Bear markets prioritize fundamentals while bull markets prioritize narratives. Despite being an oversimplification, this statement provides the underlying reasoning for how individuals behave in various market conditions. It holds true for the majority of financial markets, but cryptocurrency, which runs at a pace and acceleration 100 times more than any other recent or historical market, makes this point the clearest.

The crypto market is clearly in a bear phase in 2022, not just because most tokens are down 70–90% from their previous all-time highs, but also because investors in the market are now more focused on self-sustaining revenue, sound economics, and the need for crypto to address real-world issues than on hype-fueled ponzinomics. It's important to understand what precisely transpired during the last bull market enthusiasm even if the continuation of bull market narratives and bear market fundamentals is really nothing new - neither for crypto nor any other financial markets. This article will discuss some thoughts on the reflexive character of capital rotation games and the mostly unsustainable growth models used by blockchain startups in 2021.

The problem with Layer 1 blockchain

It is evident that one of the most pressing issues confronting the Layer 1s is blockchain scalability, which is a barrier to any future expansion that crypto may see. After all, "the internet of money should not cost five cents per transaction," as Vitalik still believes. With a throughput of 15 transactions per second with transaction costs ranging from $xx to $x,xxx is plainly unsuitable for the great majority of individuals.

While the Ethereum community first dunked on the Bitcoin community for their network's excessive transaction fees in 2017, the script has since been turned. As Ethereum became more unworkable for the public following DeFi summer 2020 and into early 2021, the issue of network congestion and high fees became obvious.

The above tweet nicely captures the basic emotions and disappointments that many people had with Ethereum in 2021. They were priced out and believed that the Ethereum community was more concerned with the ideas of decentralization, self-verification, and monetary premiums than with them. Depending on your point of view, this might be referred to as "loss of touch with reality" or "differing priorities."

In a perfect world, scaling a blockchain would be as simple as raising block size, and decreasing block time. Just speed up the blockchain and set the settings to the max; who knew it was that simple? Of fact, in practice, such an approach leads to centralization because of the higher hardware specifications to host a full node, which violates the blockchain security paradigm. Scaling blockchains without retaining the qualities that make them effective is a tough task.

How Ethereum planned to meet the mass demand

Ethereum's path to scalability is ever-changing. However, with execution sharding and Plasma removed from the roadmap in 2021, an all-in concentration on rollups was adopted to address the need for blockspace while retaining Ethereum's decentralization. Rollups decouple execution from consensus and data storage, allowing an existing layer-1 blockchain, such as Ethereum, to settle a larger volume of transactions while reducing the hardware requirements of maintaining a full node.

However, estimates of how long it would take for rollups to expand out and attain scale were significantly out of sync with the complexities of the situation at hand. This misalignment in timeframe messaging happened from both the teams building rollups and the Ethereum community at large. In fact, rollups were not ready to fulfill retail consumer demand in 2021. Even now, in mid-2022, rollups are not yet able to fulfill the degree of demand that comes with global size.

However, this explanation is so sophisticated that retail users don't care. Decentralization? Hardware requirements for a full node? Multi-year scaling plans?

Retail consumers in 2021 just desired less expensive and quicker transactions so they could continue to easily gamble with speculative tokens. It would cost a lot of money if this very genuine (at the time) market need wasn't met. Was the only option for these people to cease using blockchains and stand in line for Ethereum to scale? No, of course not; demand only needed to be temporarily offloaded.

The instant success scheme

What if scaling Ethereum wasn't necessary, and we didn't have to worry about "maintaining decentralization" at all? It would undoubtedly simplify the issue considerably. Additionally, all of Ethereum's code is open-source, the DeFi primitives have nearly all been created, and people are bidding on all of these essentially worthless governance tokens

The Layer 1s Rotation Cycle was created as a result. It was shockingly easy: just fork Ethereum's code, increase block size and speed, fork all of the essential DeFi dApps, pay users to use it, and voila! You have a cutting-edge blockchain that is more efficient than Ethereum while also being less expensive. If the time is right, you'll witness a capital inflow along with all the speculation that accompanies hyper-growth.

