The Future of Layer-2 Networks: Tokens or User Experience?

Layer-2 Networks on the Rise

As the Ethereum ecosystem continues to evolve, layer-2 networks are taking center stage. For instance, Polygon recently reported a whopping 313,457 daily active users on January 17, 2023, marking a 30% jump since October 2022. Talk about a party! With the launch of its beta Zero-Knowledge Ethereum Virtual Machine, Polygon’s native token, MATIC, is riding a wave of bullish enthusiasm. But are we in for a rough ride? Let’s unpack that.

The Token Debate: Are They Essential?

In a bold move, Coinbase’s head of protocols, Jesse Pollak, announced at ETHDenver 2023 that the new Ethereum layer-2 network, Base, won’t rely on a token to spur development. Instead, they’re banking on the product itself to shine, which might leave token incentive models on the sidelines. Pollak stated, “Tokens can change behavior, but we’ve seen them create risky situations.” It’s like bringing cake to a party only to find out half the guests are allergic to gluten.

Streamlining User Experience Over Incentives

Pollak’s alter-ego as a user experience superhero was on full display when he emphasized the need for applications that do much more than trading cryptocurrencies. “Trading alone can’t usher in the future economy. We’re making it easier for developers to create useful applications that actually serve people,” he said. Sounds great, right? But without that shiny token, how do they attract users? If only it was that simple.

Can Base Succeed Without a Token?

Many are scratching their heads over how Base can gain traction without any token incentives. Konstantin Richter, the CEO of Blockdaemon, believes Base represents a fundamental shift in how networks operate. He claims, “We are moving away from rewarding users for using a product and focusing instead on ease of functionality and low fees.” Less incentive, more experience. Who knew we’d be playing the long game?

The Tale of Two Networks

While Base has promised no tokens, let’s look at Arbitrum—another Ethereum layer-2 network that has garnered approximately $3.35 billion in total value locked without a native token. Rumors of an air drop haven’t hindered activity, showcasing the importance of product-market fit before unleashing the token hounds. Gil Rosen from the Stanford Blockchain Accelerator pointed out that many projects dive into tokenomics too soon, limiting their ability to pivot. Lesson learned!

Final Thoughts: Balancing Incentives and Functionality

Despite varying opinions, it appears that layer-2 networks aren’t vanishing. DeFi Dad believes that the necessity for tokens remains for networks aiming for decentralized control. Taxing users’ patience and wallets alike, Ethereum’s layer-2 space must strike a balance between incentives and maximizing user experiences. Whether Base can master this balance remains to be seen. After all, who doesn’t love a good cliffhanger?