How to Invest in Blockchain Scaling
A plethora of blockchain scaling solutions are rising to prominence, and PieDAO is building the perfect index for capitalising on them in a seamless manner
Since Ethereum’s inception there have been many plans to advance the adoption of scaling solutions: sharding at the protocol level with the rollout of ETH 2.0 being one of the most notorious, but there has also been consistent focus on developing technologies such as rollups, state channels, side chains, and plasma chains. Despite having highlighted the importance of these developments early on in Ethereum’s history, Gavin Wood’s warnings that Ethereum would soon become unusable for the average persona are yet to be adequately solved, and after the explosion of DeFi in the summer of 2020 and the NFT craze that ensued in 2021, many users have simply been priced out of the network. Gas prices for simple transactions rose from a few cents in Ethereum’s early days, to the double figures - the situation is even worse if one is interacting with smart contracts (Ethereum’s main USP), with trades on Uniswap rarely possible to execute nowadays without spending upwards of $100. So much has been spent on fees on the Ethereum blockchain ($10 billion in 2021 alone) that many projects have decided to capitalise on nascent developments in the layer two arena. Indeed, it is for the precise reason of a willingness to make such trade-offs that projects such as Solana and Polygon gained so much traction last year.
In line with the mantra of decentralisation, there are now a plethora of options to choose from when it comes to scaling opportunities, and users may choose to use different ones based on their requirements. Users looking to use the chain with the fastest transaction finality will flock to Avalanche, whereas those who want to “inherit” a lot of Ethereum’s security but not compromise on transaction fees may be more inclined to adopt Polygon. It is worth noting that a lot of these new technologies are not directly competing with one another, but rather that they complement one another: a litany of different options (not only on-chain, but also with EVM compatible sidechains) allows for far greater total transaction output and thus greater adoption.
For investors wishing to capitalise on the dApp economy, this has created an interesting dynamic. As Raoul Pal often discusses, there is now a clear “risk curve” in terms of investing in the blockchain space: speculators can embrace more risk by choosing to invest in projects that have smaller market caps and less dominance, in search of capitalising on higher returns - the aforementioned has made headlines in 2021 for his successful strategy in adopting the ethos of allocating further down the risk curve during times in which the market is bullish. As the incumbent, Ethereum retains its position as the most significant Turing complete blockchain, and for the time being this looks unlikely to change, especially considering that other blockchains are often hampered in their pursuit of network adoption effects if they are not compatible with Ethereum (see: Polygon, Avalanche, Binance Smart Chain, Fantom, and some planned Polkadot parachains).
Nevertheless, from the perspective of an investor it would be remiss to advise someone to solely invest in just one platform, as there is extraordinary benefit not only in potential upside from diversification and the merits of diversification for risk management, but also for the consumer - it is extremely unlikely that Ethereum’s layer one is an appropriate option for the overwhelming majority of its users, and to expect this alone to scale to the requisite levels for mass adoption is farcical. To invest in just one of the scaling solutions would be to exclude a variety of different options for scaling, and it is important that several succeed in order to cater for their various niches.
PieDAO is a decentralised asset allocation DAO that focuses on building indexes for the average user, specialising in mitigating the risks and uncertainties associated with investing, but also in removing the complexities by offering simple products. It is with scaling in mind that the DAO is currently working on bringing their next product to market. Following a meeting in the PieDAO Discord (everyone is welcome to attend such meetings), Alessio Delmonti pitched his vision for a new index (pie) that focuses on bringing the aforementioned opportunities to the masses in a way that is easy to understand.
After community deliberation over naming the pie, it appears that the branding direction is leaning towards the ticker $LTOO, to represent the fact that the pie not only comprises opportunities to invest in the layer two arena, but also in some of the other innovations focused on scaling, such as side chains. The current proposed composition of the pie is as follows:
There were many factors that were relevant in choosing which assets would be eligible to be a part of this pie, such as minimum valuation threshold ($50m+ market cap), liquidity and slippage concerns (possibility to buy $1m+ with less than 1% slippage), and time on the market (although there are certain potential exception considerations here, included assets would ideally have been on the market for more than 60 days). There are projects working on scaling solutions that, as of yet, still have not released a native token, and the team managing the $LTOO pie will be keeping a close eye on these assets and whether or not they are appropriate for inclusion.