This strategy was used often since it was so straightforward and efficient. Retail users, venture capitals, and other market participants eagerly switched to the new chain each time a new deployment with a money printer appeared in order to receive the free money. Each chain often had a new trick up its sleeve, frequently in the guise of a novel story or a little technical advancement, but the underlying concept was the same.

This dynamic was advantageous for everyone involved during a crypto bull run frenzy. Retail users were once again allowed to interact with DeFi apps (and profit in the process), blockchain core developers were able to accelerate the adoption of their chain (and profit in the process), and venture capital was able to employ their assets (and profit in the process). You're right if you think that everyone making a profit and there being no losers was unsustainable. The L1 chain rotation thesis pushed the boundaries of crypto hyper-reflexivity. What rises must inevitably descend, but more on that later.

The cycle

Let's examine the procedures in order to comprehend how and why this blockchain growth plan was so successful. This explanation may have been used as a playbook if the market had still been in a bullish phase, but for the time being, it's important to consider these actions in the context of a post-mortem retrospective study.

Step 1: Fork a new blockchain and create a token

The simplest and most apparent step is to fork the Ethereum protocol's Go implementation, known as geth. Geth is not only free and open-source software but it has also been battle-tested during years of in-production use. Why recreate the wheel when you already have an underpaid development staff that has laid the groundwork?

Go Ethereum

Naturally, this new Geth deployment necessitates the creation of a native token that users can use to cover transaction fees and support block producers through block rewards. A native coin is also required to pay the money printer you'll ultimately switch on to attract users, as well as to sustain the core development team, who must be compensated for their efforts in forking Geth.

Thus, you cannot just fork Geth; instead, you must launch a token sale to allocate the initial native coin supply to yourself (for free), VC investors (100x cheaper than the public sale price), and possibly some users as well (whatever is left over). Regulators are often too preoccupied with virtue signaling about "investor protection" and probing around in genuine initiatives to pay close attention to you.

To be clear, there is nothing inherently wrong with forking free and open-source apps or launching a token sale; these are simply necessary steps in joining the layer 1s rotation cycle, which will hopefully speed up your blockchain's development and earn you, your investors, retail users, and everyone else profit.

Step 2: Tell everyone that you have speed and cost advantages

There's minimal need to preserve the block size and block time settings of Ethereum Mainnet after forking Geth. After all, the purpose of this new chain is to be less expensive and quicker than Ethereum. After you've thanked Elon for his unlimited blockchain scalability expertise, there are a few additional cool marketing strategies you can use.

When your new layer 1 is launched, the blocks and state trie will be empty. This means that transactions will be almost free (sub-cent) and will be added to the blockchain with the following block (confirmations in seconds). You may now create some comparing charts between your new chain and Ethereum, demonstrating that anyone who continues to use Ethereum must be a masochist.

Never mind that state bloat will ultimately bring your chain to a standstill if not controlled, or that demand for blockspace will soon exceed supply (which is when the fee market for transactions kicks in) (. Although they are issues for the future, it is currently true that your blockchain is speedier and less expensive than Ethereum.

Similarly, the hardware specifications for operating a full node will be minimal, much lower than Ethereum, because blocks and the state trie are empty. This will undoubtedly alter over time as blocks are filled and the state trie expands faster than Ethereum, but for now, it can be said that scalability has been achieved without sacrificing decentralization and self-verification.

Naturally, some individuals may want to point out your shortcuts for improving throughput, but since they are obviously NGMI, you can easily dismiss them as "maximalists" or ignore them. If it doesn't work, more sophisticated strategies will be required. At this point, marketing resembles gaslighting more and Twitter turns into the main arena of conflict.

