originally published 1.24.24 via Volt Capital

2023 catalyzed a fresh wave of enthusiasm around “consumer crypto,” in part driven by the rise of products like friend.tech, but also by an acknowledgement of the industry’s over-investment in infrastructure vs. end-user applications. Many now predict that 2024 will be a breakthrough year for crypto’s application layer, as teams building everything from games to DePIN services to social experiences compete to onboard the next cohort of users.

However, even as crypto’s use cases become more compelling, the problem of identity – specifically sybil-resistance – remains significantly underrated as a bottleneck to the success of crypto’s consumer-facing applications.

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Everything is downstream of identity

The problem of onchain identity is not a new one, although despite years of development and private investment, it remains largely unsolved. Even as volumes and activity grew exponentially during the last cycle, many well-intentioned founders still burned all their runway by doubling down on false signals and mistaking inorganic usage for product-market-fit. In the absence of strong sybil-resistance, this is likely to play out similarly in the coming 2024-2025 cycle.

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Until recently, the majority of mindshare has been focused on reputation, decentralized identity (DIDs) and privacy – all of which are important but fundamentally do not address the problem of “proof of personhood” (PoP). Most PoP solutions on the market today were conceived of for the purpose of combating AI-enabled disinformation and sybil attacks, but increasingly, it seems as though crypto will need its own PoP solutions for similar albeit different reasons. It is no secret that the highly financialized nature of crypto creates powerful incentives for fraudulent and adversarial behavior, most notably hacks and sybil farming. However as we evolve beyond the ad-subsidized model of web2 into the user-owned model of web3, value-extracting centralized platforms will give way to more open networks and protocols that continuously distribute rewards and ownership to end-users. Without robust identity solutions, crypto teams will find themselves in an endless battle to protect their products and treasuries from adversarial actors, and the core value proposition of crypto as a technology for scaling incentive alignment is severely undermined.‍

Whether intentional or not, early DeFi airdrops from projects like Uniswap and dYdX set an unsustainable industry standard by rewarding end-users with tens (and sometimes hundreds) of thousands of dollars simply for using the product. Many crypto-natives have now come to expect lucrative airdrops simply for engaging with a product, even if their usage is passive or one-time. As a result, many teams are adapting by using more stringent eligibility criteria and being more strategic around mitigating the activity of bots and multi-wallet human farmers.

Anyone who has spent meaningful time working on crypto sybil resistance will concede that it is, unfortunately, an ever-evolving game of cat and mouse. Just as crypto teams working towards risk mitigation become more sophisticated in their techniques, so do sybil farmers. 2023 was a massive year for the sector, with content uploads and searches for “airdrops'' on YouTube reaching an all time high, as well as increasingly advanced farming tools coming to market. This alarming article by Kerman Kohli highlights some of the most extreme examples, including products that automate wallet deployments and various kinds of onchain actions while offering protection against any sybil-resistance techniques crypto teams may be using to weed farmers out.

This dynamic is not only damaging to most startups, but also has a deeply adverse effect on the signal quality of onchain data. Despite blockchains often being praised for their “openness” and “transparency,” the financial incentive to game key metrics (active wallets or volume) is so significant as to render most onchain user activity data functionally useless. This represents an existential challenge for crypto founders who are struggling to establish ground truth on the most basic metrics, such as number of unique human users, cost of customer acquisition (CAC), or lifetime customer value (LTV). Without access to high-signal onchain data or the growth tools and playbooks they power, attracting and retaining users will remain an uphill battle for the industry.

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Exploring the Design Space

There are two main ways to think about identity in the context of proof of personhood: uniqueness and humanness.

Uniqueness has to do with whether an account interfacing with an application is a unique human or one of many accounts being operated by a single individual. Most founders will tell you that one wallet per unique human user is the gold standard, although as they exist today, crypto wallets are not well-suited to enforce this. Some projects will resort to tried-and-true solutions such as KYC, which come with meaningful tradeoffs.‍

For those unfamiliar with the concept of “identity assurance levels,” according to the National Institute of Standards and Technology, identity assurance levels (IALs) convey “the degree of confidence that a person’s claimed identity is their real identity.” Identity solutions generally fall into one of three categories:

• Some confidence (Level 1) – identity is self-asserted; verification is not required (i.e. email account)

• High confidence (Level 2) – identity is attested to by some 3rd party; in-person or remote verification is required (i.e. government-issued IDs, credential documents, address verification)

• Very high confidence (Level 3) – identity is attested to by some 3rd party using biometric data; in-person verification is required (i.e. TSA agent verifies photo ID or fingerprints)

‍Humanness has to do with whether an account’s activity is being generated by bots or real human beings. Today, discerning humanness is arguably an easier task than discerning uniqueness, mostly because human users are generally still more sophisticated than bots. Teams that invest aggressively in tools like honeypots and data-driven monitoring & detection infrastructure can often mitigate meaningful amounts of bot-driven activity, although multi-wallet human farmers are a different beast.

Longer term, discerning humanness is likely to become a more challenging and amorphous problem, in part because of the way some accounts may oscillate between bot-generated activity and human-generated activity. This dynamic will only be exacerbated by humans deploying bots (“agents”) to traverse the internet and transact on their behalf. Many of the more ambitious (and controversial) identity solutions, such as Worldcoin, are attempting to address this “proof-of-personhood” problem — notably, many rely on various flavors of KYC or biometric data.‍

Importantly, when verifying uniqueness and/or humanness, it is critical that identity verification takes place on an on-going basis. Identity solutions that only verify at the point of identity creation are especially susceptible to sybil attacks and fraudulent behavior, which can include anything from selling access to self-custodial wallets (i.e. an OTC points trade) all the way up to more coordinated attacks (i.e reverse engineering a project’s identity and/or reward system).

The ideal identity solution would provide the highest level of assurance without adding too much UX friction or compromising on sovereignty. However, because no such solution exists (yet), crypto founders are forced to make whatever tradeoffs make the most sense for their use case.

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Promising Solutions

Attestations: cryptographically signed claims made by one identity about itself or another identity

Although generally not well-suited for PoP, attestations are a foundational primitive for crypto identity. They correctly understand identity as a compilation of reputation credentials, where different aspects of an identity are relevant or valuable based upon context (i.e. local vs national, official vs informal). An open and composable standard for creating attestations and schemas, like the Ethereum Attestation Service, should meaningfully expand the onchain identity space as well as remove the need for “identity providers” to keep reinventing the wheel with proprietary solutions.

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Progressive Proof-of-Personhood: rewarding users over time based on proven uniqueness

While no solution is completely foolproof, KYC and biometrics are definitely amongst the highest assurance identity tools available today. However, crypto comes with a few idiosyncrasies that weaken the viability of these solutions:‍

• Industry-wide aversion to KYC / value placed on privacy & sovereign identity

• Biometrics generally aren’t used for or within consumer apps (except for health & fitness)

• The need for continuous & dynamic identity assurance

The primary goal of progressive PoP is to design systems that reward users over time for proving their uniqueness/humanness through taking specific actions. The challenge, on the other hand, is in avoiding the incentivization of resource waste and making sure the actions being rewarded actually map well to uniqueness.

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Closing Thoughts

In many ways, online identity primitives never evolved much beyond low assurance solutions such as email accounts, and without the financial incentives of crypto or the proliferation of generative AI, it’s possible they never would’ve had to. For all the innovation these technologies will bring to the world in the coming years, they will also make the identity problem significantly more difficult and complex for the foreseeable future. This is why it's so important that identity in crypto is about much more than decentralized identifiers (DIDs) or privacy mixers – the very viability of crypto-economic incentives are at stake.

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If you’re building, thinking or writing about anything related to these topics, please feel free to reach out! Thoughts and feedback are welcome as always.

originally published 6.29.23 via Volt Capital

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In the bull market, trends around Google searches for the word “NFT” were often cited as a proxy for adoption and popularity, but ironically, this term fading out of the lexicon entirely will likely be the real signal of mass adoption. We’ll know meaningful progress has been made when the implementations of NFTs are so widespread and generalized that the term itself ceases to be useful, as it could be referring to… anything.

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In the bear market, NFT “utility” has become a popular topic of reflection, with many complaining about the lack of non-speculative use cases and applications that exist with six years having passed since the ERC-721 standard was first proposed on the Ethereum Github.‍

While important, these debates often become circular and run the risk of missing the forest from the trees, so the intention of this piece is to revisit the fundamentals of NFT utility and highlight the innovations extending the capabilities of NFTs to create meaningfully richer user experiences.

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Zooming Out: The Big Picture

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‍Much like how the government can freeze your bank account, seize your funds & disrupt your ability to engage with the (legal) banking system, centralized content platforms & data monopolies posses the power to do the same to you in the digital realm. Not only does this have harrowing implications for the future of censorship resistance online, but it also comes with very challenging 2nd and 3rd order effects such as extremely anti-competitive market dynamics that hamper innovation across the board and new questions around data privacy (and monetization) in-light of increased demand for valuable AI training data. This is the big picture.

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Why has NFT utility primarily been centered around provenance for (expensive) art & collectibles?

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It’s very often the case that more skeuomorphic use cases for new technologies are the first to take off, because it takes time for people to experiment and understand them enough to imagine truly novel possibilities. Another major reason that NFT utility and applications have been slow to evolve is that the blockchain scalability challenges of the last few years are actually themselves a constraint on NFT utility. Consider, for example, the new ERC-6551 standard which allows any ERC-721 token to own a smart contract account — added functionality can often come with added costs. So long as creating, distributing and engaging with NFTs remains cost prohibitive to most, it simply won’t be economically rational for businesses or individuals to invest in lower-cost and/or “non-speculative” applications of NFTs.

‍This, however, is beginning to change as a result of the enormous, industry-wide investment in scalability finally starting to pay off. L2s are leading the way with the Ethereum ecosystem, while Solana doubles down on its single-shard architecture and leadership in token standard innovation.

