it how do we feel about it yeah I mean I definitely agree that 2023 is going to be the year of lsds especially for eth

like you said when you look at comparable numbers and the cosmos ecosystem youth has a lot a lot of ways to catch up and I think with the Shanghai fork and withdrawals enabled I think that's definitely gonna sort of push it towards I think it's like 70 Cosmos but I think it's it's not going to get quite that high but it's definitely get higher than it is now and I definitely think the interesting conversation is sort of the players within the LSD ecosystem and how that plays out um I know there's a lot of people that think like Lido has 60 of the market share right now and I know the Market's sort of pricing on a relative basis these these other uh competitors like rocketpool uh steak wise Etc that have um like a lower tvl to market cap ratio

and are basically being priced as higher on a relative basis than Lido thinking that light on might lose its market share but some people think you know light over might keep its market share as well as like you said coinbase is the new competitor on the market but um there's going to be a lot of Institutions that want to stake their eath and do so using a custodial service and coinbase is obviously the biggest one for these institutions and so I could see CBE definitely getting in market share versus versus Lido and then I was also looking at the the ethereum forums the ethereum research forums and there's actually a post from June of this year early June of last year basically outlining a governance-free LSD that would be sort of the eth base

layer and I think if that gets introduced it also shake things up a bit because um it sort of maximizes the yield as you said where you're paying 10 fees to most of these providers and 25 to coinbase whereas in this case it says you're only paying three percent fees which gives you higher yield and it probably has higher security guarantees given that is created by the ethereum developers and not the core level so I think if that gets introduced which I'm not expecting it but it's definitely possible given that it's in the forums which has a lot of support behind it that could shake things up as well and so yeah I'm interested to see how things shake up in my opinion I think Lido maintains its dominance but coinbase sort of catches up and I think just overall as as a

sector the LSC it just all all of them sort of Rise together overall and I don't think one sort of overshadows the other um but yeah I don't know if you guys have other thoughts as well yeah so what I'm most concerned about with liquid staking is where the revenue is going and you know I'm obviously going to be most interested in the governance token of a project that's actually going to share the revenue because it's great that you may call this Revenue but like what are you doing with it and how do I profit off of it um so like right now I know that frax has the eight percent of their fees are going to go to buying back the fractures token

we don't see anything with Lido yet but that's something to keep an eye on and we have to monitor and then the second thing is we have to figure out the health of the validators like you know why am I gonna go stick with steak wise who doesn't have as much of a reliable track record for getting validated rewards and dealing with slashing so I think um some sort of dashboard that kind of like ranks the health of each liquid stating protocol stating staking protocol and um kind of indicates the reliability will be critical infrastructure for 2023. yeah it shouldn't agree there are Pebbles I also just think that you know you've got 10 of the rewards going to

um not people staking so 90 goes to the stakers five percent goes to the treasury five percent goes to um the actual node operators and that's something that light has done really really well they've picked like 28 really high quality validators so they're up times perfect they never get slashed that kind of thing I also know they're looking at implementing uh distributed validator technology which should improve the decentralization of Lido and like kind of reduce the attack Vector on the ethereum protocol itself I also think that most the unlocks for ldo are pretty much in the rear view mirror and I'm sure there's a lot of investors who had funds during this bear Market who are accumulating it I'm sure they want to turn on like a fee switch similar to to uniswap so I think that

value will eventually accrue back to ldo token holders so I think my favorite bet going into the next year is uh ldo but I also think cbeath is gonna gonna Garner significant market share given all the institutions that went in on the action yeah and something coinbase did that's really interest interesting with uh regard to attracting some of that institutional money is their retail product charges a 25 fee but their institutional product is only 10 which is in line with the decentralized options plus they get providing this custodial Factor as well which we know institutions find quite comforting so I I do think coinbase is really poised to take a huge a huge gash into some of this market share but again like the

market itself is growing quite significantly so I think there's room for a lot of competitors to to kind of you know battle into this but one of the interesting knock-on effects of of of liquid staking is really just how okay so you know you have all this liquidity right it's liquid staking now where does that flow right into dexes of course because one of the key advantages is being able to sell your token uh on command and so um we have a chart here with flip side's great data they you know have great Dex data on curved Unity swap Bouncer and Sushi which is really where a majority of this volume is occurring and so right now uni swap is by far the most dominant decks in terms of volume you know they do like 60 plus percent of all

