Karim’s Thoughts

My next post follow’s the format of the MOOC; going over the Web3 Landscape in 3 posts for the 3 videos.
I’ll be referencing information presented by Dan Robinson who leads this lecture as well as Research at Paradigm.

Lecture 2

L1 & L2

Let’s immediately address the elephant in the room. WTF is L1/L2? If you come from machine learning or even a mathematics background well then surely you must be thinking of lasso and ridge regression, respectively. Or if you come from computer architecture, we’re talking about caches, right?

Well in the world of cryptocurrencies, all of the above is not what we mean. L1 and L2 refer to where in the technology stack where talking about. L1 is the underlying technology that is being used. This is the actual blockchain architecture. The other important identifier is that you can build other applications/businesses on top of it. The most notable examples are Bitcoin and Ethereum. L2 on the other hand is the next layer in the stack and sits directly above the blockchain that is being used. This is where business/user cases happen (think social networks, decentralized exchanges, etc.). Alternatively, they can be solutions that are centered around inheriting the security of the underlying chain while shifting work away from the L1 to speed up transactions. A popular approach is rollups (optimistic and zero-knowledge). Some larger players in this space are Optimisim, Arbitrum, and Injective Protocol.

Still, that might not be enough so let me break it down even further. Think of L1 as the critical infrastructure you need to do business. You and I (hopefully) are free enough (no pun intended) to decide where we can live. This can mean we are free to decide whether we should live in America, China, Morocco, or anything other countries we are considering. Not realistic? Fine. Pick between two neighboring counties such as Orange Country and just north of it, Los Angeles country. LA is known for being a liberal-leaning region, and OC is known for being more conservative. Why does this matter? Well fundamentally, the place you choose to live and start a business in will determine what infrastructure you have available to you. Think public security, the priority of fixing potholes, taxes, etc. This choice you make, although not permanent, is very hard to change once you start. This is L1 infrastructure. Can you still start a business that is an L1 solution? Absolutely! The county and city don’t have lawmakers fixing potholes themselves. They hire contractors and external companies to do it. They are analogous to L1 solutions.

L2 infrastructure is what sits on top of L1. Great, so you picked what city you want to start your business in. Maybe your business is to start a new apartment building complex. You go buy one huge city block and you construct several buildings. Why stop at just creating residential units for people to live in? Why not make the space a community that people want to stay in and spend more money in? So you decide to build retail space on the ground floor of every building and even on one corner, just all retail and no residential. Fantastic! You just created overlaying network where businesses like clothing stores, coffee shops, and restaurants can now move into. You created an L2 solution.

Now that you have a better understanding of what L1 and L2 are, let’s get back to Entrepreneurship in Web3. Dan offers the following questions as guidance to help us decide what we should build.

• Problem
  • What pain point are you addressing?
• Key Differentiator
  • How is your solution different?
• Customer
  • Who is this for?
• Moat
  • How do you defend against competitors? Short term and long term. Against giant corporations with deep pockets and smaller newer startups?
• Business model
  • How does your idea/business make money?

Remember these questions as you will need to constantly visit them as you create and verify your ideas. It’s also helpful to ask these questions of startups that you are considering joining (remember you must always learn) or maybe later on in life when you’re considering investing.

If you’d like to see how L1 solutions such as Solana, Polygon, or Avalanche answer the 5 golden questions, refer to the video around 11:30. For L2-solutions, head over to 28:05.

If you’re feeling inspired, starting at 21:15, Dan talks about some of the open problems that a new L1 solution could solve (hint hint). To make it even easier, Haseeb asks the perfect layup question at 22:24 (what is the kind of founder than can build a layer 1). Similarly, if you’re interested in open problems in L2, Dan addresses them at 30:16.

Infrastructure

At face value, this may seem like a repeat of L1 but it’s not. In fact, it’s very different. This area addresses more the actual components, both virtually and physically, that are needed to participate in crypto. Think wallets (where you store the passphrase to your coins), block building (one block on the blockchain isn’t just your individual transactions its actually many transactions), developer tools, etc. Dan describes it as anything “that’s really B2B” and gives a good overview starting at 34:22. Haseeb also asks Dan a great question at 37:18 about his perspective on why most of the companies in this area are Ethereum focused and not Bitcoin.

