The Token Agnostic Approach in Venture Capital

As a venture capitalist, I maintain a “token agnostic” stance, which means that we focus on investing in equity rather than tokens at the early stages of a new technology’s development. We only receive tokens on a pro-rata basis. Our belief is that a token should serve a crucial role to be valid. Simply having tokens for the sake of having tokens raises red flags and can lead to significant financial losses for investors.

Trilemma: Exploring Different Approaches

Now, let’s delve into the three facets of this trilemma:

1. Off-Chain Networks

Off-chain networks, such as Lightning and RGB, are not blockchains but networks that save data off-chain. This approach offers scalability and privacy benefits, making it optimal for application-specific use cases like scaling payments. However, it lacks the comprehensive functionalities of smart contract blockchains like ethereum or Solana, and it requires users to run their own nodes, resulting in a significant user experience barrier.

2. Decentralized Sidechains

Decentralized sidechains, like Stacks and Interlay, enable anyone to participate in consensus by supplementing their security budget with a new token issued by the protocol. While this approach can foster community building and facilitate capital raising, it can complicate the user experience and face opposition from bitcoin maximalists. However, the anticipation is that increased usage and network effect will make the token economically sustainable.

3. Federated Sidechains

Federated sidechains, such as Liquid and RSK, compensate miners or validators solely by the company or blockchain user fees. While this approach offers a streamlined user experience and avoids the need for a new token, it requires trust in the selected entities. Efforts are underway to automate and democratize membership, but trust now shifts to the hardware being utilized.

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Mining vs. Bridging

It’s important to distinguish between RSK and Liquid. RSK employs Merged Mining, while token-based sidechains build decentralized bridges using their native token as collateral. BitVM, a newly introduced solution, aims to make federated bridges more trust-minimized and eliminate the need for complex hardware-based configurations.

Potential Solutions to Solve the Trilemma

Several prospective solutions, like Drivechains and Validity Rollups, necessitate a bitcoin soft fork and face implementation challenges. Merged Mining shows promise, especially with RSK’s adoption. BitVM could revolutionize federated bridges and resolve the decentralization dilemma.

The Question of EVM

Many sidechains opt for the ethereum Virtual Machine (EVM) for compatibility and fast market entry. However, alternatives like Stacks and Starkware have developed their own virtual machines to provide developers with superior applications and differentiate themselves from ethereum.

Abolishing All Tokens

The token vs. no token debate is akin to the startup equity vs. corporate equity conundrum. Tokens can strengthen community ties and finance development, but they also add complexity. BASE, a Layer-2 ethereum initiative, has gained traction without its own token, but the option remains open for the future.

The Risks and Rewards of Layer 2 Projects

Layer 2 projects come with significant risks and require substantial funds for development. New bitcoin cannot be created to fund a new blockchain’s security budget or developer community. Possessing a native token might offer a competitive edge, even if a zk-rollup method doesn’t inherently require a token. Ultimately, there are no clear-cut answers in business.

Final Thoughts

The bitcoin Layer 2 space is captivating, with protocols like Ordinals, BRC-20, and Runes attracting more Web3 developers. As Web3 investors, we focus on applications and infrastructure, steering clear of token trading. Our interests lie in the potential of these technologies to revolutionize various industries.

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By Team