The "Land Finance" and "Salinization Dilemma" of the Public Chain Ecosystem.

This article draws on industrial development ideas to explore the potential bottlenecks in the current construction process of L1 and L2 ecosystems, as well as future directions.

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The Eternal Driving Force: Asset Issuance

Recently, I came across an interesting concept — the “salinization of land” on public chains, where a large amount of land (L2) is reclaimed but no saplings (Dapps) are planted. If we liken the public chain to land, the ecosystem can be seen as the industries on the land, abstracting out a “financial entity.” In this perspective, akin to a government, the system income of ETH (or other public chains) can also be divided into three parts:

(1) Direct income/tax revenue (Gas fee)

(2) Fiscal deficit (block rewards)

(3) Non-tax revenue, mainly land finance (asset issuance)

According to Tokenterminal data, the current annualized fees of ETH (corresponding to tax revenue) is about $6.9 billion USD, while the non-tax revenue portion includes:

(1) In May 2020 (before DeFi Summer), the total market value of ERC20 tokens was close to 100% of ETH’s market value, approximately $100 billion USD; the current total market value is $449 billion USD, which is 103% of ETH’s total market value.

(2) The total market value of DeFi tokens is $115.3 billion USD, about 26% of ETH’s market value.

(3) The combined FDV of the Top 10 L2s is $97.3 billion USD (with a circulating market value of $30 billion+), about 22% of ETH’s market value.

Data source: Coingecko

ERC20 tokens, DeFi tokens, and the market value of the Top 10 L2s are respectively 65x, 16x, and 14x of the annualized fees. So, up to now, the driving force behind the Ethereum ecosystem and even the entire crypto space is not mass adoption, but rather asset creation/issuance. The development trajectory of Ethereum goes like this, from large-scale ICOs, to DeFi Summer, NFT Summer, then L2, and now Restaking. The non-ETH ecosystem follows a similar pattern, with RWA, Meme, Socialfi, and Metaverse, all revolving around asset issuance. The only difference lies in “what assets are issued?” and “how assets are issued?”

Development of the Ethereum Ecosystem from the Perspective of Land Finance

Land finance originates from the financial gap caused by tax reform in local governments. It is undeniable that land finance has played a positive role in economic growth for a long time, completing the initial capital accumulation and urbanization process. In the simplest model, land-related revenue becomes government income, which is then used for investment, transfers (including salaries for public health and education), further leveraging consumption, and driving employment. The “virtual market value” of real estate appreciation fixes the value of the newly issued assets, leading to wealth (static) or income (dynamic) for everyone.

The development of the public chain ecosystem bears some resemblance. Initial coin offerings (ICOs) were akin to irregular urbanization, while DeFi Summer, Gamefi, and NFTs resembled planned urbanization. Competitive L1 and L2 networks are more like building new districts after the carrying capacity of the main urban area saturates, relieving demand.

The benefit of this process is the continuous creation of new assets. Especially during the construction of new districts, not only housing is built but also supporting infrastructure such as commerce, transportation, healthcare, and schools, leading to a massive investment boom. In the public chain ecosystem, this is reflected in the continuous issuance of new protocols and assets, which accelerate ecosystem prosperity during bull markets.

A typical case is the Curve ecosystem. If we liken Curve to a residential area, we find that not only housing can be sold, but also property, parking spaces, storefronts, and even convenience stores at the entrance have been securitized (issued and listed). This approach is controversial. Supporters argue that it demonstrates a prosperous ecosystem and efficient division of labor, while opponents argue that “the city’s goose has already been taxed for 90 years.”

Source: Mr. Block

Misuse of Land Finance Leads to Salinization Issues

2022 marked a turning point in the development of competitive L1 and L2 networks. This was against the backdrop of a 62.3-fold increase in total gas usage on Ethereum from January 2017 to November 2021. Therefore, competitive L1 and L2 networks essentially absorbed the overflow demand from Ethereum. Similarly, from the perspective of land finance, the main urban area cannot accommodate the overflow of investment and residential demands. This leads to the emergence of satellite cities and new district constructions. The land premiums captured from these new districts can then be used for infrastructure development, thus restarting the economic cycle.

Source：Glassnode

However, this cycle does not have an infinite endpoint. The first issue is that after the market turns bearish in 2022, overflow demand no longer exists. The second issue is the inability to duplicate too many wheels; schools in urban areas can be relocated to suburban areas, and DeFi and infrastructure protocols on the Ethereum main chain can migrate to other L1 and L2 networks. Therefore, we can see many L2 networks experiencing salinization. The essence of this phenomenon is that most of Ethereum’s demand serves “asset issuance,” and L2 networks without asset issuance capabilities have inherent deficiencies.

One of the most intuitive examples is that only Ethereum, Bitcoin, and Solana have truly successful meme tokens in terms of market value, duration, and community popularity. A notable L2, AIdoge, has a current market value of only $120 million USD.

Furthermore, this ecosystem development centered around asset creation has also given rise to some interesting patterns.