decks volume uh with the exception of when you look at just LSD or liquid sticking derivative volume uh or it's actually like rolls reversed with curve and curve is actually doing like 75 80 of that LSD volume and uni swap's really only in that 20 range and so if we look at this chart here on we have on the screen and for the viewers and for the listeners rather than the viewers we're looking at the Dex volume share of liquid staking derivatives and we have a 30-day moving average of the amount of volume divided specifically by token uh and so staked eth is responsible for around 60 63 64 percent of all volume and of coinbase coming in second in there around 20 and then rocket pool

reth coming in uh third with around 10 or so percent of volume and so if you think if you're a DEX like you're thinking okay well how do I attract this liquidity uh to eventually be kind of like the lead role player in exchange volume for lsds and and that's going to be an increasingly large field right like if the Market's growing and then now the withdrawals are enabled so there's going to be an Arbitrage opportunity that's you know relatively quick probably a couple day withdrawal queue um and now there's like a massively growing field that's very you know particularly liquid um I think that we're going to see an explosion in LSD volume and I wouldn't be surprised to see some of the larger liquid staking tokens kind of being in that top three top five of of exchange

traded tokens right so we're going to obviously have eth and usdc most likely that's a very common pair specifically on uni Swap and I think in that top three top five we're going to have a liquid staking derivative token and so if you're a DEX obviously volume translates directly to fees and you're going to want to be having these kinds of tokens listed on your Exchange in deep liquidity uh and pretty interestingly curve already has by far the deepest um liquidity for staked eth and that has a lot to do with the fact that steak teeth is a rebasing token that doesn't really play well with a lot of current contracts and uni swap is one of those it's just not compatible with their uni uni swap V2 or V3 and because of that a lot that immediately that liquidity was born into curve and now I don't really

see that changing uh it's a you know it's almost a billion dollar pool I think it's around 750 million dollars of liquidity there so uni swap actually does have coinbase if in the deepest liquidity and that's what's where a lot of that volume does occur today but it's pretty interesting we're seeing a little bit of a coinbase or CBE Wars starting to break out curve has actually increased their rewards flowing to that pool and uh they increase the CRV emissions and starting next Thursday there's actually going to be the yield on that pool jumps from five to ten percent because the founder of curve Mitch has increased his percentage of voting on that pool so it's gonna be pretty interesting to see if somebody

liquidity flows out from uni swap to to curve and ultimately like this kind of shows that you know maybe not all token emissions are created equally and if you can effectively use token emissions to increase organic Revenue in trading fees then that's ultimately the goal so it'll be I think it's a really smart move to see curve kind of battling in this direction but again you know we can see if curve now let's say let's say a curve does flip uni swap for CBE liquidity and that trading volume starts getting sucked into curve uh well then now they have like almost 90 percent of trading volume with lsds and that's going to be a massive Money Maker for them and you know we can really see that Illustrated on this chart just given that you know flip side makes this data so easy and so

accessible and they really do have the most comprehensive on-chain data in crypto so you know it really gives you the opportunity to get the insights you need to work smarter and you know we actually have a little Bounty going on so if you're interested in querying data and you have some SQL skills then this is definitely for you be sure to check out the link in this in our description for an opportunity to earn some free usdc yeah that is super interesting to out of there Dan I mean considering they're taking 25 of all staking rewards like that is going to be such a cash cow for coinbase and considering where coinbase is trading like kind of makes me want to dabble in it like what is it at like three times earnings and it's like a high growth stock like and they've got 100 million users using

their app you know every month so I definitely like that plan I think it was Matt from bitwise he was talking about how he really likes the coinbase play as well so but uh that's a good segue into into my kind of 2023 uh prediction for the year I think that an OG D5 protocol or alter one will announce plans to launch as an L3 I don't think we'll actually see anything live on testnet or anything like that but I do think we'll see kind of similar to how dydx announced their move to the cosmos in the beginning of uh 2022 I think we'll see a similar thing happen towards the tail end of 2023. I mean you've got l2s like pretty much every L2 is like putting together an L3 strategy you've got the op stack you've got Stark net moving Stark X so all the applications