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Expanding NFT Utility: Novel Token Standards

(note: these standards aren’t necessarily mutually-exclusive)

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NFTs as applications — xNFT

The xNFT (or “executable” NFT) is a Solana-native non-fungible token standard built in conjunction with the Backpack wallet, which serves as an operating system and key management layer for interacting with xNFT-based applications. xNFTs can be used to build either collectibles (i.e. PFPs such as the Mad Lads collection) or applications — however because they represent ownership over the execution of some code, the experiences developers can build with xNFT are significantly more expressive.

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Perhaps most uniquely, application xNFTs resemble onchain software licenses — making it easy for developers to retain provenance over their code, enforce how many times their xNFT app is installed and by whom, how much it costs to install, as well as making & keeping track of upgrades and user interactions.

The team at Backpack also recently released a new feature they’re calling Soul Abstraction, which not only enables NFT-Escrow-like features for xNFTs, but also allows developers to permissionlessly build additional features and/or airdrop perks to xNFTs and their holders without needing permission or technical support from the Backpack team. Think iOS, but open.

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Dive Deeper: Click here to watch a developer walkthrough for building xNFTs.

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NFTs at scale — Compressed NFT

Compressed NFTs (cNFTs) are made possible by state compression — an innovation developed by a group of engineers across Solana Labs, Solana Foundation and Metaplex. The idea emerged out of conversations around what it would require to bring an application like Instagram onchain, and was designed for the expressed goal of bringing “the marginal storage cost per unit as close to zero as possible.”

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Simply put, state compression works by storing a merkle root of an NFT’s data onchain while keeping the actual data itself off-chain. Security is maintained by the fact that even if the off-chain data is tampered with, the merkle root will then differ from the one stored onchain. (Metaplex’s Bubblegum contract can be used to verify the correctness of NFT data).

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Dive Deeper: Click here to check out the Concurrent Merkle Tree whitepaper, and here for a fantastic explainer courtesy of Helius Labs.

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You may be wondering if 1000x cost reductions are truly necessary — however it’s important to consider the scale necessary for NFTs to become truly ubiquitous. The “tokenization of everything” has become somewhat of a meme, but cNFTs are beginning to make it economically viable to bring the internet’s data onchain and convert its artifacts into “persistent sovereignly owned digital objects” at scale.

This is one of the major reasons why continued work on the scalability front to bring down minting and issuance costs is so important. L2 solutions like Arbitrum and Optimism have already made impressive progress bringing down transaction costs by around 10x relative L1. These improvements are by no means trivial, but as is often the case, the devil is in the details. We know based on the sheer scale of applications like Instagram that even $0.10 - $0.50 fees can still be prohibitively expensive for many use cases, and that extreme improvements in cost are actually needed to unlock this next level of “utility” and accessibility. It’s also worth noting that L2s are still relatively nascent and may take longer to get there, but we will highlight some early signs of L2 NFT innovation below.

DRiP

Brought to you by the team that previously created Solana Spaces, DRiP is building out a crypto-native, creator-first content distribution platform. By subscribing to their main channel, Showcase, you’ll get a free item curated by the DRiP team airdropped into your wallet every Wednesday. For more direct and engaged access to your favorite content, you can also subscribe to a (rapidly growing) number of creator channels, including Degen Poet, Degenerate Ape Academy, Vault Music, Floor and more. Users can expect to receive collectibles of all kinds packaged inside their cNFT airdrops, from video games to music videos & more.

‍With hundreds of thousands of subscribers already, dripping content to users at this scale would be significantly more expensive without cNFTs. DRiP Season 2 saw over two million NFTs distributed to subscribers, including over 500k just in the last few days.

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Dialect

Web3 messaging platform Dialect has also minted hundreds of thousands of cNFTs for use as tradeable sticker emojis. Users can leverage Dialect’s smart messaging features to buy & sell assets from directly inside the messaging interface, powered by Tensor under the hood.

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Helium

As part of their migration to Solana away from their own L1, Helium is now using cNFTs to represent its nearly 1M unique physical hotspots onchain. Hotspot operators are able to claim the NFT upon logging into the wallet tied to the hotspot.

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Metaplex

After their Mailchimp account was expectedly suspended, NFT Infrastructure provider Metaplex resorted to instead using cNFTs for sending out invites to its new Creator Studio tools. Metaplex is now collaborating with Underdog Protocol on a cheaper and more crypto-native replacement tool.

NFTs with superpowers — Dynamic NFT, Private NFT, NFT Escrow, NFT Fusion

Dynamic NFT

The ability to update metadata, particularly based on specific on or off-chain events is a subtle but game-changing superpower that makes dynamic NFTs significantly more useful than their static counterparts in almost all cases. Additionally, as we’ll explore below, dynamic NFTs also highlight the urgent need for crypto-native databases & storage infrastructure that make the deployment and management process much more seamless and standardized.

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Private NFT‍

One of the earliest examples includes the Secret Network’s SNIP-721 standard, which was used by Quentin Tarantino in 2021 to drop an unreleased Pulp Fiction scene as an NFT. Other solutions include leveraging Lit Protocol access controls in conjunction with Arweave to enable permissioned access to encrypted metadata. Solana-based music platform Vault Music uses this solution to offer private NFTs to its user base.

NFT Escrow & NFT Fusion

Another Solana-native standard, NFT Escrow is an extension of the Metaplex Token Metadata contract that allows any NFT to function as a wallet and hold its own tokens. It enables two different types of escrow accounts — Token Owned Escrow (TOE) which is managed by the NFT holder, and Creator Owned Escrow (COE), which is managed by a specific creator. This functionality is also now coming to the EVM ecosystem thanks to ERC-6551 and the team at Future Primitive.

Alternatively, NFT Fusion is a feature built to extend the functionality of NFT Escrow by enabling NFTs to be bundled together to create new NFTs, to change based on the assets it’s holding and more.

Both of these standards are extremely powerful primitives for building immersive game-like experiences such as token inventories and level-ups.

NFTs for trust & provenance over AI-generated content — AIGC NFT‍

EIP-7007 proposes an ERC-721 wrapper which includes a function for checking the validity of prompt & proof combinations using zkML techniques. The metadata schema would also provide structures for storing information about the AIGC-NFT, such as prompt, content, proof-of-ownership, etc.) In practice, creators of ML models could publish their models and accompanying ZKP verifiers to Ethereum, where users can claim an input prompt, publish an inference task and eventually receive the output as an NFT. The proposers of this EIP theorized it was a way to help monetize smaller models.‍

NFTs for finance — DeFi & Real World Assets

While DeFi might seem like an unlikely place to find novel NFT use cases, it turns out that many financial assets, especially derivatives, are non-fungible (hence Uniswap using the ERC-721 standard for representing V3 LP positions). To this effect, NFTs have many non-obvious use case in DeFi:

Panoptic (Concentrated Liquidity Market Makers & NFTs)

Built on top of Uniswap V3 LP positions, Panoptic is a crypto-native perpetual options protocol. Options can be very capital inefficient due to the need to post collateral, so in an attempt to enable under-collateralized options, the team turned to NFTs for a solution.

Pantopic essentially replaces Uniswap’s Non-fungible LP position manager with a Semi-fungible position manager that uses the ERC-1155 interface instead of ERC-721. This allows them to combine several options into a single NFT to create “defined risk positions,” which then makes it easier to calculate the collateralization requirement of a set of interlinked options. This is especially useful for multi-leg option strategies that have a holistic risk-defined profile even though individual options inside of it may theoretically be exposed to infinite losses.‍

Homebase (Real Word Assets)

Homebase, a platform that allows users to invest in tokenized residential real estate for as little as $100, uses NFTs to represent the assets traded on the platform. Each token has its own unique metadata URI in which information about the asset is stored and regularly updated. New home data may include the addition of new bedrooms or bathrooms.‍

While Homebase and other RWA / NFT finance platforms may resemble toys today, they actually highlight exactly why financial infrastructure built specifically for NFTs is so important. Most assets and many financial positions are actually non and/or semi-fungible. Examples such as these also highlight the possibilities that could be unlocked by bringing more financial metadata onchain (more on this another time).

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Infrastructural Challenges

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As exciting and inspiring as the use cases explored above are, the severely fragmented current state of NFT metadata remains a major barrier to realizing the full potential of NFTs not only as incentives mechanisms, but also as data standards. Today, NFTs exist on various different L1s and rollups, some with onchain metadata, some with off-chain metadata, some with hybrid models, across EVM and non-EVM ecosystems, some leveraging centralized storage, others decentralized storage, and on and on.

The point is that as NFTs become the container for more and more content, assets & experiences, the need for a decentralized, web3-native database that brings composability and feature-richness to the metadata layer becomes increasingly important. This would ideally enable a world where much less data is locked inside centralized walled gardens, and more importantly, where data can be more granularly and permissionlessly exchanged between entities without the need for rent-seeking intermediaries. Brands and creators could cease spending billions of dollars annually on Google analytics & Facebook ads just to understand and engage with their own fans and customers, while allowing ownership and control to flow back to the user.

Promising examples of such a product include Tableland, a SQLite database solution built specifically for web3 development. You can think of Tableland as a layer that sits between Filecoin storage and EVM smart contract logic, enabling databases that are programmable directly from smart contracts. For example, developers can allow certain cells and/or rows to only be changed by the owner of a specific NFT or as a result of some on-chain event. This is exactly the right direction to be building in, although there remains much to be done around accommodating newer token standards and ecosystems.

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Dive Deeper: Click here to check out Tableland’s curated list of databases and metadata solutions.

The demand for data is not slowing down anytime soon, and as AI & digital economies come to the forefront of human life, it will become increasingly difficult to thread the needle between extracting / controlling data and preserving digital property rights. NFTs might just be our best chance.

If you’re currently building anything related to the topics discussed above or simply want to jam out / collaborate on fleshing out these ideas further, please don’t hesitate to reach out! As always, my DMs are open for ideas & feedback!

Part I of this MEV Series focused on blockspace markets across ecosystems, specifically:

• The rise of MEV on Ethereum, R&D efforts around incentivizing decentralization and competition in these markets.

