March 16, 2023
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This article was originally published June 9, 2022 on SEVO's Medium blog.
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2022 has seen rapid sell-offs across markets, and this phenomenon has only been exaggerated in the crypto world. A hawkish turn from the Federal Reserve has created a hostile environment for risk-on assets that thrived in the post-covid stimulus economy.
Staying true to form, this crypto cycle was one of extreme speculative fervor in which countless alternative crypto assets (assets that are not Bitcoin or Ethereum) saw incredible price appreciation. A popular narrative among these alt coins was that of the alternative Layer 1 (L1). These are crypto projects which seek to perform similar functions to Ethereum, promising users powerful trustless smart contract functionality, on top of which decentralized applications can be built. The majority of these alt L1s are simply Venture Capital-backed copy pasted versions of the Ethereum code that sacrifice much of its decentralization in favor of lower fees. These chains mostly provided speculators a chance at being “early” on the next big thing without making any improvements on what is now the standard model for programmable money; namely, Ethereum. Innovative or not, almost all of these projects saw massive appreciation during the bull run. Fast forward several months and all of these alts are down more than 80% against their USD pairs. With the euphoria of the bull long behind us, now is as good a time as any to challenge our old assumptions, refine our investment theses, and allocate only to those investments which we can afford to hold with confidence.
Ethereum is considered by many to be the golden standard in decentralization, second only to Bitcoin. However, it’s not without its faults. For example, miner extractable value, or MEV, has taken value from Ethereum users and enriched cartels of shadowy coders and miners, who together, cooperate to extract every drop of gwei from unsuspecting traders.
A MEV searcher bribes miners with high gas fees, and in return, miners sacrifice the fair ordering of the blockchain to validate the searcher’s transaction ahead of the user who requested it first. This creates an arbitrage opportunity, which, if transactions were ordered fairly, would not have been possible. Searchers profit from this backdoor arbitrage. chart from https://explore.flashbots.net/
The fact that “anyone” (in quotes because not everyone has access to the capital or the knowledge to do so) can profit from MEV does nothing to refute the simple fact that fair ordering is a fundamental promise of decentralization. The above chart is not representative of a vibrant free market in which value is created; rather it is a tally of all the dollars extractedfrom ETH users by the MEV cartel. A purely subtractive phenomenon.
The belief that ETH will always remain the most decentralized, secure, and popular L1 is certainly worth challenging. With that in mind, two L1s standout from the rest for their unique architectures: Solana and Hedera Hashgraph. Both of these seek some sort of interoperability with the Ethereum virtual machine, however, propose their own unique sets of solutions to the now famous Blockchain Trilemma. Solana and Hedera offer faster transactions than Ethereum, lower fees, higher throughput, faster finality, and neither has any opportunities for MEV style value extraction. While neither platform can be truly be called decentralized today, they do have clearly stated goals towards decentralization. Whether you are willing to take them on their word on not is a wholly different matter.
Of these two, Solana routinely experiences downtime, so much so that it has become a popular joke on Twitter. Solana is also notorious for its extremely shady relationship with Venture Capital to the detriment of the end user. These VCs profit from extremely one-sided vested token deals which allow them to buy tokens at a fraction of a penny on the dollar. SRM, Solana’s premium DEX token, had a fully diluted valuation < 15 billion dollars as of August of 2020. This was at a time when hardly any trading was done on the platform. SRM’s FDV peaked in September of 2021 when it reached a colossal figure of $119,899,800,000. For reference, the Solana network in its entirety had less than $12.2 billion of total value on it at that time. SRM is notoriously difficult to invest in and mostly traded on perpetual futures contracts by speculators seeking to profit from intraday volatility.
By contrast, the Hedera Hashgraph is quiet and drama free. It rarely makes it into the discussion on social media, has no issues with downtime, no large security breaches have ever occurred on mainnet, and its developer community is still very nascent. The slow methodical growth of Hedera’s network has put it in an awkward position. What was previously a frenzied mob of investors with an insatiable risk appetite has become timid and quiet — too scared to deploy capital anywhere, let alone to a new ecosystem. Yet the building continues as more and more developers slowly become converts and building really hits its stride. Hedera is more than capable of supporting the whole host of decentralized applications you currently find on other DLTs, as well as new apps entirely impossible to build on other L1s due to consensus issues or an inability to scale. For now, the killer app on any distributed ledger technology is decentralized finance.
There is no question about the demand for DeFi. At the time of writing, Ethereum currently has ~ 69 billion dollars’ worth of TVL. The vast majority of this capital is stored in DeFi applications. Curve: $8.55 billion, Uniswap: $5.99 billion, MakerDAO: $9.65 billion, Aave: $8.38 billion, etc.
DeFi users require four things:
1. 24/7 access to their funds (non-custodial)
2. Security
3. Sustainable economics
4. A chance to profit
The current state of Solana fails at numbers 1 & 4 because of downtime and predatory VCs (SRM tokenomics). The current state of Ethereum fails at number 3, as high gas fees and MEV chip away at your capital. Hedera currently has the ability to meet all four criteria in a frictionless way. With how underused the mainnet is, opportunity is abound for those willing to take the first leap betting on fundamentals.
A quiet team is currently chipping away at a protocol with the potential to lock up billions of dollar in crypto assets and kickstart of a whole new chapter for Hedera Hashgraph: mass adoption.
SaucerSwap is a DEX similar to Uniswap. They plan to offer a bridge, single-sided staking, Community Pools, and a DAO-based governance model. These services themselves aren’t new — what isn’t broken doesn’t need fixing. What is new is the ease at which users will be able to interact with DeFi. Gone will be the days of getting ruined on a trade because a miner’s arbitrage bot targeted your Uniswap transaction. Gone are the days of DeFi being accessible only to those players who can stomach $400 gas fees to stake their tokens. The Hedera network has an impeccable record with uptime, microscopic fees <= $0.01, and ABFT levels of security. SaucerSwap completes my Hedera investment thesis by providing a critical piece of infrastructure, and most importantly to me, a chance to profit by betting on fundamentals.
Web3 doesn’t need to feel like the internet in the 90s, nor does it need to feel like a playground for shadowy coders and pirates. Decentralized finance is meant to be unintrusive and accessible to all. Most investors believe this to be true, but those same investors spent 2020–2022 allocating to projects they themselves knew didn’t live up to this vision. While those investors capitulate their low conviction speculative bets and flee to ETH, BTC, and USD for safety, I will find opportunity to invest in the future today.
“Ethereum is a dark forest” is a phrase thrown around proudly by machismo crypto natives who feel a sense of pride for surviving the player vs. player hostility of Ethereum. Let them have their forest, I would rather fly over it.
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