like dydx immutable and a couple others are going to actually be l3s on top of Stark net then you have ZK sync following the L3 Vision as well and I just think that projects that were born on ethereum won't want to make the same decision that dydx did I think that they're going to want to remain loyal to kind of like where they started so I think going to an L3 to enhance their kind of customizability and take advantage of some of those Trends is going to be something that we definitely see as a narrative going forward I also know that Mev can be extracted as an app specific roll-up so I think that Revenue will be returned to either the treasury or token stakers and then provide more utility to the tokens and we see this with sushi swap right now you know

they're kind of running out of Runway we've talked about it a few times the last couple episodes and I think there's a lot of OG D5 protocols that have a lot of really good product Market fit for their applications but then not such good tokenomics so like maker Ave comp uni so I think that this is a really good outlet for them to try and redesign their tokens l3s offer a lot of different advantages over being just an app on the ethereum L1 you're going to get higher throughput even more so higher throughput than an L2 you thanks to the recursive proofs and kind of their multiplicative scaling nature and then you've also got better control over the tech stack in general not quite as customizable as a Cosmos app specific chain but you definitely get more customizability than you would as an

ethereum dap on the letter one I also think like you'll see you know different data availability structures like you'll see a lot of validiums launch in this system uh where basically there's a data availability committee securing the data of The Ledger and then I also think that those uh those committees will kind of be secured by the token so that also provides more utility for the native token of the dapps and then also you get privacy with the L3 scaling Solutions and cheaper interoperability between the the L2 L3 L3 to L3 so I think that's going to be a huge narrative going forward I don't know if we'll actually see anything launch on testnet but I do think that we'll see someone announce

towards the tail end of 2023. yeah the L3 structure is really interesting I do have a question for you though so like okay so if we have this one standardized prover then we can have a network of l3s built on top of the L2 with the standardized prover that can all communicate with each other but if we have multiple standard or multiple provers with multiple ecosystems built on them then how does that become any different than like the cosmos ecosystem right you're still going to need to bridge between the two L3 ecosystems because they're not going to be interoperable without that standardized prover so like I do agree that we're pushing in that direction but like I start thinking about how long it's going to take to come to consensus on what the

best best proving technology is right if we have like five teams building it there will probably be some that perform better right out of the gates but then the teams that have the worst performing one aren't just gonna like throw in the towel and be like Oh yours is better we'll just use it they're gonna be like no we're gonna build ours and make it better than yours so I don't know I want to hear your take on kind of like how we get to that point of standard station yeah I think Alex said it best from ZK sync the the other week I think that you are going to see a lot of competition in like the next two three maybe even four or five years but I think at some point there will be like marginal progress made instead of these huge leaps that

we're seeing today and then like everyone's gonna kind of come together and be like all right this is the best standard that we should all work towards and I think whoever kind of develops that their L3 ecosystem will ultimately end up being the winner and then applications that are built on you know let's say it's uh Stark net and they're the one who wins like I think that the l3s that were built on ZK sync and polygons EK VM Etc I think they'll all kind of migrate towards that one standard prover yeah and building on top of that like different healthy ecosystems like you might need Bridges to to go between them but people are also building CK IBC which is derivative of IBC and Cosmos since you're going to be able to have at least better bridging

capabilities from one to the other and so it does end up looking a lot like Osmos but I also do think this is a like a really good thesis just in the fact that I mean on our last episode we looked back to last year and roll ups in terms of their adoption were just up and to the right both from a user standpoint and from a development standpoint and once we see these these ZK Roll-Ups launch this year and like you said we see l3s and at least one or two are successful I do think that one of these applications that lives on ethereum and it's very much aligned to the ethereum ethos chooses to build on an L3 or maybe even their own app specific L2 I definitely see that in the in the future