• The proliferation of PBS (proposer-builder separation) across ecosystems including Solana and Cosmos.

• An overview of distinct approaches to MEV-related challenges that we see emerging within these various ecosystems.

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Part II will focus on the order flow side of the market, specifically: providing a framework for thinking through the challenges associated with extracting value from user order flow, exploring technical & design implications of these challenges, and finally highlighting promising R&D efforts, as well as outstanding challenges.

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Framing the Problem: Extracting Value

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Just as value can be extracted through auctioning off privileged access to blockspace, the same is true for order flow. This extraction can take a direct form, such as searchers bundling user transactions into sandwiches, or a more indirect form, where information asymmetries are acquired through exclusive access to order flow.

When thinking through the problems associated with this value extraction, it’s important to note that not all order flow is created equally. For example, we know from TradFi that professional market makers and high-frequency trading firms are willing to pay a premium for exclusive access to non-toxic retail order flow. This reality creates a scarcity dynamic that mirrors the other end of the MEV supply chain, where blockspace is generally abundant but market participants are willing to pay a premium for blockspace that is perceived as “more secure” or ”higher quality.” It goes without saying that scarcity dynamics such as these tend to foster intense competition, which if unchecked, can lead to intense centralization.

‍The reality is that order flow originators (users/wallets/dApps/RPCs) all want a cut of MEV extracted from order flow and should be expected to exercise whatever leverage they posses to (1) monetize their access to order flow (2) limit the access of perceived competitors. Some obvious and highly plausible examples of how this might manifest include:

• Users/Wallets/dApps/RPCs selling exclusive order flow to a single trusted builder (or small set of trusted builders)

• Users/Wallets/dApps/RPCs vertically integrating (opting to control some other part of the MEV stack, i.e. operating a builder and/or proposer node)

Out of all the problematic vertical integration scenarios outlined in this fantastic post on the topic, Builder-Validator collusion stands out as the most likely, primarily due to the immense value of privacy and inclusion guarantees in what is becoming an increasingly complex and specialized MEV supply chain. Not only this, but as Flashbots has demonstrated, creating trust-minimized and decentralized methods for achieving such guarantees is no trivial feat.

Ultimately, the major challenge of order flow extractable value is the same as MEV more broadly – identifying and designing for some incentive aligned equilibrium where:

• Users receive the best UX, execution & routing

• Validators (including smaller, long-tail) are sufficiently compensated

• Rent seeking (between the points of tx origination and inclusion) is minimized

• Centralizing forces are mostly tamed and kept at bay

This has several implications worth exploring from different angles.

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Implications: The MEV-aware design space

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Design Philosophy

After accepting that some amount of MEV is inherent to (truly decentralized) blockchains, the next important step is to decide which of the following design philosophies to work with (not mutually exclusive):

1. Capture + Redistribute → extract as much MEV as possible, then decide how to redistribute those profits.

2. Mitigate → reduce the extent to which MEV can be captured as much as possible (typically uses privacy-enhancing technologies, discussed further below).

3. Leverage → aligning the incentives of MEV supply chain actors to (especially searchers & builders) to provide order flow originators with optimal routing & best execution (especially for complex, expressive transactions preferences).

As noted above, these philosophies are not mutually exclusive, as projects like Osmosis are experimenting with features like threshold encryption (mitigate) and protocol-owned-builders (capture + redistribute). Future iterations of this series may explore the trade offs across these approaches.

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Technical Design

Although there is an ever-growing number of MEV-related experiments being run in the wild, the focus here will be on two major, overarching technical designs for addressing order flow value extraction: OFAs & PETs.

Order Flow Auctions (OFAs)

Before digging into OFAs specifically, it is worth reiterating the importance of auctions in facilitating democratized access to MEV (and public goods in general) and highlighting why getting auction design right is of critical importance:

• On Auction Fairness → Many people think of the web2 analog to MEV as being high-frequency trading (HFT), however given the increasingly critical role of auctions in the MEV supply chain, advertising auctions may be a better analogy. If you doubt this, look no further than the masters of auction manipulation: Google & Facebook, two of the most profitable companies of the last twenty years. In January of this year, the DOJ announced a landmark lawsuit against Google for “anti-competitive auction manipulation,” specifically accusing the tech giant of abuses such as “limiting real-time bidding on publisher inventory to its ad exchange,” and “manipulating auction mechanics across several of its products to insulate [itself] from competition.” Given this, the failure of MEV auction providers to credibly decentralize should be considered a genuine risk given that the government has actually demonstrated a meaningful level of sophistication in understanding and adjudicating these issues.

• On Best Execution → It’s worth keeping in mind that part of the reason why business models such as payment for order flow (PFOF) are even legal in TradFi is because there are legal requirements around providing users with “best execution.” In addition to registering with the SEC, broker-dealers also have to provide the SEC with quarterly reports on how client orders are being routed, while FINRA (Financial Industry Regulatory Authority) conducts regular audits of these firm’s reported best execution practices. The key implication here is that viable designs for MEV auctions and routing systems must carefully consider what it means and looks like to provide users with best execution. We could (but won’t) dedicate an entire series to exploring the problems with how financial regulators measure and enforce these “best execution” policies, however the general point still holds. This is also what makes crypto-native approaches such as DFlow, which provide users with cryptographic guarantees around best execution, so exciting.

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Back to OFAs…

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When it comes to the specific problem of monetizing user order flow, OFAs have emerged as a dominant design for auctioning off the right to execute user orders and facilitate MEV capture & redistribution to originators.‍

‍OFAs come in various flavors, each with distinct design trade offs around considerations such as how access/participation is permissioned, types of orders supported, information disclosure, bid selection process, and more. However, in a recently published deep-dive into the OFA design space, Stephane & Ankit highlight four primary design implementations which they expect to become dominant:

It’s safe to say there is (currently) no single best “one-size-fits-all” approach to OFA design, however it is easy to see how:

• RFQ + Batch auctions → may be particularly attractive to professional market makers, considering the emphasis on last-look privileges and/or avoidance of toxic flow.

• Trusted Execution Environments + Blockspace aggregators → may be particularly attractive to end-users and/or user-facing applications that are willing to pay a premium for reliable inclusion guarantees to make UX as smooth & seamless as possible.

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Privacy-enhancing technologies (PETs)

Despite the name, privacy-enhancing technologies in this context are less about preserving privacy as an end goal, and more about bringing the cost of collaboration (not collusion) down as much as possible.

• A crude example of this which exists in production today would be the Flashbots Relay, which as a trusted piece of infrastructure, plays a key role in enforcing the integrity of blockspace auctions – specifically fair payload routing for builders, and block validity, accuracy and DoS protection for proposers.

With the unveiling of SUAVE, Flashbots has also begun invoking the concept of “programmable privacy,” which (1) acknowledges the trade off space between privacy (low info disclosure) and efficiency / execution quality (2) aims to create flexibility and optionality within that trade off space.

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Some popular & commonly discussed PETs include:

• Trusted Execution Environments (TEE) → allows for running computations on private data inside a secure enclave, such that these computations cannot be accessed by anyone or anything except for the enclave itself. What happens in the enclave stays in the enclave. TEEs can be used for everything from simply running trusted portions of applications, to whole applications, to whole virtual machines. Intel’s SGX is one of the most popular and widely used TEEs, and will actually be used in the initial implementations of SUAVE to support an encrypted mempool.

• Multiparty Computation → allows for splitting input data into different shares and applying operations to those shares before recombining to obtain some result. Secure MPC implementations are being explored for a number of use cases, perhaps most notably distributed block-building.

• Fully Homomorphic Encryption → makes it possible to perform arithmetic operations on ciphertext and receive the same outputs as running the sequence of operations on plaintext. FHE is currently less accessible to the average developer, as it requires expressing problems as circuits, but does provide desirable security assumptions (believed to be post-quantum secure). Most importantly, FHE may be a very powerful tool for navigating the privacy-execution trade off space.

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Final Thoughts

It would be a profoundly reactionary goal - and against the ethos of crypto - to simply recreate the same norms and power dynamics of TradFi with crypto assets. Even worse would be to leverage the most undesirable aspects of both crypto and TradFi (re: Arbitrum sequencer latency wars) without genuinely attempting to build something fundamentally better.

Designing and building provably fair and decentralized auctions, especially around user order flow, will undoubtedly be one of the major challenges for crypto finance over the coming 12-18 months. However, the implications of success here extend far beyond narrow conceptions of MEV and crypto finance.

Huge thank you to Tarun, Tom & Nitesh for reviewing this piece & providing thoughtful edits.

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If you’re thinking about or building in any of these verticals, want to chat or collaborate on further writing, feel free to reach out via DM or to natalie@volt.capital!

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Citations

1. Toxic Order Flow – https://deepwaters.xyz/learn/toxic-order-flow

2. The Orderflow Auction Design Space – https://frontier.tech/the-orderflow-auction-design-space

3. Distributed Block Building – https://github.com/flashbots/mev-boost/issues/139

4. The Joys and Challenges of Adopting PETs – https://www.youtube.com/watch?v=4iy8zSl96Ck

5. Order flow, Auctions & Centralization – https://www.youtube.com/watch?v=ilc3EoSMMDg

6. Why Privacy in MEV – https://www.youtube.com/watch?v=cJ_c-69neUQ

7. Encrypted Mempools – ​​https://www.youtube.com/watch?v=XRM0CpGY3sw

8. Privacy Tradeoffs – https://www.youtube.com/watch?v=ueZMJHGsQzc&t=493s

9. Justice Department Sues Google for Monopolizing Digital Advertising Technologies – https://www.justice.gov/opa/pr/justice-department-sues-google-monopolizing-digital-advertising-technologies

The MEV conversation until this point has been focused almost exclusively on Ethereum, however this series explores MEV within the Solana and Cosmos ecosystems. This article will highlight a diverse range of approaches to address MEV and associated incentive alignment challenges, including comparative analysis of tradeoffs. By broadening the conversation, we can learn from the various experiments being run in the wild to better anticipate potential problems and ultimately design better solutions.

