Rethinking the Investment Logic of Public Chain With Open Sewer Model

Special thanks to Mr. Charlie Munger for his help and support on this article.

Warren Buffett’s longtime business partner, Charlie Munger, has continued to express his distrust of cryptocurrencies in media interviews. He called the “crypto craze” a “massive act of stupidity.” He described cryptocurrency as “like an open sewer full of evil creatures” and hoped investors would never touch or buy it.

I can well understand the source of this sentiment and believe that his claim is valid. As an early supporter of the crypto industry, I have often been more concerned about the price of cryptocurrencies than I am about the technology.

At first, I thought misconceptions like Mr. Munger’s were caused by people not understanding the potential benefits cryptocurrencies could bring to their lives. But over time, I’ve listened to more traditional investors, and think that a lot of the criticism has actually been productive.

More broadly, the practice of cryptocurrency scaling around public chains is evolving dramatically over time. In this article, I will share evolutionary points about public chains and build an interesting sewer model around the current historical stage of public chain technology development. In particular, I’ll explore a new model called PipeFi. It is very likely to lead the new public chain development direction in the next stage.

Why the public chain

Traditional Web2 companies generate cash flow through business flow rather than aggressively monetizing financial practices from the start. Because multi-chain ecology is thriving outside of Ethereum, every public chain ecosystem develops and expands their own features, including higher security, faster thoroughput, cheaper, better privacy, more open compatible adaptation ability, more unique resource allocation patterns (such as storage, calculation, bandwidth) , developers and communities with regional characteristics.

Blockchain with top P/E ratio, Source: Token Terminal

The transfer of assets between different public chains is often referred to as cross-chain, but Mr Munger seems to have come up with a more graphic version. The Inter-blockchain Communication Protocol (IBC) concept is more like a city’s sewer system. IBC enables different blockchains to work independently, but also to communicate and collaborate. IBC is also very different from cross-chain Bridges. Bridges often act as direct routes between blockchains, while IBC functions more like a high-speed high-throughput sewer open to all blockchains.

Different chain bridge schemes consume time and resources. IBC, on the other hand, allows a direct connection to the Layer1 blockchain without a cross-chain bridge. A common sewer design tends to be more systematic and resilient. In fact, the public chain has become entangled with the currency to form a dense network of money. So how do you build the most secure, interconnected, fast, capital efficient, cost-effective and censor-resistant sewer system?

What is the open sewer model

Before we explain the open sewer model, we must first assume that everything in the social and natural world is in a changing network of relationships. The basic goal of sewer network theory is to explore how blockchain networks can be built or combined and maintained to achieve the goal of “longevity and durability”. The change and evolution of the public chain are determined by the interaction between the nodes in the sewer model and the network generated by the interaction. There are three core concepts in sewer theory: pipeline capacity, transit node and network value.

Total value locked in all chains, Source: DefiLlama

Pipeline capacity

Pipeline capacity can refer to both the scalability of the public chain and more metaphysical indicators such as the size of community organizations, the speed of technology iteration, biometrics, and consensus mechanisms. The two positions are equal and decentralized. Among them, the scalability of the public chain needs these technical indicators to express. In my opinion, there is not much difference between the public chains in principle, they are all emerging enterprise forms.

From the user’s point of view, the public chain and the current traditional technology companies are no different. For example, Apple was introduced by Steve Jobs, and Ethereum was introduced by Vitalik. Compared with traditional companies, the public chain has a wider range of initiatives. Capacity performance must be evaluated during user flow and public chain operation.

Switching nodes

The transfer node runs through the whole theory of sewer networks. The transfer node changes, translates, monitors, and guards the state of the entire public chain network. Even a fairly insignificant node or transit point can be enough to become an inflection point in a complex public chain to change the situation. All nodes are in the state of being transformed and transforming, that is, the role of a node is defined by other nodes. In a public chain network, nodes are expected to establish stable relationships.

The main role of the transfer node is to facilitate the consistency of the blockchain, thereby eliminating the sense of distance in the network. Because the pipeline network is composed of different nodes. The more active a node is and the more it interacts with other nodes, the more complex the public chain network it forms and helps the pipeline to spread outward. In addition, the more active the nodes, the more frequent the activities and the closer the connections. The more complex and dense the pipeline network, and the wider the extension and coverage.

Network value

Network value is a method to describe the value generated by node interaction, emphasizing the process of work, interaction, flow and change of various roles in the public chain ecology. Each role is a node of the network, which is equal and decentralized. The only difference is the amount of interaction with other nodes, but the importance and status of the network should be equal.

In general, the larger the scale, the larger the network effect. The network relationship formed by the circulation of nodes in multiple levels is the factor that really affects the public chain. The stability of the network depends on the degree of fracture, contradiction and conflict in the node relationship. The whole value network is a heterogeneous and pluralistic society, which is composed of various productive parts.

PipeFi is coming

Current public chain competitive games are often labeled as money-burning contests. Many critics fear that public chain competition will always move in this direction. But I think we’ve learned from the failures of previous EOS and LUNA projects that aggressive cash-burning games tend to encourage users and developers into a bubble. Most of the dApps that have come out of this user-subsidy war have undoubtedly turned out to be poor projects or even dead ends. I think the real estate industry in some countries seems to coincide with the development of some public chain projects, mainly reflecting the following similarities:

1. People enter the public chain only as a way to hype tokens. FDV and TVL data lack liquidity and resilience;

2. Competition based on technical characteristics is still an important driving force to determine public chain reputation;

3. When the public chain economic model overdraws the user’s expectation, the public chain will fail in large probability;

This is not to say that all forms of tokenization hype are bad, but rather, we should seek to grow in ways that do not harm long-term users or are truly consistent with the longevity and use case of the sewer network. There is no one-size-fits-all public chain solution. The idea behind Layer1 is as different as the sewers of every city in the world.