yeah it's definitely going to be interesting to watch it play out I just I guess I feel like it's the best way to Stay ethereum Native while also um I guess providing your token more utility so I'm excited to watch it play out that's for sure but Westy I know you got a kind of a topic on the the same vein for today so I'll pass it over to you for your thesis for next year yeah it's definitely very well connected to yours but mine is that essentially app trains application specific chains will grow exponentially in 2023 both on Cosmos and as app specific role of l2s or l3s as you talked about so like I said app specific chains have started in Cosmos through the cosmos SDK you could essentially create a chain for yourself

and it can be application specific and essentially through IBC you can connect to other chains and have that composability so the point of having sort of an application on a generalized level one is sort of the East ease with which you can build your application you can just sort of build and have it on L1 available to use as well as the composability with other applications and Cosmos essentially allows more customization at one level so you're not basically required with whatever let's say you're using ether Solana you're basically tied to the design decisions they have but at the same time you still have that ease through the cosmos SDK that's just available to use as well as

the composabilities or IBC and I think this app chain thesis is going to gain a lot of momentum in 2023 I think specifically because dydx is migrating from the Stark Stark X to its own Cosmos chain and I think if they are successful which I think it's very likely that they are given just the the team's capabilities and what I've heard so far if they are successful I think that's going to pull a lot of other developers to think along the same lines and see oh okay dydx was able to do these things that they couldn't on ethereum previously have to do on their own chain as well as providing more value to their token and so dydx sort of becomes that

trial run and I think we're also going to see a lot of other cost machines launched in 2023 I can think of a few off the top of my head like Mars I say Babylon even stride as well are building their own chains and it'll just show even more how how powerful these app chains can be and then like Sam alluded to earlier um there are a lot of developments in the roll-up space and I think l2s and more importantly l3s will become a big launching place for these as specific chains given that a lot of these applications built on the evm one remains aligned to ethereum and don't necessarily want to just abandon ship and go to something like Cosmos and l3s

allow for most of that same customizability as well as having really really low fees and remaining aligned with ethereum and I also think we're going to see a lot of app specific l2s built with the op stack as well as other different things and I know Avo is one of those examples which is an option options exchange built on ribbon which is going to be its own app specific L2 and I think just as the role of ecosystem builds out and there's more composability across different Roll-Ups either at the L3 level using the same approver or at the L2 level I know the op stock is trying to build sort of like a super chain of their l2s and then there's also the ability for ZK Roll-Ups

to have um synchronous composability like sort of at the L1 level where they all settle down which I think is super interesting and so yeah I think we just see an explosion of app chains especially in my opinion as applications on a relative basis to these generalized l1s get more value I think they're just gonna grow exponentially over the next year or so I I definitely agree and I think if 22 or 2022 showed us one thing it's that the fat protocol thesis is kind of dead and I see app chains as kind of like the revamped opportunity for you know big protocols that have a lot of users they still struggle to accrue value but I

think having their own specialized app chain or Roll Up is the move and will probably be how the fat protocol thesis could come back to life yeah I love the concept of app chains right like if you think about even like building a protocol in general like let's say just on ethereum main chain why is that exciting and you know you can go to like Global wallet distribution you can access the whole world immediately but one of the more interesting things to me is the fact that you have a token and that doesn't exist in the physical world it's kind of like this new design space that crypto has really invented and then if you take that even a step further and say okay well then what's different between an app on main chain versus an app specific blockchain well now you also have a token in an app specific

blockchain but you also get the expanded design space of the validator set and seeing what gets like built out into that design into the the validator set space is is very very intriguing to me if you think about something like Thor chain they kind of like use their validators to secure vaults on other chains and like create this decentralized bridge Network we had Chad barefoort on the other day kind of like walking us through what that whole process looks like and then you think about something like dydx you know they're coming to the cosmos they're building an app chain specifically for the purpose of decentralizing their protocol by creating a decentralized order book that's run within the validator set memory there am and that's really interesting right like that's just something that physically can't be

done um without an application specific blockchain so kind of like giving developers a bigger design space is just I'm I'm inherently bullish on that idea and I really don't think that will change yeah and another thing there is with protocols that didn't have their own options um those were so much easier to Fork like you saw it happen time and time again with dexis GMX Etc so this definitely gives that bigger moat for these teams to really innovate and not worry about their stuff just getting jacked like next week yeah strong agree with that spent or all right yeah Sean agree with that pitbulls uh definitely agree there and it's also kind of interesting that we were just talking about liquid staking derivatives and ldo I think that's also another pretty solid uh play in order to get