There is no shortage of threads making the case for why MEV is an important topic (from centralization to network performance and beyond), but the way MEV reifies the intrinsically social nature of blockchains may still be under-appreciated. The technical solutions that we design and deploy have and will continue to be guided by fundamentally political questions: Who are the stakeholders? Who should be the stakeholders? What degree of centralization or censorship risk is acceptable? Should we redistribute wealth? If so, how? It is well known that governance is often messy, often characterized by intense battles between competing interests, and taking on forms that reflect the unique qualities of the societies that give rise to them. In that sense, Part I of this series can be seen as a political analysis of MEV as much as an overview of emerging blockspace market structures.

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Ethereum

On Ethereum, the rise of financial applications became the catalyst for more widespread research and understanding around MEV. The now seminal Flashboys 2.0 paper published in 2019 not only coined the phrase “MEV,” but also shed light on how exactly this phenomenon was manifesting itself onchain. It was the first time that most of us were exposed to concepts like priority gas auctions (PGAs) or searchers. Shortly thereafter, Flashbots was founded to tackle the many incentive alignment challenges associated with MEV head-on. They originally put forth three core goals to work towards:

1. Illuminate the Dark Forest

2. Democratize Extraction

3. Distribute Benefits

4. 
   

Having since achieved over 90% network adoption on both of their major product releases, it’s fair to say that these goals also evolved into the guiding principles that have largely shaped the development of Ethereum’s blockspace market.

Flashbots Core Releases

• Flashbots Auction (mev-geth + mev-relay) created a private transaction pool & off-chain sealed bid auctions. This allowed searchers to express more granular preferences for tx ordering in the form of bundles, as well as bid for inclusion at the top of the block without clogging Ethereum’s public mempool with failed arbitrage attempts and driving gas fees up severely.

• Flashbots Protect is an RPC endpoint that can be added to consumer wallets like MetaMask. This extends to benefits of bundles to regular users.

• MEV-Boost was designed in anticipation of The Merge, as MEV was expected to become an increasingly centralizing force in Proof-of-Stake. It was the first implementation of proposer-builder separation (PBS), which aims to separate the role of building a block from the role of proposing a block by creating a more decentralized, competitive market for block-building.

• MEV-Share (unreleased) outlines designs for a protocol that matches transactions from users, wallets and/or applications with searchers in a private & permissionless fashion. Decentralizing access to order flow and introducing the notion of programmable privacy are among the key long-term goals here, however the matchmaker function will begin as a trusted role operated by Flashbots.

• SUAVE (unreleased) is an upcoming release which aims to address the remaining centralizing vectors of (1) exclusive orderflow and (2) cross-domain MEV. Minimal detail has been shared about the nature of the project, however it appears that SUAVE will serve as a decentralized mempool & sequencing layer for the EVM ecosystem. It will feature an encrypted mempool, as well as introduce a new actor to the MEV supply chain: executors – who will compete to provide users with the best execution.

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Solana

Much like Ethereum, the growth of Solana’s financial sector attracted MEV activity that started to degrade the end-user experience. However unlike Ethereum, where gas fees became prohibitively expensive, Solana’s problems were caused by a combination of (1) extremely low gas fees, (2) the absence of a fee market and (3) a sub-optimal transaction propagation protocol that didn’t offer much optionality around discouraging network spam. In moments of intense market volatility or popular onchain events like NFT mints, the amount of spam transactions being sent to the network was sometimes so significant as to cause network outages.

Some might wonder why the Flashbots product suite couldn’t simply be repurposed for Solana, however it's important to consider that Solana’s architectural design is distinct to Ethereum’s in ways that necessitate a unique approach. Key differences include Solana’s speed (400ms between blocks), unique data propagation protocol, mempool-less transaction forwarding, localized fee markets and parallelized transaction processing, just to name a few.

In 2022, Jito Labs entered the picture to take an ecosystem-specific approach to providing Solana with much-needed MEV infrastructure. Like Flashbots, they set out with a few key goals in mind:‍

1. Minimize the negative externalities of MEV

2. Prevent centralization

3. Distribute the rewards of MEV

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Jito Labs Core Releases

Since then, Jito has been the dominant MEV solutions provider on Solana, and has released a number of products including:

• Jito-Solana was the first third-party Solana client, optimized for efficient MEV extraction. Much like mev-geth, this allowed validators to support transaction bundles and was built to work seamlessly with the Jito Relayer and Jito Block Engine.

• Relayer is meant to provide validators with a layer of protection between their TPU (transaction processing unit) and network spam. Validators can run their own relayer or use a version hosted by Jito Labs.

• Block Engine is essentially a high performance block builder – it runs a sealed bid auction for blockspace, and forwards the most profitable bundles to the current leader for immediate execution. The block engine is also globally distributed to provide open access to low latency.

Searcher Tools:

• Jito Mempool -- Despite Solana not having a mempool in the traditional sense, this allows searchers to subscribe to “accounts of interest” and atomically extract MEV from their transactions using bundles, allowing for a more proactive approach to searching.

• ShredStream -- Run on Jito-Solana clients, this sends shreds directly to the locally connected block engine, allows searchers to access shreds forwarded by leaders and reduces the latency by hundreds of milliseconds. (Shreds are fractions of a block (the smallest unit) which are constantly being emitted as validators produce blocks. They are distributed to the network based on a stake-weighted shuffle, so that servers with a higher stake are likely to receive shreds more quickly, which can bring meaningful advantages when engaging in high frequency trading.)

• MEV Payments & Distribution enables validators to seamlessly distribute MEV rewards to their stakes in the form of airdrops.

Chorus One, one of the largest node operators across all major crypto ecosystems, also recently released a whitepaper outlining a prototype for Solana-MEV – a modified client designed to further decentralize extraction for validators without adding unwanted latency to the system. The client would make it easy for validators to check for potential MEV opportunities after each batch of user transactions and insert their own to capture the value.

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Cosmos

Despite having arguably the most nascent DeFi ecosystem, Cosmos promises to be fertile ground for experimentation in both blockspace market design and cross-domain MEV. Unlike Ethereum, where trading & lending volumes are already in the billions of dollars, and Solana, where low-latency financial applications were the primary imaged use case, Cosmos seems to have been slower to the MEV conversation. There are many possible reasons for this, but the most obvious explanations are Tendermint clients using first in first out (FIFO) ordering by default as well as a lack of financial activity.

It was not until the release of Osmosis in late 2021 and even more, the collapse of Terra in May 2022, that anyone began to notice and measure meaningful amounts of MEV being captured within the Cosmos ecosystem. Combine these events with bear market conditions like a collapse in fees, and it becomes easy to see why validators began to consider other options in an attempt to remain profitable. Foreshadowing this, a number of Cosmos-native MEV solutions providers have entered the scene, most notably Skip Protocol and Mekatek.

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Mekatek Core Releases

• Zenith is meant to create an open market for block building within the Cosmos. Searchers can submit transaction bundles and compete for priority inclusion within blocks, while validators can outsource block-building to Zenith and sell their blockspace for maximum profit.

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Skip Protocol Core Releases

• Mev-Tendermint is a modified version of Tendermint that allows validators to accept transaction bundles and introduces a seal bid auction for inclusion at the top of the block (Skip does not build the entire block, only the top).

• Skip-Select brings Cosmos-style sovereignty to MEV by allowing for fully configurable, governance-driven blockspace auctions. It makes it easy for validators to decide how to split MEV rewards, what % of building for a given block should be outsourced to Skip, whether or not to protect blocks from frontrunning/sandwiching, and more. Skip-Select is also laying the groundwork for a future where in-protocol MEV preferences are voted on and implemented via onchain governance, which is uniquely enabled by the Cosmos SDK and ABCI++ (application-blockchain interface).

• Skip Secure is very similar to Flashbots Protect – private transaction RPC that end-users and frontends can leverage for private execution.

• Proto-Rev – arguably Skip’s most exciting product – refers to custom-built modules for enshrining certain MEV preferences into the core protocol. The first implementation of proto-rev was proposed to help Osmosis capture some meaningful amount of arbitrage-based MEV rewards internally, but the service will be available on a chain-by-chain basis.

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Although there is less publicly available information on the project, FairBlock is building IBE-based solutions (identity based encryption) to address MEV-related challenges, such as ensuring end-user access to pre-execution privacy and best execution. The team plans to leverage Interchain Security from the Cosmos Hub for their consumer chain, which will be used to manage and distribute the validator decryption keys.

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Key Points

• The success of PBS – The notion of proposer-builder separation has spread beyond Ethereum, as some version of it now exists within both Solana and Cosmos.

• Latency Wars – In part because of Solana’s network architecture, Jito Labs takes a very latency-sensitive approach to MEV extraction, which could be especially compelling for people running servers and/or validators outside USA/Europe (or anywhere connectivity to the rest of the cluster is less than ideal). Latency could also be an interesting vector for aspiring Flashbots competitors to experiment with, although such an approach would likely come with less than ideal implications for decentralization and incentive alignment.

• Enshrined Solutions – Due to the level of sovereignty and autonomy that Cosmos communities have over their tech stack, it is generally much easier to enshrine MEV solutions (such as PBS) into the core protocol. There are a number of reasons for this, one being the political dynamic of achieving social consensus among single-issue voters (appchains) vs. factions of competing interests (general L1s). As challenging as Cosmos governance can often be, the fact that it can take place onchain and the fact that there is no need to consider how changes will affect other applications can be a meaningful accelerant to the implementation process. While Flashbots and many Ethereum core developers have expressed a desire to enshrine PBS into the Ethereum protocol, such an upgrade will no doubt require a significant amount of technical work and social consensus building. On the technical side, innovations such as the latest version of ABCI++ allow for new possibilities with respect to how Cosmos-based applications communicate directly with the consensus layer, allowing for features like threshold encryption, for example. For this reason, we should expect most of the innovation around in-protocol solutions to come out of the Cosmos.