MATIC (Polygon): 20%
Polygon, which retains the ticker of its former name Matic, is a layer two scaling solution founded by Sandeep Nailwal. At $1.53 at the time of writing, MATIC currently has a market cap in excess of $10 billion (well over 30% of this is staked), with a 30 day average transaction count of 3.4 million, and over 132 million total wallet addresses. The reason that Polygon has gained so much transaction recently is not only due to the fact that Ethereum has become undesirable to use due to the high gas fees, but also because the way in which Polygon’s architecture is built means that there are very few trade-offs in terms of security for participants.
LUNA: 20%
Terra’s $LUNA is the smart contracts platform home to the stablecoin $UST. As one of the fastest - if not the fastest - growing ecosystems in the crypto economy, $LUNA has performed extraordinarily well during the bull market so far. With the goal of decentralising money both in terms of storing value and as a medium of exchange, Terra’s support from billionaires such as Mike Novogratz has meant that it is already being used in many real-world scenarios, even amongst those who would otherwise be unfamiliar with blockchains. Terra’s home is South Korea, so it makes sense that it is most popular there: currently there are over two million people using the network per year, capitalising on the 20% yields that they can earn from $UST during a macroeconomic environment in which savings are being eroded and interest rates falling to record lows. The $LUNA stablecoin is used not only to collateralise in order to mint $UST, but it also can be used in protocol governance to further the goal of decentralisation. Perhaps the most interesting aspect of the Terra ecosystem, however is the Mirror Protocol, which focuses on building synthetic assets and securities on the blockchain. By using the Mirror Protocol, investors are able to speculate on the stock market without the burden of all the traditional intermediaries; Mirror Protocol is thus particularly useful in countries in which freedom is stifled by bureaucracy and elitism, such as the United States - US investors can face extraordinary difficulties when it comes to investing in the stock market unless they are “accredited investors”.
FTM: 20%
EVM-compatible Fantom has also risen to prominence in recent times due to the fact that their aBFT consensus protocol, Lachesis, allows for near-instant transactions with extremely low fees. By using a different consensus mechanism to solve the Byzantine Generals’ Problem, Fantom is able to scale more effectively than the Nakamoto Consensus or the Classical Consensus would ever be able to, all whilst maintaining a high degree of security.
Over the course of 2021, FTM performed exceptionally well: rising from circa $44m in market cap on January 1st to a high of over $8 billion at the end of October.
WAVAX: 12%
The only asset in the pie that is to be wrapped, WAVAX represents the native token of the Avalanche blockchain. Avalanche was founded in 2018 at Cornell University by Professor Emin Gün Sirer with the purpose of reimagining the ways in which blockchain consensus mechanisms can operate more efficiently. In 2019 and 2020 Sirer went on to successfully raise $60m to start the project, and the mainnet went live in September of 2020. After the proposed consensus protocol was ratified by an anonymous group known only as Team Rocket in their paper Snowflake to Avalanche: A Novel Metastable Consensus Protocol Family for Cryptocurrencies (2018), Sirer brought the protocol to market. Avalanche has since become one of the largest blockchains in the space, and the blockchain with the highest speed in terms of transaction to finality.
Avalanche takes a slightly different approach to scaling compared to many other scaling solutions. As well as being EVM-compatible, and thus hugely beneficial to the Ethereum ecosystem, Avalanche is divided into three separate chains:
Exchange (X) Chain: this is used to mint assets
Platform (P) Chain: this allows for customisable blockchains to be built. In essence, it allows for developers to build “walled gardens” and subnets. These configurations make it possible for transactions to be validated without requiring the consensus of the entire network
Contract (C) Chain: this is where Avalanche’s smart contracts are hosted. Since the C-Chain is EVM-compatible it is very easy for developers to deploy Ethereum-based dApps to the Avalanche blockchain. It is perhaps for this reason that Avalanche was so quickly and seamlessly integrated into Aave, with Aave founder Stani Kulechov noting that the reason they added it was that “it just worked”, and did what it said on the tin.