some exposure on all these proof of stake networks in the cosmos ecosystem um because I'm sure they'll they'll be super active there as that market grows but I also wanted to take a second to thank our wonderful sponsor chain analysis they're one of the leading crypto providers that are helping build the tools that we need to legitimize our industry they enable investors investors to track funds on chain with ease and they also have some great research which is available for free on their website they also have some really cool courses that they offer in case you want to get really in the weeds of the crypto stuff so they're definitely worth checking out and we'll link to them in the show notes but uh Pebbles I know you got a pretty good 2023 thesis so I'll kick it over to you yeah so my thesis kind of goes along

with l3s but it's a little more specific and I'm talking on-chain order books I think amms definitely had their place in time whenever unit swap first came out we needed an easy front-end and infrastructure to kind of swap whatever tokens we want but personally I don't like using amms because I get terrible execution and I'm really interested in anything that is high throughput and low fees that can kind of give market makers more of an edge and more predictable profits I think we see a couple interesting whatever protocols popping up like obviously we have say coming out on the cosmos and I think that's going to be a really interesting case study we'll just

have to see how the actual like VCS invest their tokens on us so we'll see how that goes but then you also have like Solana head serum and now we have open book popping up which is just a serum Fork minus the predatory VCS I think both of these are just really promising for 2023 and we'll have to stay tuned to see how that pans out yeah strong agree with this one I've always been saying that we need more Central limit order books I just think they haven't existed because they're not very compatible with the ESL one but now that we have Roll-Ups as well as well as chains like Solana that have parallelization that just allow for quicker transaction throughput the

finally we can build these Central limit order books I know when am AMS on the large majority of people who provide liquidity end up losing money and I know there's a lot of toxic flow that goes through uh amms as well and so I think just for a better price execution in general better with liquidity overall I think sea lobs are just just better infrastructure but at the same time I do think there's a place for MMS especially with stable swap specifically because like um if you provide liquidity for a stable swap uh you're not really getting in permanent loss especially if those two tokens are structurally

correlated with one another and you can earn yield in a different way than let's say lending out your assets I think it's a structurally better way to earn yield and so just from that fact I think amms specifically for stable swaps are definitely going to stay around and we'll achieve product Market fit whereas I think we're going to Trend more towards Central limit order books when it comes to trading non-correlated assets Wesley you just kind of hinted at how curve is better suited to kind of Thrive long term because they typically Target like assets that are you know pegged one-to-one with each other so what does this mean for uniswap are they working

on anything for for a a club that they're trying to launch or do you think there's going to be a new competitor that comes in and completely takes away the market share yeah I can comment on the you know swap order book I know that the labs team funded a grant that is working on building a uniswap order book front end but I'm not so sure how that's going to work because again you can't have it on like each mainnet so like what's going to happen off chain is this going to be a AWS order book Etc yeah I feel like we just don't have the tech to have a central limit order book on chain today on ethereum like I think the L3 ecosystem makes that possible or even like um I think it goes to Westy's thesis

that you know they kind of like the L2 side of things get built out maybe you can have like an app specific roll-up uh sort of like Evo I don't know actually if essential limit orb would be possible in that particular environment but I don't know I feel like we still need to focus on like building out the tech before that can really happen uh then but like specifically on ethereum of course like say is trying to do this in the cosmos ecosystem and Solano already has an operational version of this live but is the serum or I guess now it's called open book uh is that like is there uh order book fully decentralized they're like how does that work is it is it it's all on chain right I believe yeah I think it's all on chain and actually last week I saw something and

it looks like jump is already using openbook to try to do some high frequency trading so that's pretty neat I think there's definitely going to be some sort of farming opportunity coming up probably in the first quarter when they actually decide to launch an open book token and that's going to be really fun and we'll definitely have to have a report about that so just recapping we got a Cambrian explosion of lsds coming to the ethereum ecosystem then we have an increased number of l2s and l3s in that ecosystem developing as well as the application specific blockchain sector as well and then we also have kind of the transition away from amms to clobs that's like a lot of technical