• Cross-domain MEV – As noted by Flashbots in their SUAVE primer, incentives to capture cross-domain MEV are expected to ramp up in the coming years, and could pose serious threats to the economic security models of various ecosystems. Because Cosmos was built for cross-chain on day one (over 50 chains connected by IBC) and because knowledge of how to run one version of a Tendermint client likely lends itself well to learning how to run others, it may be uniquely exposed to the centralizing forces of cross-domain MEV. There are already large entities that run validators on multiple Cosmos chains, and if left unchecked, it’s easy to imagine this leading to a world where only a handful of and extremely well-capitalized validators control meaningful stake across various chains.

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Part II will explore the implications of the above for end-users and applications, specifically: Focus shifting from blockspace → orderflow

• The design space for mev-aware applications & wallets

• Incentives for private orderflow and vertical integration

• MEV & Privacy

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Huge thank you to Barry from Skip, Drew from Brevan Howard and Hasu for reviewing this piece & providing thoughtful edits.

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If you’re thinking about or building in any of these verticals, want to chat or collaborate on further writing, feel free to reach out via DM or to natalie@volt.capital.

Where we've been

In the early days of smart contract platforms, the consensus view was that there could only ever be a handful of L1s – maybe even only one – that truly mattered. The bridging approaches of the day reflected this, as many were designed to be pairwise and/or asset-specific bridges that focused exclusively on basic functionalities like moving bitcoins to Ethereum.

As the landscape evolved further, we saw the emergence of numerous L1 ecosystems and importantly, sub-ecosystems of rollup networks and application-specific chains emerging within them. While these developments in blockchain architecture design came with many advantages, they also made the problem of bridging meaningfully more complicated. As a result, bridge designs started shifting away from the “one chain to rule them all” approach towards a vision of cross-chain interoperability.

However, in building towards that future it quickly became clear that bridges – like blockchains – have their own “trilemmas” and trade off profiles.

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Where we are now

This realization led to yet another shift towards more specialized, often ecosystem-specific approaches and less focus on building one-size-fits-all solutions. To illustrate this, let’s consider two examples: 1) Hop Protocol 2) IBC‍.

Hop Protocol addressed a specific need of the Ethereum ecosystem – token transfers between rollups – which is becoming increasingly important as execution moves off Ethereum L1 for scalability reasons. While Ethereum’s rollup-centric architecture benefits from having secure, native message bridges for moving funds between L1 and L2, it’s also faced with liquidity fragmentation and withdrawal latency. Hop works by leveraging Ethereum L1 as a hub through which L2 assets can be transferred via spokes (native message bridges), while also providing up-front liquidity through an AMM operated by well-capitalized, permissioned market makers. This provides the end-user with the experience of interacting with Ethereum and its L2s as though it were one cohesive network. While this design allows Hop to leverage Ethereum’s strengths to address some pain points specific to its ecosystem, it also sacrifices generalizability, as it does not support arbitrary messages or non-EVM rollups.

IBC addressed a specific need of the Cosmos ecosystem – communication between sovereign blockchains – which is becoming increasingly important as more developers invest in building their own bespoke chains. While Cosmos chains are sovereign and distinct, many of them were constructed using roughly the same building blocks: some version of Tendermint and Cosmos SDK modules. The subtle but important implication of this standardization is that more native and trust-minimized methods of bridging, such as lightclients & relays, become much easier to implement across the entire ecosystem as a result. However, despite these strong security properties, lightclient bridges like IBC have been slow to achieve adoption outside of the Cosmos ecosystem due to a lack of extensibility. This can be attributed to the fact that this approach requires the continuous building of new smart contracts on destination chains that can make sense of state proofs from new source chains. Additionally, the cost of streaming block headers and signature verification can be prohibitively expensive, especially when dealing with Ethereum.

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Where we’re going

In this latest phase of evolution, the focus is now shifting towards supporting cross-chain application development, specifically around reducing liquidity fragmentation and enhancing the developer experience.

It turns out that just as applications fall on a spectrum with respect to the amount of throughput or security they require, the same is true for bridging capabilities. For example, a standalone game may only need a method of connecting to a major L1 where users can trade in-game assets on a more general marketplace, while a yield aggregation application may need to send large amounts of tokens and arbitrary messages across multiple chains at high speed and with robust security.

To get a better understanding of how bridges are working to provide developers with more flexibility and optionality, let’s again consider two examples: 1) LayerZero 2) Hyperlane.

LayerZero works by constructing Endpoints – a set of non-upgradeable smart contracts – which, when deployed to supported chains, allow for arbitrary message passing between them. Applications can then decide which third party services to use for the actual relaying of messages (block headers & transaction proofs) across endpoints. As co-founder & CEO Bryan Pellegrino pointed out in an interview, this more modular approach puts application developers in control by moving all of the parameterization up the stack from the protocol layer to the application layer. Applications can pick oracle/relay services based on specific cost and security needs or set custom configurations of the messaging library used for sending & receiving verified messages. This design approach also makes it relatively easy for LayerZero to offer new proof validation libraries down the line, which could allow applications to leverage zero-knowledge proofs to improve security or performance.‍

Set to go live in 2023, Hyperlane brands itself as a modular interoperability network that’s especially focused on abstracting away the complexities of cross-chain communication for developers. Hyperlane plans to introduce a suite of unique product offerings, including:

• An on-chain API that can be used to send & receive messages across chains

• Sovereign Consensus – the ability to configure and implement application-specific security models

• Interchain Accounts – use the Accounts API to do function calls on other chains without deploying contracts on them

• Interchain Queries – use the Queries API to access & verify information on another chain, enabling that information to be leveraged for initiating other actions

A few other notable examples:

Connext

Introduced xApps earlier this summer, which are decentralized applications that can perform operations between independent chains and/or execution environments. This allows developers building cross-chain applications to have a single, unified smart contract interface rather than needing to deploy separate instances to various different chains, and also allows the notion of gas fees to be abstracted away from the user by letting the protocol call the functions.

deBridge

Working towards offering developer tooling for easily building NFT bridges, something that is still very much absent from the bridging ecosystem. deBridge also offers a Hardhat plugin for integration testing, which allows for developing unit test cases for contracts or performing functional tests on the deBridge infrastructure.

Axelar

Deployed Satellite earlier this year, which is a cross-chain asset transfer application built natively on Axelar. Additionally, after being selected by Osmosis governance as its bridge of choice, Axelar has worked on an integration with Osmosis that allows developers to easily use Osmosis as a cross-chain back-end, allowing users to swap and purchase from any chain within a single interface.

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Looking Forward

Ultimately, the endgame for bridges looks like a seamless and cohesive experience for both end-users and application developers. There’s no question that there’s more to do before that vision is achieved, but it does feel like the design space for bridges has taken significant steps forward and been more fully explored. Just as modularity in blockchain design – breaking apart core pieces of the stack to avoid tradeoffs and allowing for plug & play – led to more choice and flexibility for developers, the same will be true for bridges.

This next wave of bridging will be amount improving DX, high quality oracle/relay services, bridge & liquidity aggregation, NFT bridging and miner/oracle extractable value – future articles will take a deeper look at these topics individually. If you’re thinking about or building in any of these verticals, want to chat or collaborate on further writing, feel free to reach out via DM or to natalie@volt.capital!

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Special thanks to Bryan Pellegrino (LayerZero), Arjun Bhuptani (Connext), Dmitriy Berenzon (1kx) for reviewing and providing thoughtful feedback!

The design space for blockchains has recently opened up: we no longer just have “monolithic” chains, but also:

• “modular” chains

• data availability & consensus layers

• rollups & execution environments

• application-specific chains and more.

With many options to choose from, the most important question becomes not which design is best for decentralized platforms but which design gives decentralized platforms the best chance at competing with their centralized counterparts?

Since blockchain use cases differ, it is impossible to find a one-size-fits-all answer. This article will focus on appchains as one of the most viable and underexplored approaches to this challenge. It will dive into how appchains facilitate the creation of truly novel products and features, as well as explore the benefits of the sovereignty they provide. Though appchains are surfacing in various crypto verticals like DeFi and gaming, here we'll focus on DeFi appchains.

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The Advantages of Appchains

When we consider the various architectures mentioned above, it’s not immediately obvious which options are best for addressing important UX pain points while also remaining sufficiently decentralized. Every approach has trade-offs, but appchains offer one crucially important and unique advantage: Sovereignty.

From a technical perspective, sovereignty can be thought of as vertical integration. This means that application developers can control and customize every layer of the blockchain stack to meet the specific needs of their application, and do so in a way that allows for optimal integration between each layer.

Outside of the fact that technical sovereignty can mean less reliance on middleware solutions, it can also exempt applications from having to compete for blockspace with unrelated or competitor applications, as well as reduce reliance on the development roadmaps and governance of any other projects. These benefits will be especially compelling to projects that have achieved some notion of scale, need more throughput, require frequent upgrades, and/or desire predictability around how the platform they’re building upon will change and evolve.

Technical sovereignty also allows application developers to unleash their creativity through experimenting with different consensus models, bespoke node requirements, state models, and other exciting features which will be explored through the examples in the next sections. Just as many new L1s have emerged specifically to make changes to the core architecture that they lack the social consensus to implement on existing chains, appchains bring that same level of optimization to individual applications.

On the social side, sovereignty is fundamentally about individual applications having the ability to put their values first and get extremely specific about the set of trade-offs that make the most sense for them. It allows communities to be in control of their own fate and even take actions such as hard forking their blockchain, whether for political or technical reasons. Most projects that are willing to undertake the technical feat of building an appchain will do so primarily for technical reasons, but the demand for social sovereignty should not be underestimated. There are and will continue to be applications that opt into this vision simply because they do not feel that other ecosystems adequately share their values.