Choose and claim ownership of a catchphrase like "Consensus is the bottleneck, scalability is a minor engineering concern." Simply label people who do not share your viewpoint "poor" and that "your size is not size," or say that "decentralization is the expense to demolish all copies." For good measure, add in "The future is multi-chain."

Congratulations, you've just found a zero-tradeoff solution to the blockchain scalability issue! A community of financially motivated token holders that will repeat your claims and protect your blockchain against FUDsters at all costs exists because you developed and distributed a token. Don't forget to emphasize how pricey Ethereum is on a frequent basis.

Step 3: Deploy some dApps

Although you've undoubtedly developed a small community by this time, your new blockchain doesn't yet provide many activities. Retail consumers demand tools they can use to speculate on tokens, which necessitates the usage of fundamental DeFi projects like decentralized exchanges, overcollateralized stablecoins, derivative platforms, and so on. Once more, focus on Ethereum, which has a burgeoning ecosystem of open-source, free smart contracts that are simple to fork and implement on your new chain.

You'll need other teams to deploy these dApps since a blockchain core development team distributing its own forked dApps to its own forked blockchain doesn't seem like much of an ecosystem. One of the two following methods is a simple approach to accomplish this.

The first is giving rewards to intrepid developers who have the creative concept to build "The [XYZ] dApp of the chain [ABC]".

forked dApps

Forked Dapps

To be fair, forking and upgrading an open-source protocol can in fact advance the field by pushing the envelope of what is conceivable. However, the concept is frequently as straightforward as forking a known protocol, applying it to a new chain, and then referring to it as a completely new item because of the altered branding.

Although the second strategy is a little more subtle, it often saves time and money. Hire a dev team to act as the founders and maintainers of those dApps, then fork them yourself. If there are no developers available to play the part, take on the position yourself but use a false name so that no one can figure out who you are.

The end result and objective are the same: to replicate the Ethereum ecosystem on your blockchain while using brand-new dApp tokens that ordinary users may speculate on. Thus, statements like "If this new dApp token achieves merely [x]% of the market capitalization of its Ethereum counterpart..." are possible.

Step 4: Sell your user a bridge

The wonderful thing about forking geth is that your blockchain is running the EVM, therefore all of the tools created for Solidity and Ethereum smart contracts are compatible with your blockchain. This is significant because it implies that Metamask, which your target audience has already downloaded, will function just as it does on Ethereum with the addition of a single RPC connection. Ethereum (but cheaper and faster).

Ensure your other dependencies are under control as well, though. You'll want a block explorer, so either clone an existing one for free using Etherscan or fork an existing one. Get in touch with Chainlink because your forked DeFi apps will require oracles. Work with exchanges to be listed if you want your currency to have liquidity and a fiat on-ramp. You desire an Ethereum-like experience (but cheaper and faster).

Last but not least, you need a means for users of current ecosystems like Ethereum to transition to your new chain. A segregated garden is unpleasant for everyone and severely restricts your ability to flourish. As a result, you must establish a cross-chain token bridge, which will be a multi-sig run by a select group of reliable validators. Given that more than $1 billion worth of cryptocurrency has been stolen via bridges in the last year alone, cross-chain bridges can be challenging to implement correctly.

Simply said, deploying a cross-chain bridge is a risk that must be taken in order to engage the chain rotation cycle. Once the bridge has been installed, be sure to inform consumers that it is the easiest and most secure bridge they have ever used.

Step 5: Make profits

By this time, you have forked (made a new blockchain), and you have persuaded some community members to endorse your claim that your blockchain is quicker and less expensive than Ethereum. But why should users abandon their current use of other alt-L1 blockchains that are "cheaper and quicker than Ethereum"? The liquidity, users, traction, and mindshare of your blockchain will probably be lower than those of existing systems.

The L1 chain rotation thesis' essential component is this making money. Create, promote, and implement a large-scale token subsidy scheme that allows users to profit from yield farming by simply investing money in your blockchain's dApp ecosystem.