Innovation and you know when you think about that like it just kind of puts things in perspective of like yes prices are so right now uh but there's a lot of different things moving in a lot of good directions and it's like it's crazy it's like yeah the the macro environment's so bad for Price appreciation but literally everything else feels so good you know we're like trending towards better tokenomics we're improving technology from a scalability and usability standpoint ux is significantly less than it was two years ago it's like actually becoming easier to use crypto and like easier to say like hey this would be a great way to on onboard some of my friends that maybe have never used crypto before so uh it's just like once we kind of get through this macro black hole maybe like

there's just so many reasons to be bullish it's like so frustrating yeah definitely and there's a lot to be excited about like you said from like the development like Network level especially with ethereum there's a lot of upgrades coming this year I mean we talked about the Shanghai fork and that's in like that upgrades implications but there's a lot of other things being built like account abstraction um is also being built Proto dank sharding will get as well and I think there's going to be a lot of trading narratives around these ethereum developments so with Proto dang sharding I think a lot of the roll-up tokens we'll see a pump and then lsds are off the back of Shanghai as well as eigenlayer being developed which should come around mid 2023 I think those it increases the value of each staking and

therefore lsds and so yeah I think there's a lot to be excited about at the eth core level from Roll-Ups and yeah I'm just super excited uh for 2023. I got a question for you Westy that Sam you guys are the L2 gurus so when right now there's like there seems to be this huge focus on like scaling l2s to get to a point where they you know are like Mass adoption a mass adoption utensils essentially but when do they like kind of shift that Focus to like actually decentralizing um and like becoming that fully like right now for example you know my understanding is optimism's fraud proofs aren't even live so like it's sort of just like and yeah it's connected to ethereum but there's no way to challenge

the validity of the state so like when do they shift into saying okay like this is going to be a fully functioning decentralized L2 I can take a stab at that one I guess I just think these things take a long time to decentralize and it really is just like a waiting game like I would call Solana or Avalanche or some other altar one more decentralized than an optimism an arbitrum or really any other L2 live today but that's also just a time thing they've been around longer than you know these l2s have plus the technology that they built with is more similar to something like a tendermint or uh you know something that's already been built before whereas l2s are really just a new groundbreaking technology and I think it's going to take longer to

decentralize that process and I think right now the main focus is getting users building up adoption making the user experience as good as possible lowering transaction fees all of that stuff that l2s are supposed to do to scale ethereum before you actually decentralize and if you have that base layer where you can go back to that is fully decentralized and that's like you know censorship resistant I think that's that's the main point right now but I do think at some point this year we'll see nl2 start to like kind of take off the training wheels as vitalik has has said in the last couple weeks so that would be another prediction I would make for 2023 but I don't feel as strongly about that one as I do uh the thesis I laid out earlier yeah I think it also depends

on the specific project so no scroll was like very heavy on we need to decentralize the sequencers and the provers as soon as possible whether there's a sort of more lackadaisical when it comes to decentralizing things but at the same time just think about the incentives like these projects are incentivized to have a mainnet that people can use the applications are on and that's sort of where the incentives lie less so the decentralization and they just want something up and running that people are using and so they're going to focus on that side of the tech and then like the decentralization security part of things comes later unfortunately but that's just the way it is and I think like Sam says like later this year we'll definitely get some of

these projects decentralizing more and more and I think once one project does it others are just gonna follow suit after them um and it is going to take time I think later this year is when a push is going to happen but I think it's going to take a few years if not maybe five years before things are like fully decentralized secure and ready to go yeah my question about Altus I know this was an issue on arbitrim like a year ago I'm not so sure what the situation is now but is the throughput basically limited by what the sequencer can handle um like if if someone was to do like the other side mint right now on arbitrim is arbitrim dead like is it going to be

able to process all those transactions that's something I'm like pretty clueless about so and like I first thought I just think like maybe app chains offer a better Advantage there yeah I would agree in the current state but I think it just comes down to like ethereum just recently coming into the vision of becoming like a roll of a roll-up Centric like layer essentially for data availability and settlement um so I don't know I guess I would just say that I think that proto-dink sharding is going to drastically enhance the ability of l2s to like compress their data and post it to ethereum and I think that's only going to get better and it's actually kind of funny because Westie and I like to look at that chart that's

