How do blockchain Layer 3 services capture value?

Editor's Note: This article comes fromChain News ChainNewsEditor's Note: This article comes frommediumChain News ChainNews

, by Gregory Rocco (Head of Strategy at ConsenSys), reprinted with permission by Odaily.

in short:

Earlier this month, Kyle Samani, the co-founder of Multicoin Capital, published an article describing how the protocols of Layer 1 and Layer 2 of the blockchain capture value, and proposed a theoretical framework for analyzing how these two layers of protocols capture value.

in short:

On Layer 2 of the blockchain, what is measured is whether the asset has the ability to capture any meaningful value by storing "external, valuable state". It basically boils down to this: if you can pull the community cost apart as the only glue, it won't capture any valuable state.

Governance as a method of value capture is problematic, payment tokens capture little to no value, but work tokens capture valuable state and cash flow. For example, Augur holds the valuable state of funds locked in the Augur contract, while Livepeer can be measured based on open interest (available cash flow).

For example, Radar Relay needs to consider risk factors related to the Ethereum protocol (measured through the Layer 1 framework) and 0x governance risk. If a governance decision affects or disrupts a business built on top of 0x, there is a cost associated with voting to consider - this can be more than 51% of the voting power on the protocol, rather than forking the protocol just to satisfy one's own needs (Think of the lesson of the Hydro protocol forking from the 0x protocol).

To give concrete examples of these services, we will use two examples of Layer 3 applications. Two examples of these are Veil and Radar Relay.

Veil is essentially a service for both creating and participating in Augur-powered prediction markets and trading derivatives on those markets through the 0x protocol. Obviously, these two supporting middle layer protocols sit on top of the Ethereum blockchain.

Augur prediction market user interface

The user interface of the Augur prediction market For many people, the user interface of Veil is simpler and more friendly. Veil creates value by simplifying the experience of ordinary users. Redeem their positions at a fee of 1% before finalizing.

Radar Relay is a non-custodial exchange built on the 0x protocol. Of course, its underlying layer is the Ethereum blockchain. Radar Relay initially charged sellers and buyers 0.45% in ZRX and 0.70% in ZRX, but later dropped these fees in order to attract user interest. But if they want sustainable development, they will probably still have to take the road of charging in the future.

What is the framework for analyzing Layer 3 value capture?

Assessing the value of these Layer 3 platforms is usually done by analyzing interest in their current charging models. It seems simple, similar to how we measure existing businesses and value them.

However, there are other factors that need to be factored into the consideration, such as the risk of the layers upon which these services are built, as each layer below these services has its own risk profile.

For example, Radar Relay needs to consider risk factors related to the Ethereum protocol (measured through the Layer 1 framework) and 0x governance risk. If a governance decision affects or disrupts a business built on top of 0x, there is a cost associated with voting to consider - this can be more than 51% of the voting power on the protocol, rather than forking the protocol just to satisfy one's own needs (Think of the lesson of the Hydro protocol forking from the 0x protocol).

Similarly, if Ethereum governance decisions affect middle-layer protocols like 0x, there will be corresponding costs. However, the main cost to consider when looking at these base layer protocols is the risk of attacking the blockchain network, as outlined in a previous framework by Kyle Samani of Multicoin in his article. If the underlying public chain is severely damaged by attacks, it is difficult to simply move to another protocol, because the latter may not provide all the content of the business you have built. You not only need a new basic public chain, but also need to rebuild the middle layer protocol to build the business.

Taking Veil as an example, they not only have to worry about the decisions and compromises of the base protocol, but also the decisions and risks related to the two middle layer protocols, Augur and 0x. The more you integrate with Layer 3 services, the more risk you incur.

secondary title

• Veil — risk: dependency;

• 0x and Augur — risks: protocol failure, governance;

• Ethereum — Risks: Network Compromise, Governance.

Attention must be paid to the risks associated with Layer 3 protocols

It should be noted that most of these Layer 3 services are not necessary. For example, even without the help of Veil or Radar Relay, some of the services they provide may be implemented in other ways, but the user experience they provide is what makes It's something that creates value. Think about it, as a user, do I want to use Augur's client, or do I want to use the simple experience Veil provides to trade derivatives on existing markets?

Attention must be paid to the risks associated with Layer 3 protocols

It should be noted that most of these Layer 3 services are not necessary. For example, even without the help of Veil or Radar Relay, some of the services they provide may be implemented in other ways, but the user experience they provide is what makes It's something that creates value. Think about it, as a user, do I want to use Augur's client, or do I want to use the simple experience Veil provides to trade derivatives on existing markets?