Trade-offs & Concerns

Appchains are not a perfect solution for all projects and ultimately represent an opinionated view on what trade-offs blockchains and applications should make. Many critics cite (1) the loss of synchronous composability and (2) liquidity fragmentation as reasons why the appchain approach is not well-suited to DeFi, however these concerns are not so straightforward. Just as liquidity on general-purpose L1s has become concentrated within a few popular applications, the same is likely to happen within the ecosystem of DeFi appchains. Rather than users toggling between DEX chains, lending chains, perps chains, liquid staking chains and the like, it’s much more likely that all these features eventually become consolidated into the core products of a few extremely liquid DeFi appchains, making fragmentation much less of an issue. It is also worth noting that while Ethereum Mainnet is still DeFi’s center of gravity, its rollup-centric scaling roadmap has its own implications for synchronous composability and liquidity fragmentation.

While appchains are by no means exclusive to the Cosmos ecosystem, many of them have chosen it as their home because of the robustness of the developer tooling and the asynchronous composability primitives, which do not yet exist for ecosystems like Ethereum.

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UX Pain Points

When it comes to the current state of UX for most DeFi projects, here are just some of the pain points:

This list is not exhaustive, but it does begin to paint a picture of how many things DeFi applications need to get right in order to have a real chance of competing with CeFi. The following section will highlight a number of DeFi appchains that are tackling some of these problems head-on.

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Compelling Features & Experiments

‍The best way to fully grasp the power of appchains is to explore some of the most compelling and innovative user experiences being built today, most notably on Osmosis, Mars Protocol, Penumbra and dYdX.

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Osmosis

Osmosis is an appchain DEX and emerging liquidity hub within the Cosmos ecosystem. The original inspiration for Osmosis was outlined in a blog post by co-founder Sunny Aggarwal called DAOifying Uniswap Automated Market Maker Pools, where the core idea was to bring the customizability and sovereignty of Cosmos to the world of AMMs. Today, the protocol lets users create liquidity pools with unique and changeable parameters, allowing for experimentation with different kinds of bonding curves, multi-weighted asset pools, and more. Hybrid liquidity models that experiment with both order book matching and concentrated liquidity pools are also on the way.

As a trailblazer in the world of DeFi appchains, Osmosis has already introduced a number of innovative features to the market, including superfluid staking, which offers an elegant solution to the incentive problem that arises from having to choose between staking yields and DeFi yields. Users can instead stake any LP share token containing $OSMO, which incentivizes contributing to chain security while also driving additional value back to the community. This feature is made possible by the fact that the Osmosis chain can recognize application level-assets and use them in PoS consensus, and there’s no reason it cannot be leveraged for other similar use cases as more functionality and asset-types come online.

When it comes to creating a CEX-like user experience, Osmosis is working towards offering margin trading and lending as part of their core product. The team is currently working with Mars Protocol on integrating lending directly into the Osmosis trading engine, which will enable staged liquidations, cross-margining of assets and using Osmosis LP shares as collateral for margin trading. Osmosis writer Steview Woofwoof concisely outlined the benefits of this design in a Medium post earlier this year:

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“Staged liquidations ensure that unexpected volatility will not immediately and catastrophically liquidate a levered position. Efficient cross-margining means that because the DEX and lending engine are so tightly coupled, Osmosis (unlike a stateless DEX) can track all your supplied collateral from different assets and pools block-by-block so that it can essentially be used as one big pool of collateral against all your loans and margin positions.

An additional benefit to building the lending protocol into the DEX is that it removes the need for an oracle. Indeed, it is possible that Osmosis price feeds will themselves be oracle-ized for use by other platforms. It may, of course, still be useful to use an external oracle for backup or added security against certain types of attacks (price manipulation, dDOS, etc.).”

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Osmosis is also exploring several creative approaches to dealing with MEV on its DEX that are significantly more easy to implement as an appchain, including:

Threshold Encryption *– Encrypting user transactions before broadcasting them to block producers & allowing for decryption and execution only once the block has been voted on and finalized.*‍

Fee Discrimination – Charging different fees for different kinds of transactions (i.e. making arbitrage txs more expensive).

‍Skip*** ***– Building Flashbots-like features into the base protocol (i.e. auction slots within blocks).

Internalizing MEV* – Building in-protocol arbitrageurs that run at the beginning of each block and give the revenue to $OSMO stakers.

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Mars Protocol

Mars is a cross-chain credit protocol being developed by Delphi Labs as well as the pioneer of a novel DeFi primitive known as Contract-to-Contract (C2C) lending. Originally deployed on Terra, the Mars team has since taken a step back to re-evaluate their product strategy and decide which ecosystem to invest in going forward. After surveying the entire landscape of L1s and L2s, the Mars team ultimately landed on a unique Outpost & Hub model that allows them to enjoy the benefits of deploying to an existing L1 and the benefits of appchain sovereignty.

‍Outposts are instances of the Red Bank, a non-custodial & over-collateralized lending protocol, that are deployed to various different chains – allowing for atomic synchronous composability with other applications on the same L1. It’s also where liquidity for C2C lending comes from, as authorized smart contracts can borrow from the Red Bank without posting collateral. The current plan is to build the first outpost on Osmosis.

The Mars Hub is an appchain that serves 2 key functions:

1. Governing all the outposts (including voting for which contracts can be approved for C2C lending)

2. Collecting revenue from all outposts & distributing it to $MARS stakers and validators

So far, the cross-chain strategy of most DeFi protocols has been to redeploy on all the popular L1s or build an appchain that needs bridges to connect to other chains. This Hub & Outpost model attempts to achieve the best of both worlds by composing with existing highly-liquid DeFi ecosystems and streamlining governance & token value accrual – both of which should alleviate some of the fragmentation issues that the predominant approaches suffer from.

The team at Delphi Labs is vocal about their hyperfocus on building the best possible UX for DeFi, and once live, Mars will be one of the most ambitious attempts to compete with the UX of centralized exchanges to date. The development roadmap includes a number of other exciting novel features such as Rover credit accounts, which will enable users to trade across various DeFi products with leverage from a single account and liquidation threshold, while also replicating the “sub-account” experience so many enjoy on CEXs. You can read more about it here.

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Penumbra

Penumbra is a cross-chain shielded asset pool and appchain DEX that leverages privacy to improve the user experience of onchain trading and market-making. The vision for the project emerged out of frustrations around the lack of adoption and interest in privacy-preserving tools such as Zcash, and a desire to build a product that would be better precisely because of its privacy. However, as the last few years have shown, it turns out that privacy is a much harder problem than many initially appreciated (especially when building a private DEX).

There have been many well-funded attempts at building methods for doing private computation on blockchains, however the team at Penumbra has not been satisfied with any of the existing approaches. They’ve instead decided to ask a more subtle but critically important question:

If useful blockchains revolve around public shared state, how can we build a private ledger with useful functionality?

For Penumbra, the notion of public shared state is at the core of why blockchains are useful precisely because it means that anyone who wants to use a blockchain only needs to coordinate with the chain itself rather than with off-chain counterparties. Because of this, they take the view that while previous attempts at designing privacy-preserving L1s & rollups may solve the privacy issue, they do so in a way that severely limits the extent to which users can meaningfully interact with public shared state.‍

Ideally, private computation would be done in a way that preserves privacy for individuals while also allowing for transparency of important aggregate data. However, it turns out that building a system capable of managing these trade-offs requires a fundamentally different state model from anything in the market today, so the Penumbra team has been building one from scratch. Additionally, while they are currently very intentionally focused only on the use cases of trading and market-making, the research and design work being done by the team may have broader implications for privacy and scalability in other contexts.

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Privacy on blockchains is accomplished by moving user data and execution off-chain: replacing onchain user data with cryptographic commitments to that data, and replacing cleartext execution with zero-knowledge proofs of correctness of state transitions. This requires a different state model. Rather than a state model centered on global, mutable state which valid transactions change as they execute, there is instead the notion of immutable, composable state fragments, where each transaction consumes input state fragments and produces output state fragments (this is conceptually similar to Bitcoin’s UTXO model). This allows state fragments to be replaced with commitments to those state fragments, while transaction contents can be replaced with proofs of valid state transition. The problem with this approach, however, is that because the execution moves off-chain, access to shared state is no longer possible, as the exact final output of the proposed state transition must be included as an input to the transaction. For instance, a DEX trade would require freezing the exact state of the AMM reserves and the exact output price, before submitting the transaction to the chain.

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Unique State Model‍

Penumbra’s state model is built first and foremost to facilitate private interaction with public shared state, which it does by using an actor model that explicitly separates off-chain computation, which is private and deals with per-user state, from on-chain computation, which is public and deals with shared state.‍

In the actor model, a user creates a message (rather than a transaction), encrypts it and sends it to a smart contract. Each smart contract is then executed once per block and takes as inputs all the messages sent to it during that block, allowing transactions to be processed in batches or using any other kind of custom application logic. This also has some nice scalability benefits in that the computational cost can be amortized over all transactions in the block since each contract is only being executed once. The validators will then decrypt some information about the batch total before executing the transactions asynchronously and producing public outputs.

This asynchronicity is made possible by the minting of a private NFT that records the intermediate state of the execution and models the future state. Once the contract responds with an output message, the private NFT is consumed and used to prove that the correct future state was being modeled, at which point the message from the contract is used to mint the private outputs of the execution. The trade-off here is that execution may take place over multiple blocks.

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Private Staking

In order to preserve privacy for delegators and accountability for validators, the Penumbra team had to take a novel approach to how they designed staking. Instead of treating “unbonded” and “bonded” as different states of the same staking token, bonded stakes are recorded as delegation tokens. These tokens represent percentage shares of a validator’s delegation pool, much like how LP tokens represent shares within a liquidity pool. While the size of each validator’s delegation pool is part of the public chain state, delegation tokens retain privacy by being fungible with each other and residing in the multi-asset shielded pool (where all value on Penumbra is recorded). Lastly, staking rewards are calculated by tracking the exchange rate between staking tokens and delegation tokens, which has nice tax-efficiency benefits, as only unbonding is a taxable event.

Ultimately, the bet Penumbra is making is that privacy is actually integral to the experience of trading, and even more, that the customizations they’ve made will lead to better execution because enabling private strategies means enabling more sophisticated and well-capitalized players to enter the arena, which comes with better liquidity, better pricing and less slippage. The vision is to create a user experience that offers more privacy than CeFi with the open and permissionless benefits of DeFi.