like the percentage of L1 gas used to settle L2 contracts for like a measure of adoption but it's kind of ironic that you really want that number to go down as transactions go up on l2s because that would mean that l2s are scaling more effectively like what we're seeing is exactly what you're pointing out it's like it's starting to get congested a little bit so I think it's going to continue to improve um but yeah uh I think it's something that's still being worked out but Westy I don't know if you have any thoughts there yeah back to pibble's question it does depend on the sequencer I know a lot of them use Geth which is the same as sort of ethereum transactions and so if the other sidemen were to happen you'd probably have a lot of failed transactions but the gas fees would be

significantly less than that of the ethereum based layer but yeah I agree with everything Sam said after that yeah I mean it kind of just feels like ZK Tech is really gonna you know move l1's from like you know you hear the phrase zero to one but I feel like optimistic roles were kind of the one and now we're going from one to two if you will uh because you know I think about like I wasn't trying to throw rocks at uh optimism earlier but like you know like they're trying to get to like the op stack State like this is far from their end state if you think about polygon right now they're like a proof of stake uh commit chain which is essentially a side chain right and you know they're a bridge secured by a multi-sig um you know arbitrim's kind of in that

same ballpark as well as the other two and then you think about like ZK and that's really when things can kind of like see that seems to be like the next transition point so once we start to get like a ZK main NET LIVE uh start to like ease and do some adoption there that's what I'm really excited about and I know ZK sync is pushing in that direction yeah and as much as we were excited about the base layer technology what I really want to see in 2023 is just one application that really takes off and has product markets fit with not only crypto specific users but with just normies in general and I think the thing that's likely to do that is a game and so yeah I'm excited to see or I at least hope we have some sort of game that brings in a lot of people into

the ecosystem but overall I do think the value Trends towards applications versus the base layer and yeah all we need is some applications that really take off to really prove that the tech that we are building is worth it which chain is the best chain to build a game on today I'm team Solana we saw the step in Ponzi get money token that was killer and they chose Salon just because Solana was equipped to handle that kind of load and I think with the Saga phone Sega phone whatever you want to call it I think um that's going to open the door I think there's going to be like a really

successful game that's like kind of as addictive as Candy Crush that's going to come out on Solana's phone and I think that maybe their strategy is to have some awesome game that people are printing money on and it kind of drives orders for the segophone through the roof I mean I personally think that once l3s are live those are the primary place I think first off because really really low transaction fees um but also account abstraction is really huge for games and that you can have session keys where you don't need to keep signing signatures anytime you use a game you just keep doing one transaction after the

other really easily as well as the fact that these games can pay on pay for transaction fees on behalf of the user and because they're on an L3 that then settles to an L2 and then the L1 the transaction fees are really really small and so that becomes really easy for the application to do and I just think from like a ux standpoint for the developers as well as for the users that l3s are just perfect for gaming I'm surprised none of you guys say this but I would go with Harmony secure Bridges defy kingdoms doesn't get any better no I'd go with Westie I strongly agree I think they already have like the infrastructure built out with uh immutable X as a primary Marketplace for nfts and games and I think when they go

to starknet as an L3 and then you see other games launching as L3 utilizing their Marketplace I think that has a lot of catalysts for Success you're gonna get some hate mail for that one yeah I probably will so all in all we have a Cambrian explosion of lsds an increased adoption of l2s and l3s and even application specific blockchains and we see a transition from amms to clubs so you know pretty exciting like as I said earlier you know there's just so much to be bullish about in this space right now from a technology standpoint um so once kind of like the markets calmed down sentiment kind of settles out flat lines um you know then it's really kind of like a back up and to the right you'd want to think just because of all the development going on so it really is an

exciting place and as always you know thanks a lot for joining us pibbles and Westie that was a great conversation and we will be back next week next Wednesday with a new episode we have an exciting interview with sriram from eigenlayers so doing some ethereum scaling sticking on the same vein excited for it and thanks again everyone