Fundamentally, what’s going on in this area is that if you look at the blockchain, it’s not immediately accessible to everyone. It’s almost like having land but no one can start a business on it because there are no roads, water, or electricity. Whether it’s Bitcoin, Ethereum, or any other chain, accessing the blocks on the chain, reading them, and writing new ones, it’s hard for the average software developer yet alone average person (who may or may not be technically inclined). Thus, this area of the industry is really about how can we make this more accessible to people.

You can also think of Bitcoin being access to protected lands for public benefit such as National or State Parks and Ethereum as being land approved for commercial use (the downtown of your typical city). While we do have roads and trails in National Parks, there isn’t much business outside of that because people want to maintain a level of purity. Meanwhile, Ethereum has tons of building opportunities because that’s really what it was designed for as well as what the community around it wants to do with it. Does this mean you can’t start a business on top of Bitcoin? Not at all. It’s just going to be a little harder to get traction going.

The 5 Golden questions are answered with Fireblocks as the Case Study Infrastructure company at 39:49. Current open-ended problems that are ripe for a new solution are explained at 44:20.

Centralized Finance

Dan starts talking about this area at 48:26.

This area may seem a little counterproductive as one of the big selling points of crypto is the following section: Decentralized Finance (DeFi). Nonetheless, it’s another significant portion for both good and bad reasons. Dan identifies three large areas starting at 48:26.

The first is exchanges and as you may have heard in recent news, one of them turned out to be a giant scam; FTX. The other more reputable large players are Coinbase and Binance though there are more. Essentially these exchanges are where you can buy and sell coins similar to a stock market exchange like the Nasdaq or New York Stock Exchange. The larger players in this area can also differentiate themselves with features traditionally found at stock brokers. Such features include margin trading, crypto lending, etc. If you’re curious about how such companies answer the 5 questions, watch the video starting from 54:05. If you’re thinking about starting your own exchange, Haseeb asks Dan about the qualities such founders posses at 56:19. Immediately after, they talk about why is it that the largest companies in crypto happen to be exchanges. Spoiler alert, Dan speculates it’s because the best use case of crypto until now has literally been to just buy and sell coins (these companies do make money off trading fees).

The next area is crypto on and off-ramps. Buying crypto isn’t as simple as turning on your computer and trying to convince it to accept your dollars to exchange for crypto. On-ramp companies offer users the ability to exchange traditional state-backed currencies (think dollars, euros, dirhams, etc.) for desired cryptocurrencies (think Bitcoin, Ether, Dogecoin, etc.). The opposite is true for off-ramp companies. They allow you exchange your coins for traditional currencies. Note, on-ramp and off-ramp companies can be the same.

Finally, there are custodians and these are companies that are willing to hold your crypto and keep it safe for you. These are often the exchanges we spoke of earlier although they don’t have to be.

If you’re looking for inspiration on some of the open problems in this space, checkout the lecture starting at 58:58.

Decentralized Finance (DeFi)

Dan begins introduction around 1:00:23. In his words, DeFi is perhaps one of the more popular areas because of how quickly someone can launch a startup in this area. My take is that this is really because the notion of decentralization is that you takeaway power from one central place and distribute it. This is possible because of the technology blockchains provide and it’s why we see industries such as Decentralized Exchanges, NFT Marketplaces, and Insurance companies popping up. It’s made even easier by L1 technologies like Ethereum because you can program instructions into the blockchain (if something happens execute these instructions). This programmability is more popularly known as Smart Contracts.

Dan uses Decentralized Exchanges to answer the 5 questions starting at 1:01:36. He also goes into the backstory of how Uniswap was founded (side note Dan has a lot of experience with this company) which brings up an interesting insight: “you can build a startup in your garage”. If you’re really interested in Uniswap and how you can even build something better than them, check out Dan’s public talk titled “Uniswap v3”.

Haseeb asks about the types of founders that would found a startup in this area 1:05:30. Some of the current open problems are explored at 1:07:19.

TL;DR

Crypto is now it’s own full blown industry. As such, there are many areas to explore and they all come with their own challenges on personal, market, business, and technical levels. In this post we visit a few of these areas as well as define some terms that are widely used in industry.