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dYdX

After becoming the largest application by volume to be deployed to an Ethereum L2, perpetuals exchange dYdX recently announced their plans to build V4 as an appchain. In the official communications following the announcement, a “unique combination of decentralization, scalability and customizability” was cited as the primary reason for the move, however it’s worth digging a bit deeper into each of these reasons:

Decentralization‍

In the face of regulatory headwinds, especially in the US, many DeFi projects have been forced to confront the possibility of severe crackdowns, as well as how resilient their projects would be in the face of such actions. dYdX V3 is currently deployed to an Ethereum L2 (StarkEx), and while the details won’t be covered here, much has been written about the challenges around full decentralization for rollups. Despite the fact that solutions are actively being researched and developed, projects that need nearer-term solutions and predictability may not be able to wait for this vision of fully decentralized rollups to materialize. dYdX was one such project, and they ultimately decided that operating their own chain with ~100 validators would be the best they could do given the specific trade-offs they needed to make.

Scalability

Given that dYdX V3 currently processes about 10 trades per second and about 1,000 order places/cancellations per second, the team surveyed the entire blockchain landscape in search of a chain that would allow them to scale that throughput up by orders of magnitude. Because they were able to find no such chain, they resorted to a more creative solution: a decentralized & off-chain order matching network. The realization that the dYdX chain only needs to reach consensus on which transactions have been settled, rather than on all orders being placed, will be the unlock for enabling truly superior scalability on V4.

At a technical level, this design was enabled by the fact that appchains allow for bespoke node requirements, such as requiring that validators help out with things like running oracle networks or bridging infrastructure.

Customizability

In an interview with Bankless, dYdX founder Antonio Juliano shared his grand vision for a fully vertically integrated product and user experience that involves not only building the base L1, but also building custom execution modules, an off-chain orderbook network, an oracle network, an alchemy-like indexer, mobile applications and a custom wallet. Juliano himself has described this endeavor as “very risky,” but has also made it very clear that he believes this is the best available option for creating the highest quality possible user experience for the dYdX product.

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Closing Thoughts

For all the benefits and innovative experiments highlighted above, it is important to acknowledge that building an application-specific blockchain is significantly more technically challenging than deploying an application as a smart contract or even within a specialized execution environment (rollups, subnets, etc.) This reality should not be understated, however neither should the potential benefits that come from the vastly more open design space that appchains provide. Superior UX is not only how decentralized products beat out their centralized competitors, but it's also an integral part of building moat in an open-source, permissionless world.

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Special thanks to the Sunny Aggarwal (Osmosis), Rob Sarrow (Delphi), Henry de Valence (Penumbra), and Aaron Kong for their extremely thoughtful notes and feedback! If you're building a DeFi-focused appchain or would like to discuss these topics further, feel free to reach out at natalie@volt.capital.

We used to have frameworks for meaning & purpose; blueprints for How To Be that we could look towards for guidance on what to strive for and how best to live our lives. Although far from perfect, these frameworks provided us with stories, knowledge and identities that we could use to make sense of the world and our place in it. They equipped us with tools that we could use to navigate the inevitable chaos and suffering that seem to be built into the experience of life.

Here in the West, however, we seem to have left behind many of our previously cherished frameworks for meaning and purpose. Whether this was done with awareness and intentionality is certainly up for debate, but the results of the shift seem less debatable, as the absence of these frameworks appears to have left many of us forced to grapple with untenable amounts of existential angst and ultimately, nihilism. This observation is not a new one, as German philosopher Friedrich Nietzsche famously declared in 1883:

“God is dead. God remains dead. And we have killed him. How shall we comfort ourselves, the murderers of all murders? What was holiest and mightiest of all that the world has yet owned has bled to death under our knives: who will wipe this blood off us? What water is there for us to clean ourselves? What festivals of atonement, what sacred games shall we have to invent? Is not the greatness of this deed too great for us? Must we ourselves not become gods simply to appear worthy of it?”

Despite not being a religious man himself, Nietzsche did not view the decline of Christianity in the face of The Enlightenment as a development that was necessarily positive. He was a rather fervent atheist, but his prophetic words reflected a concern about what it truly meant for Europe to abandon the moral framework upon which it had relied for centuries, and it wasn’t clear to him that good things laid ahead.

MORAL FRAMEWORKS

Religion is probably the most obvious example of what I will refer to as a moral framework, which can be thought of as a kind of mental technology that facilitates moral perception, emotional regulation, and protects against the psychological anxiety that often accompanies nihilistic thinking. It is certainly not the case that a human being cannot survive without a moral framework, but as I’ll later argue, trying to get by without one tends to make life more painful and burdensome than is desirable or necessary for most people.

There seem to be 3 primary components of a moral framework:

1. The Transcendent

2. The Moral Landscape

3. The Prescription

The Transcendent Refers to that which transcends all else, meaning that there is nothing above it or before it, and that it is intrinsically meaningful and valuable. Common examples include notions of God(s), The Universe, Truth, Mother Nature, “highest value(s),” etc.

The Moral Landscape Refers to the idea that human beings find themselves in a landscape of morally-weighted values (i.e. compassion, honor, loyalty, deceitfulness, jealously, etc.) Some values are to be aspired to and emulated while others are to be avoided.

The Prescription Refers to the explicit sets of rules and guidelines for how human beings should navigate The Moral Landscape and become more aligned with The Transcendent. Common examples include scriptures, fables, commandments, practices, etc.

HAVE WE LOST OUR MORAL FRAMEWORKS?

While many people in The West still identify with a particular religious tradition, I would argue that it is difficult for modern people to conceive of what it meant to be religious in say, 12th century Europe, during the Crusades (a nearly 200-year holy war). Religion has by no means disappeared, but it is almost impossible to overstate the degree to which it has been transformed in the last few centuries. Not only did The Church go from being the single most important institution in human life to becoming subordinate to the power of The State, but divine monarchies also went from being the dominant form of governance and social hierarchy to largely being replaced by various forms of democracy with clear separations between Church and State enriched into their foundational value systems. The implications of these shifts will likely never be fully comprehended, but there are certainly some useful insights that can be gleaned from seeking to better understand these developments.

The declines in religious affiliation and church attendance both in the U.S. and Europe speak for themselves, however the “secularization” of The West is probably overstated and misunderstood. The ascendancy of “Enlightenment values” is often credited for these declines, but I want to argue that The Enlightenment is better understood as the ‘watering down of religion’ than as the ‘end of religion.’ It turns out the distention is actually quite important…

The Enlightenment

At its core, The Enlightenment was a philosophical shift that elevated ideas such as reason, scientific progress, and liberty to a level of fundamental importance. It was also a moment in history where people were at once forced to grapple with the the consequences of centuries of religious violence as well as with the beginnings of the first Industrial Revolution; two rather significant circumstances. Given that state of affairs, it was not at all obvious where society should go from there — Should Christianity be left behind? Can it co-exist with this new scientific way of understanding the world?

It was the philosophers and public intellectuals of the time who found themselves confronting these questions, and it is of critical importance to highlight that most of these thinkers were not atheists who believed that religion should be done away with entirely. By contrast, many of them were raised in deeply religious communities, received traditional religious educations, believed in some notion of God, and also believed that faith was an extremely important part of human life. Rather than devote their energy to the project of destroying religion, thinkers such as Immanuel Kant instead became principally concerned with finding a balance between the Judeo-Christian worldview and the emergent scientific worldview. This reconciliatory approach was thought by many to be more desirable and sustainable than disposing of religion in favor of science or disposing of science in favor of religion. The former was not ideal because even amongst the non-religious, there was a sense that it was dangerous for human beings to live without moral frameworks. Kant himself believed that even if God could not be empirically proven to exist, it would still be better for human beings to believe in God, because a world without God was a world without free will and morality.

“Morality leads, inevitably to religion, through which it extends over a moral Lawgiver.”

This is a profound idea in that grounds morality in something transcendent and makes sense of it as something that human beings can reason their way to but cannot create for themselves. It provides a universally accessible framework for moving through the world in a virtuous and ethical way; removing much of the ambiguity and uncertainty associated with worrying about how to live and how to carry oneself.

The latter was not ideal because it simply was not feasible within the context. The Enlightenment sharing a period of overlap with the first Industrial Revolution meant that remarkably rapid technological development was beginning to become a fact of life. As society became more visibly dependent upon industrial technologies, denial of the scientific worldview became increasingly untenable. From electric batteries, to steam engines, to cotton gins, one’s use of these tools was an implicit admission of belief in the scientific worldview.

The (Failure of) Reconciliation

To be clear, I don’t believe it’s the case that religion and science are intrinsically at odds. As Kant noted, empirical knowledge and faith are two entirely different domains of human thought and epistemology that serve entirely different purposes. Religion and science are only incompatible insofar as they fail to stay in their own lanes, meaning that religion is not for making empirical claims and science is not for making metaphysical claims.

I do, however, believe that Christianity was ultimately not able to survive the challenges and attempts at reconciliation that came out of The Enlightenment. It seems to me that in attempting to bring these two worldviews together, something fundamental was lost: mysticism.

So, what is mysticism?

Mysticism essentially refers to the idea that a person can become one with The Transcendent, but it also encompasses ideas about altered states of consciousness and experiences of spiritual truths and revealed insights. I tend to think of it as the more ‘spiritual’ component of religiosity. So perhaps unsurprisingly, many of The Enlightenment thinkers found belief in mysticism to be particularly problematic, and felt that if faith and Christianity were to remain as foundational elements of western society, a more “reasonable” and “rational” approach would be necessary. All the talk of miracles and revelation would need to be done away with, as it was these kinds baseless and unnecessary notions that inspired and motivated so much of the religious violence that had been plaguing Europe for hundreds of years. At best, mysticism was something that we could get by without, and at worst, it was something actually that perverted religious faith.

This is where things began to break down.