These token subsidies can come in the form of governance tokens issued by the dApps themselves, the chain's native coin (of which you coined yourself a part of the quantity designated for this purpose), or both.

The tokens used for subsidizing prizes will inevitably have a price above zero, even on day one, which is enough to start the subsequent virtuous loop during a bull market when retail investors would speculate on everything that moves. Give the subsidy program a memorable name, emphasizing how it will foster ecosystem growth and how this program will facilitate that growth.

Step 6: Watch the TVL grow

The "yield" provided by dApps on your blockchain may appear rather enticing when token subsidies are used. The ROI on depositing tokens into a contract that does nothing will increase, as will lending rates on money markets, returns on providing liquidity in DEXs, and ROI on putting tokens into contracts that do something will all increase. The "yield" will keep flowing as long as the money printer is still printing tokens and people are ready to buy them. However, the majority of people don't inquire as to the source of the yield, and even if they did, it wouldn't matter because the "yield" would still remain.

Retail investors and mercenary capital will be drawn to utilize your cross-chain bridge to invest their assets into your blockchain ecosystem as a result of the enhanced "yield" from the token subsidy scheme. The Total Value Locked (TVL) of your blockchain and its dApps will rise as a consequence of this capital investment from yield-chasing investors, which is an important indicator that informs users and investors that your blockchain is strong and expanding. TVL will be used as evidence that the "fundamentals" of your blockchain are growing.

This gain in TVL will undoubtedly be thrilling, and now is the moment to publicize your achievements. Multi-channel marketing efforts, promoted tweets, and paid media pieces are the gasoline that will propel this virtuous cycle further. You won't be alone either, as your core team, VC investors, token holders, dApp dev teams (if any), and KOLs will all be touting how fantastic the growth of this new chain is.

There's no reason to stop at TVL, as a slew of other measures will rise as users seek subsidized yields. Active address count, daily txns count, protocol income, market cap, and pretty much every other measure that gains from subsidized yields may be pushed as proof that your layer 1 is the future.

The one indicator you don't want to emphasize is the amount of money spent on token subsidies or the accompanying inflation rate. The large figure was remarkable at the time of the announcement, but following deployment, you should concentrate on boosting yield, TVL, and growth. The intention is to generate FOMO energy. If you haven't deployed your money to this new chain and aren't gambling on these hot new tokens, you're missing out.

All chain TVL

All chain TVL. Source: Defi Llama

Step 7: Enjoy the speculation increase

This is the point at which things really begin to pick up speed. The retail masses will notice this promotional campaign on their social media timeline and feel compelled to participate; otherwise, consider the opportunity cost! The increasing TVL and other growth indicators will appear too powerful to ignore. As a result, retailers will see these tokens to be cheap and will begin to gamble and bid up their value. The token's inflation rate, lack of profitability, or unsustainable economics are unimportant; the TVL is rising, which is a positive thing.

People that speculate on tokens not only protect but actively promote their investment, pushing the cycle even faster through word-of-mouth marketing. Anyone who calls out the cycle as an unsustainable hype cycle is simply fudding since they missed out and did not make as much money as everyone else. The market has already spoken, and these worthless governance tokens are becoming increasingly valuable as their price rises. Look at the TVL increase instead of the circular logic!

The flywheel of the Layer 1 rotation cycle is now fully operational. Due to market speculation, when the cost of a token used to subsidize yield grows in price, the rate at which users get subsidized yield likewise rises. These higher yields encourage investors to invest even more money in your dApp ecosystem, which boosts key growth indicators like TVL. These growth indicators may be shared on social media, which encourages more trading in those tokens, increases yield, raises TVL, and so on, accelerating the cycle.

Step 8: Let the problems emerge

The underlying blockchain eventually reaches its breaking point. Blocks start to get full, which raises transaction costs and lengthens confirmation times. Your chain was intended to fix this exact issue, yet it did no good! Fortunately, you can just put the problem off by raising the blocksize. Yes, this increases the amount of hardware needed to run a complete node, and yes, this is unsustainable because ultimately, disk IO will get so overloaded that even the most powerful server farm nodes will lose their ability to maintain synchronization with the tip of the chain.

