Crypto Fundamentals #91

🌞 BET on Drift brings prediction markets to Solana

Polymarket has emerged this year as a blockchain application with real product-market fit, boasting over $350 million in trading volume for consecutive months and attracting more than 50k unique monthly active traders. However, the onboarding process remains cumbersome—bridging assets to Polygon and funding your account to trade is no small feat. This highlights a significant issue with Ethereum today: liquidity is increasingly fragmented across rollups. In contrast, Solana has gained recognition this year as a unified blockchain stack, positioning it as an attractive option for a prediction market.

Drift, a leading perpetuals exchange on Solana was the first to jump on this idea, launching their prediction market BET this week. Taking advantage of a gap in the market, with excitement and betting activity around a neck-to-neck election cycle, Drift has positioned themselves to come out in front. BET is built directly on top of Drift’s existing protocol which includes a perpetuals exchange and borrow/lend protocol. This means that users can take advantage of the functionalities of the underlying protocols, allowing users to earn yield on their prediction market positions, bet with over 30 tokens, and create more complex, structured bets.

BET initially launched with a focus on U.S. election markets, allowing for direct comparison between Polymarket and Drift. Using Artemis' new Prediction Market Sector dashboard, you can now contrast pricing across these two major platforms (more metrics coming soon!).

Notably, Drift’s BET tends to price positions slightly higher than Polymarket, with a ¢1.1 spread observed on a $100k Kamala sell order.

The ongoing conversation in prediction markets centers on whether volume will persist post-election and if these markets can sustain themselves beyond the four-year election cycles. We're also witnessing a real-time comparison of the integrated versus modular approach: Polymarket benefits from first-mover advantage on Polygon, while Drift, despite launching later, leverages Solana’s user base and liquidity.

💫 The Layer 2 Debate Returns: Are Rollups Truly Extensions of Ethereum?

This week, a familiar debate resurfaced within the Ethereum community, catalyzed by a provocative tweet from Max Resnick (X/MaxResnick1). He states that popular Layer 2 (L2) solutions like Base, Arbitrum, and Optimism are not extensions of Ethereum but distinct entities. His assertion—"Base is not Ethereum, it is Base. Arbitrum is not Ethereum, it is Arbitrum. Optimism is not Ethereum, it is Optimism. L2s are not extensions of the L1."—sparked widespread discussion.

Key industry figures, including Base’s Jesse Pollack, weighed in. Pollack disagreed with Resnick, arguing that L2s are indeed part of Ethereum, albeit with current technical limitations. Haun Venture’s Breck Stodghill added nuance by emphasizing the dual nature of L2s: while they extend Ethereum’s usability as a gas token, they also dilute its value capture due to mechanisms like the lack of ETH burning on L2s.

Let’s dive into the data. These charts reveal some critical dynamics:

1. User Migration to L2s: The charts clearly show a significant increase in activity on L2s like Optimism and Base, especially in daily active addresses and transactions. This suggests that while Ethereum’s L1 remains foundational, user engagement is shifting. This migration could signal a trend where Ethereum's role evolves more into a settlement layer rather than a transaction-heavy network.

2. Economic Impact on Ethereum: Despite the growing activity on L2s, Ethereum still dominates in Total Value Locked (TVL) and Fees. However, as Breck pointed out, the value capture is "leaky." The economic benefits from L2 activity aren't fully flowing back to Ethereum’s base layer. This has significant implications for Ethereum’s long-term value proposition, especially as L2s become more self-sufficient and potentially less reliant on Ethereum.

The debate isn’t just about semantics—whether L2s are “extensions” of Ethereum. It’s about understanding the shifting landscape of blockchain architecture. L2s are undeniably enhancing Ethereum’s scalability and usability, but they are also introducing new challenges:

• Fragmentation Risk: As more users migrate to L2s, Ethereum risks becoming less relevant as a direct interaction layer, and liquidity is fragmented across various ecosystems.
• Sustainability of Value Capture: Ethereum’s economic model, particularly around ETH as a deflationary asset, is under pressure. If L2s continue to grow without mechanisms that directly benefit Ethereum’s L1 (like EIP-1559’s ETH burn), the value proposition of holding ETH could weaken.

The resurgence of this debate highlights the evolving relationship between Ethereum and its L2s. While L2s are boosting Ethereum’s scalability and reach, they also pose new challenges in terms of network cohesion and value capture. As these dynamics continue to unfold, Ethereum’s future may hinge on how well it can integrate L2s while maintaining its foundational role and economic integrity.