My argument that The Enlightenment was the ‘watering down’ of religion rather than ‘the end’ of religion is fundamentally about the trivialization of mysticism. It’s about the idea that all of the wisdom and morality that we derived from religion could be separated and extracted out from the mystical; the idea that we could have our cake and eat it too. We cannot. As Nietzsche so presciently put it:

“When one gives up the Christian faith, one pulls the right to Christian morality out from under one’s feet. This morality is by no means self-evident… Christianity is a system, a whole view of things thought out together. By breaking one main concept of it, the faith in God, one break the whole.”

While there are certainly no shortage of gifts from the The Enlightenment to be thankful for, this to me, is probably it’s most consequential flaw. The benefit of hindsight allows us to see that rather than a reconciliation which lead to both worldviews existing in their fullest and most robust forms, what we got instead was a damaged and diluted version of a previously robust (albeit imperfect) moral framework. Kant, again, serves as an example of this, as he more-or-less ended up maintaining belief in God and in the importance of “moral religion,” but did not do so in a way that was entirely compatible with the Judeo-Christian understanding of God and religion. Spending his entire life contemplating faith, religion, rationality, reason and morality led Kant to very different beliefs and conclusions than the ones he started out with, and I would argue that this largely reflects the trend we have seen in The West. Fast-forward to present day, where as I noted above, we can see that many people still report as identifying as Christians. However the degree to which religion is more than a cultural affiliation, the degree to which people have and are formally educated in the texts and teachings of the religion, the degree to which people routinely engage with the practices and rituals of the religion, and maybe even the degree to which people actually derive their meaning, purpose and moral values from the religion have markedly declined. It’s almost as if religious fundamentalists, many of whom haven’t reformed or updated their beliefs for centuries, are the only ones who still fully engage with their faith and get everything out of it that it was meant to provide us with.

The problem doesn’t end there either.

What’s more is that the fundamental values of The Enlightenment are predicated on Judeo-Christian values. So not only have we attempted to pick and choose which aspects of Christianity we would adhere to, but in doing so, we have at once compromised our legacy moral framework and unwittingly undermined the core principles of this new philosophy as well. For example, let’s take democracy, one of the crown jewels of Western philosophical and political thought. The idea that the power to govern should be placed in the hands of the people is predicated on the notion of human beings as divine creatures who have been bestowed, by God, with unalienable rights, free will, and the ability to reason.

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed…”

These claims are not empirical claims, but rather testaments to faith and belief in something transcendent. So when we lose or even weaken our spiritual connection to that which is transcendent, we inevitably find ourselves trying to uphold values that have been untethered and ungrounded from that which gave them meaning and purpose in the first place. This I, believe, is what it means to lose one’s moral framework. Even as someone who has not identified with or practiced Christianity for over a decade, I view this development as problematic. To understand human beings is to understand the importance of moral frameworks, and whether its indigenous religions, Judaism or Scientology, human beings will always find their way to faith and religiosity. Even if they have to channel these impulses though non-traditional channels such as politics or sports. Some will find that their traditional religion provides them with all the moral and spiritual nourishment that they need, while even fewer will be able to get by without it. However, I would argue that neither of these approaches are scalable and sufficient for most.

For me, the fundamental question becomes…

How can we have a moral framework that:

1. Actually provides us with meaning & purpose while reducing our proclivities for nihilism and existential angst

2. Is able to evolve and be updated without being watered down

3. Can retain our rich cultural traditions of ancestral wisdom, spirituality and practices without becoming dogmatic and anachronistic

SO WHAT NOW?

Just a few hours before I began writing this, I was added to a Twitter Circle for the first time, which was cool because I very much enjoy the more unfiltered and intimate vibe of close friends social content. I figured I’d enjoy this new feature too if there was a similar concept at play, and sure enough, Twitter Circles lets users send tweets only to a select group of up to 150 people (a “circle”).

I found this pretty interesting and quite clever, as it made me fairly certain that someone on Twitter’s product teams is familiar with the deeply important concept of Dunbar’s number.

As nicely defined by Wikipedia, Dunbar’s number is a “suggested cognitive limit to the number of people with whom one can maintain stable social relationships — relationships in which an individual knows who each person is and how each person relates to every other person.” That number is, of course, thought to be roughly 150. The term itself was originally coined by British anthropologist Robin Dunbar in the 1990s, and various studies on the topic have since suggested that the number may actually be slightly higher or lower, but these granular details are largely beside the point. The main point is this:

For thousands and thousands of years, human beings lived and evolved in the context of these Dunbar-sized communities, and the transition from that reality to one of large-scale societies has been one of the most consequential developments in the history of our species.

So… what exactly is so consequential about this?

As far as I can tell, the answer has a lot to do with how much more complex human social life became as a result of this development. For obvious reasons, an individual human living in a tribe of ~200 people is going to have a much easier time keeping track of the state of the their tribe and the relationships within it than a human living in a society of 500,000 people. This is precisely the “cognitive limit” that Dunbar refers to, and what it really meant, was that humans had to find new ways of managing the societies they lived in. Things had to be done differently.

So as we traversed this new terrain and evolved into who we are today, we learned many things along the way. We learned, first and foremost, that interpersonal trust and self-sufficiency don’t scale. We learned that self-defense is not an adequate solution to public safety in a society of thousands. We learned that everyone can’t grow their own food because a robust economy requires division of labor, and some people need to (and should based on their skills) do other things. We learned that we can’t use informal credits (IOUs in people’s heads) as the basis of a monetary system, because no one can keep track of or verify that at scale. We learned that we can’t all engage directly in dialogue about the governance of our society because there’s no forums that support hundreds of thousands of people (or more) engaging in real time, good faith, coherent conversations (key word being ‘coherent’).

Luckily for us, humans are no stranger to this fundamental problem of consensus and coordination. In fact, we have a long and impressive track record of conjuring up new tools that have allowed us to tap into a shared reality and evolve as a species. This time around was no different, as we began establishing things like social contracts, banks, governments, and institutions of various kinds. Eventually, what were once close-knit nomadic tribes had grown into much larger, complex societies.

Wow. All that seems pretty great… so, what’s the issue?

It is, but like everything in life, this transition came with no shortage of trade-offs and second-order effects. It goes without saying that this more complex manifestation of human social life brought with it more benefits than we could ever hope to imagine. Among those were a radical increase in diversity of every kind, from ethnic to neurological and beyond, as well as superlinear scaling in human creative output and productivity. The sum of all this basically added up to an explosion of innovation across the board, the likes of which we still benefit from (and take for granted) today.

On the flip side, however, I think it’s also fair to say that we left a lot behind, including some things that maybe shouldn’t have been left behind. I would argue that there’s a certain way in which this shift away from what is local and communal has alienated us from certain aspects of our nature that are deeply important and meaningful. One of the places where this alienation shows up most obviously is in how we exist in relation to the natural world, and the way we seem to view as it that which must be harnessed and controlled vs that from which we originate and are sustained.

Interestingly enough, it seems to me that this post-Dunbar era of complex society is actually what many people (incorrectly) think of and refer to as capitalim, whereas the Dunbar era itself is often invoked as some sort of pre-money communist utopia where everyone lives off the land in harmony without private property or government. Part of me very much sympathizes and resonates with these conceptions, but the problem is actually much deeper, I fear.

The problem of alienation

Some people’s minds will go to straight to Karl Marx when they hear the word alienation, but I ask you to resist this urge, as the is notion I’m trying to invoke is not quite the same. What I’m talking about is not an alienation that results from class stratification, but rather one that results from a kind of radical outsourcing. In this context, aspects of human life that existed firmly in the domain of interpersonal trust and/or self-sufficiency began to be outsourced to institutions and social systems. We don’t “live off the land,” we have commodities markets and food supply chains. Things like identity, our very sense of who we are, become a product not only of experience, relation and history, but also of “official record.” Reality itself becomes a centrally managed ledger.

This is probably not great, but I don’t think the real problem lies within radical outsourcing itself, so much as with the economy of power that inevitably emerges around it. In outsourcing all these responsibilities, part of what we’ve done is create centralized power honeypots within society. When we outsource the problem of coordinating public safety, there’s now an institution (or set of institutions) that have something like unilateral control and knowledge over that domain. The same goes for our food supply, financial system, education system, communications infrastructure, and so on and so on.

Individuals now have an intense and perpetual incentive to gain monopolistic control over these honeypots. Why? Because gaining such control allows for value capture via gate keeping and rent seeking, and as a firm believer that powerful incentives have an effect on human behavior that’s comparable to the effect gravity has on mass, this strikes me as problematic. I’d actually go as far as to say that it seems like the pervasive centralization of everything (even domain-specific knowledge), and the subsequent exploitation of that power asymmetry is actually just the logical conclusion of this emergent alienation and outsourcing dynamic. Not the work of the devil, the Illuminati, George Soros, or any anyone else.

I say all this to say that if you’ve also experienced the intuitive sense that everything wrong and broken in society seems to be wrong and broken in the same very specific way… this is why. Hence the ‘meta’ problem.

So… what now?

Dramatic and dark as this may sound, I want to be really really clear that this is neither a critique of human evolution nor a call for the return of tribal living. What I actually think we should be striving for is something like balance.

Before we launch into writing think pieces about the evils of post-Dunbar human life, its probably worth considering whether or not there was really even a viable alternative. Evolution is, after all, an amoral process, and can anyone honestly say they’d prefer human beings to have remained permanently in the Dunbar-era? Did anyone really have a serious solution for how to reap the benefits of large-scale society without sacrificing many of the Dunbar-era benefits? I think it’s safe to say the answer is largely no. So where does that leave us?

I personally believe that we find ourselves in a race against time to identify and transition to a new paradigm before we break something beyond repair in this current one (like our planet or our limbic systems). As one person, I obviously can’t consume or process all the information in the world, but from everything I’ve seen up to this point, there are a few develops that seem especially promising in their potential to help our species succesfully navigate this dilemma.

The first one I’m going to explore involves global-scale peer-to-peer networks and decentralized coordination….

#StayTuned