The first pattern is the rise of Airdrop Hunters. Analogous to land finance, the practice of airdropping tokens to consumers is somewhat similar to “monetizing shantytown renovations.” Initially, land is sold to obtain development funds for infrastructure construction, and rewards are distributed to early residents (users). The activities and residency of these residents attract more operators, and the prosperity of production and life makes the land more valuable. Therefore, we can see that incentives in public chains are becoming more and more generous, with disruptors like zkfair, Blast, and Manta emerging. However, this is also a progressively escalating state; the sustainability of short-term incentives is decreasing, and more ruthless profit farmers are beginning to emerge.

The second pattern is the emergence of developer incentives. Analogous to land finance, airdrops to developers (To B) are more akin to industrial policies. Governments provide a series of preferential policies for companies settling in new industrial parks, such as almost free land, low-interest loans, and administrative benefits. The only requirement is that companies must contribute enough taxes at a certain point in time. In the crypto industry, public chains can provide a range of services such as investment, incubation, market cooperation, and token incentives, but protocols need to contribute to the public chain in terms of Total Value Locked (TVL), user numbers, and transaction volume. There are many typical cases, and some public chains even establish separate entities (such as Near’s Proximity Labs) to promote ecosystem development.

However, it is evident that whether it’s To C or To B, the output generated by subsidies will be unable to cover costs for a long time, leading to some problems: 1) Programming towards subsidies, such as severe homogeneity in projects on platforms like Blast. 2) A sharp decrease in users after incentives are distributed, leading to “ghost chains.” This problem is also prevalent in industrial policies. A friend who works for a unicorn electronic components company recently told me that they signed many industrial cooperation agreements with local governments over the past few years, obtaining land at low prices. However, now the company does not have enough resources to expand production, making it difficult to achieve the tax/employment goals to be fulfilled in the coming years.

In Search of Fertile Ground

One of Munger’s investment principles is “fish where the fish are,” meaning in the crypto world, fish represent the ability to create assets (or issue them). Only in large ecosystems or those with new asset-creation capabilities will there be significant opportunities.

The Bitcoin ecosystem is currently the largest and only full-track opportunity. The emergence and development of NFTs in the Bitcoin ecosystem resemble a “renaissance” of Bitcoin. Art may not directly increase productivity, and NFTs are similar in this regard, but they can bring about a change in issuance methods, allowing Bitcoin to return to the center of crypto attention and gather community consensus and participation. The current Bitcoin ecosystem is akin to Western Europe of centuries past, with Bitcoin L2 networks represented by Merlin, Bitlayer, BSquare, RGB++, and heavy asset DeFi represented by BitSmiley, poised to launch an industrial revolution that will change productivity.

ETH’s growth rate may be slower in this cycle, but it hasn’t changed the fact that it is still on the right path. Although duplicating DEXes, animal avatars, or play-to-earn (P2E) mini-games may seem pointless, there are still some structural opportunities, akin to “new infrastructure” in the traditional world. The first certain opportunity is Restaking. We’ve talked a lot about Restaking, but LRD is just the beginning, with a series of downstream and derivative service areas yet to be fulfilled.

The second sub-track worth paying attention to is ZK hardware acceleration. The next 1-2 years are likely to see a large-scale explosion of ZK applications, but in practical business, most projects need to limit ZK proof generation to seconds or minutes. Achieving this using only CPU calculations is almost impossible in the current scenario, making hardware acceleration the preferred method for generating ZK proofs at high performance.

The importance of hardware acceleration for ZK is equivalent to the importance of oracles for DeFi. It is currently the most urgent and essential infrastructure for the ZK track, with a high probability of seeing projects worth billions emerge. We are already seeing many related projects steadily progressing.

Source: Coinbase Ventures

Vitalik pointed out at this year’s Hong Kong Web3 Festival that the efficiency of ZK-SNARK proof generation is low and that hardware acceleration is needed for proof generation.

One of the typical representatives is Cysic (@Cysic_xyz). They will serve as the first ZK proof generation and verification layer, providing a real-time proof solution for the large-scale application of ZK from both hardware and computational network perspectives (which are also the two core requirements of ZK hardware acceleration).

Source：Cysic

Additionally, we can see that some other ecosystems have also demonstrated differentiated ecosystem structures. For example, Solana’s DePin and Meme ecosystems, Near’s AI Memeification and DAO narratives, and StarkNet’s active gaming ecosystem. These public chains, which have asset creation capabilities and have not yet completed “urbanization,” deserve higher expectations from us.

The last topic worth noting is the improvement of asset efficiency and the construction of liquidity layers (or asset reuse). When MakerDAO introduced a large number of RWAs and Blast emerged in 2023, the seeds of the liquidity layer were already planted.

Currently, there are only three truly large asset classes: BTC, ETH, and stablecoins. From a broad perspective, Restaking has laid the groundwork for the liquidity layer of ETH, while Ethena has outlined the blueprint for the liquidity layer of stablecoins. However, the largest asset, BTC, is still in an earlier stage. This trend has become more apparent recently, with projects like Lorenzo, StakeStone, and Solv making some new progress. Especially with the upcoming launch of Babylon, there is a possibility of completely changing the “low-rate” status quo of BTC, bringing on-chain demand-side income for BTC for the first time. Building upon this, Lorenzo and other potential competitors could unlock the potential for asset utilization. Compared to ETH and stablecoins, BTC Restaking and liquidity layer construction present greater non-consensus opportunities.

Source：Babylon

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