GNO: 12%
Formerly the xDAI chain, the Gnosis Chain is focused on making fast and inexpensive payments. Almost unique to this chain is that it has a dual-token model, in which xDAI can be used to make transactions and payments as well as pay fees, and STAKE (which is currently undergoing migration to GNO) is used to support to the PoS consensus - when the Gnosis Beacon Chain is fully implemented GNO will be used for consensus rather than STAKE. Whilst xDAI is stable around $1, GNO serves the purpose of community governance, and for this reason remains volatile. Many Web3 users will already be familiar with minting on xDAI in order to receive POAPs - this chain was so chosen because of how seamless the experience has proven to be for this use case in particular, although there are many more use cases, and the ecosystem is expanding rapidly, as shown by some of the integrations below.
METIS: 10%
Metis has gained a lot of attention recently not only because of the technological developments that the project promises for the ecosystem, but also because of the core team’s personal links to Vitalik Buterin: it has now been publicly disclosed that Buterin’s mother, Natalia Ameline, is working at the project alongside her friend Elena Sinelnikova (the CEO of Metis), who has known Vitalik since he was a toddler.
By focusing on Optimistic Rollups, Metis does not compromise on Ethereum’s security and decentralisation. In fact, ETH 2.0 sharding will actually be built on top of Metis’ infrastructure, demonstrating how integral the project is to Ethereum’s future ecosystem and roadmap. Metis has been focused on implementing many of Vitalik’s ideas with regard to the future of Ethereum since 2014, and has even begun making strides towards building more seamless DAC (Decentralised Autonomous Company) infrastructure. It is perhaps for this reason that since the mainnet was launched on November 19th the market cap of $METIS rose from $134m to a peak of $674m on the 16th January.
SKL: 3%
The last two proposed allocations to the pie are to receive smaller allocations due to the relative sizes of their market caps. SKALE Network was founded in 2018 by Jack O’Holleran and Konstantin Kladko in San Francisco. Backed by investment from names as well-known as Winklevoss Capital and Consensys, SKALE’s mission is to “bring the power of Ethereum to billions of users”. They plan to do this by focusing on interoperability between EVM-compatible chains by using BLS threshold signatures, which means that dApp-specific chains are able to run at a higher level of performance.
ZKS: 3%
Zero-Knowledge Rollups are a combination of Rollup technology and Zero-Knowledge Proofs, which are cryptographic proofs that allow for something to be known and proven without sharing all of the relevant information.
ZKS’ innovation is that it is able to harness Zero-Knowledge Proofs to verify transactions in a scalable manner without being forced to compromise on security, an application that is particularly useful when bridging assets between layer two and layer one.
Conclusion
There are many different aspects that one could try to wrap their head around in pursuit of understanding the best ways to invest in scaling Ethereum, and the trade-offs that are associated with each.
However, when there are other aspects of DeFi to learn about, NFTs, oracles, etc., it quickly becomes clear that the task of becoming proficient in understanding everything, much less having an edge on the market, is a near-impossible goal even for the most involved investors in the space, but especially for those who aren’t. Nevertheless, it is clear that for Ethereum to scale there are several different approaches that can be embarked upon, and different approaches have different merits and drawbacks. There is a lot of potential upside upon which one can capitalise, and the best way to do this is to take a bet on the sector as a whole rather than to try one’s hand at speculating in a sphere that requirements an inordinate amount of specialised understanding.
Fortunately, with PieDAO, investors can outsource that expertise to a decentralised community “hive mind”, which comprises not only specialists and industry leaders, but an active group of fund managers who have their incentives aligned to build and maintain the best indexes that they possibly can.
Since the goal of PieDAO is to allow anyone to employ responsible and disciplined wealth-generation strategies that function efficiently over the longer term, the team is currently working diligently to bring the $LTOO product to market within the next couple of months to capitalise on these nascent developments, and to quench the desires of anyone interested in investing in the sector as a whole without needing to worry about losing an edge due to lack of specialised knowledge.
For more information about PieDAO:
Website: https://www.piedao.org/
Discord: https://discord.gg/TmT4Zq8hWD
Twitter: https://twitter.com/PieDAO_DeFi