But don't worry, every blockchain like your experiences "growing pains" from time to time. It turns out that scaling a blockchain is a complex issue with many moving parts. It always has been, but you now have to persuade your audience of this as well as they probably don't believe you have solved anything. It's time to change course.

Step 9: Launch sidechains

It would be a pity to just let the cycle stop like that because it has been so profitable thus far. Thankfully, you are now an interoperability blockchain, so you don't have to. Your blockchain is no longer a single chain; rather, it has evolved into an ecosystem of sidechains connected by a core hub chain.

However, because of the bad connotation associated with inadequate network security, you cannot refer to them as sidechains. The important thing is that you're going to tackle scalability by expanding horizontally, therefore the name doesn't really matter. Although the security and decentralization of these new chains won't be as high as those of the original when has it mattered in their success up to this point?

The flywheel effect rather than the TPS is what you're aiming to scale. A new sidechain involves a new token that can be traded, a new decentralized application (dApp) that can be funded with tokens, and a new blockchain with blank blocks and state that has to be filled in. These sidechains will eventually get crowded, just like the initial blockchain deployment did, but fortunately, you already found a solution to that. Just start a new sidechain.

Step 10: Move to the next cycle

The game of musical chairs is over when there are more sellers than buyers, which might occur for a variety of reasons. The flywheel has started to turn backward. The returns start to decline as the cost of the token used to fund them does as well. People withdraw their cash when yields decline for a variety of reasons, including to increase yield in another blockchain ecosystem or just because the risk is no longer justifiable given the declining return.

As a result, the always crucial fundamental indicators like TVL decline, which lessens the appeal of the subsidy token as an investment. The fundamentals have changed, which makes people who are speculating on the token more pessimistic and causes them to sell it. As a result, yields further decline, which leads to more capital flight, which leads to another cycle.

This isn't to say that your blockchain and ecosystem are dead; rather, it just means that a lot of venture capitalists and retail investors are moving on to other opportunities. The only users remaining are those who have really benefited from your blockchain ecosystem, believe the level of return provided is still adequate, or have merely joined the community. Even in extreme hyperinflation situations, tokens never actually reach 0, therefore the ecosystem will always be supported by the subsidy.

What, however, causes the first shift to more sellers than buyers? Most frequently, a brand-new, flashy blockchain has emerged that promises a better overall story, reduced transaction costs, faster transaction speeds, and/or greater total return. This blockchain will undoubtedly encounter all of the same problems as yours, but it doesn't matter since they'll let people know that they're quicker and less expensive than your blockchain.

The layer 1 rotation cycle continues in this manner.

Conclusion

The L1 chain rotation concept and the NFT craze dominated cryptocurrency in 2021. Nothing draws the attention of capital holders more than the possibility of making money, whether through speculative NFT that can be resold at a greater price or by subsidized DeFi yields on a fresh blockchain fork. When money flows freely, projects must compete on the basis of attractiveness.

While this article may appear to be a negative perspective on layer 1 blockchains, the growth strategies we detailed above were simply the natural path to pursue given that this strategy was actively rewarded by the market in terms of both interest and capital allocation. It's evident that not every blockchain is a blatantly unoriginal fork designed to make money, as many blockchains have genuine redeeming traits and distinct value propositions that propel the industry forward as a whole. This article is not intended to criticize individual blockchain ecosystems, but rather to illustrate the capital rotation games that the crypto industry as a whole not only tolerated but actively promoted.

Given current market conditions, this old strategy no longer works as effectively as it once did. Growth narratives are now expected to be accompanied by good economics and genuine defensive moats. Let's hope that by the time the next bull cycle arrives, whatever that may be, we have all learned our lesson about sustainability.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

Layer 1s rotation cycle breakdown