Daily P/S ratio (circulating) for Solana, Algorand, Litecoin, Polkadot, NEAR Protocol, Cosmos in the past 180 days. Source: Token Terminal

However, equality is absolutely the core value of the public chain network, although the influence of nodes has not really achieved equality. Introducing the concept of PipeFi helps solve this problem. PipeFi regards transit nodes as the agents of the network, and transit nodes can decompose themselves infinitely to dynamically balance node power.

The entrenched CopyFi model tends to overdraft network value in advance, which has taken away the soul of many public chains. For PipeFi, a new network operation model, equality can be improved in the following aspects: 1) Increase the long-tail assets of the network; 2) Enhance the consistency of the token economy; 3) Improve the way developers interact; 4) Creative use of interoperability and composability.

The interconnected value of blockchain

The unequal design of the current public chain economic model leads to the following two situations:

1. The creation of opportunistic liquidity rewards and predatory CopyFi mechanisms, and the obsession with TVL and FDV data over user experience.

2. Give up differentiated operation ideas, and ecological deployment replicates the Ethereum template set favored by top capital.

Now we look at the public chain itself as an active role, with a complex network perspective. The network value of the public chain is constantly changing, and liquidity will depend on the network value and combine into a new value cycle.

Source: CryptoFees

The establishment of a pipeline network helps limit the transferability of highly liquid assets and also reduces the early wear and tear on the public chain ecosystem until more application components are established. PipeFi’s value system is mainly composed of the following points:

- Digital sovereignty: In the traditional gold mine of wealth, players are always trying to control the information gap or even become the source of information to own the sovereign wealth, but they are actually “renting” the information rights from the sovereign people and swallowing up the wealth premium. When public chain assets become assets under the control of digital sovereignty, users can theoretically cash in the utility of these assets under the supervision of all parties on the chain.

- Developer language: The value orientation of smart contract programming language often determines the pricing of resources of a public chain. There is no doubt that Ethereum occupies an undisputed dominant position in this field. The public chain which can achieve rapid development is not necessarily a good public chain, but a robust and safe public chain will be able to go the distance. I believe Solana’s narrative speaks for itself.

- Performance space: There are bound to be people who joke that simple performance improvements sacrifice decentralization and security. But there’s no denying the never-ending quest for performance. ETH2.0 provides network performance and execution speed through beacon chain, sharding, and eWASM, which lays the foundation for the following performance narrative. “Higher concurrency + lower cost” has become the cornerstone, and Ethereum has basically taken over the current traffic entry unless more innovative consensus mechanisms are provided.

- Modularity and composability: The rise of Rollups has brought the concept of modular blockchain. A mature public chain consists of three core elements: execution, settlement, and consensus & data availability. Modular blockchains focus on one or more of these parts and outsource the rest to other dedicated chains for higher scalability. Cosmos provides universal application functions through a modular SDK design. While each function can be independently run, combined and managed, it can also ensure liquidity through IBC protocol and value flow network cross-chain bridges, which is very consistent with the sewer model we discussed.

- Privacy security: The security of privacy is definitely one of the biggest gold mines of the Web3 era, which will elevate the social governance paradigm and democratic social experiment to another level. The existing major Layer1 public chains are upgrading to fill their privacy gaps. Some native public chains that support privacy smart contracts have languished in the last round of developer competition. In my opinion, the narrative cycle of the public chain powered by privacy computing is longer and more imaginative. In essence, the private computing public chain is a different application development path from Ethereum, which means that the private computing public chain has more possibilities of technological breakthrough and higher potential for an application explosion.

- Adaptation ability of hardware infrastructure: With the advent of the Web3 era, the public chain must meet the hardware challenge. Concentrating on the application layer of the public chain is indeed the key to win the user war in the short term. Although the capture of hardware value by most public chains is still focused on payment and mining, more hardware application scenarios will emerge with the maturity of data computing, storage, DID solutions and biometrics. Storage public chains have a natural advantage in supporting the underlying infrastructure of the hardware.

Seek the public chain that equalizes and financialises public interest

If we want to realize the vision of “blockchain connected sewer”, these are the key weights and measures to maximize the balance of the public chain triangle dilemma. The trade-off between scalability, decentralization and safety determines the longevity of a sewer. Currently, Ethereum is struggling with scalability and is seeking a shift to ETH2.0 PoS. However, ETH2.0 will be rolled out in several phases over the next 1 to 3 years. In short, ETH2.0 is a completely different system from Ethereum, and they will run in parallel for many years. But the uncertainty of this journey may allow other Layer1 public chain solutions to regain popularity among community users.

We continue to believe that the demand for financialised public chains will be great. We believe PipeFi has the elements needed to propel the public chain into its golden age. Centralized sewerage services that operate on a regional scale have long been seen as a public good, but have also led to economic savings and undisciplined capitalization. But in the Web 3.0 era, what we need is an autonomous, highly private blockchain network.

Global anonymity is the only truly strong security. The first thing average users and developers want to address is performance, followed by usability and finally, privacy. Perhaps the last darkness before the dawn of the Web3.0 era will be privacy. PipeFi’s pipeline theory re-examines the value of privacy on the basis of addressing public chain equality, which means that perhaps only global privacy protection on blockchain networks is the most effective.

Privacy is a key element in maximizing equality in the public interest. At present, public chain projects with PipeFi value are expected to achieve this.

By Kyle, Investment Manager@Bing Ventures