Layer-2 Ethereum Virtual Machine Platforms, and Decentralized Apps on them, Are Heating Up These Scaling Sidechains
xDAI DAO vs Other top DeFi Platforms

Layer-2 Ethereum Virtual Machine Platforms, and Decentralized Apps on them, Are Heating Up These Scaling Sidechains

By Rekt | Rekt Report | 9 Aug 2021


Increasingly, it’s becoming clear that community organization is as important as the technology that underlies a blockchain project. For blockchains using the Ethereum Virtual machine "EVM," effectively the same code and processes as the Ethereum mainnet, the question becomes how do you differentiate yourself between projects that have effectively the exact same technical architecture? 

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Projects in blockchain tech, specially the crypto sphere, that have fared the best are usually first movers and come to the table with something innovative and new that the community rallies behind. For layer 2 blockchains, built using the EVM, the technical architecture has been forked, so the question really becomes how does one platform differentiate itself from another most meaningfully? This is not an inconsequential question because the valuations of many of these blockchains like Polygon, xDAI, Binance Smart Chain, and a host of others are a byproduct of the intellectual pursuit to win the hearts and minds of savvy developers that have the requisite Solidity skills to build innovative decentralized applications on their blockchain. 

Most all of them can offer smart contract deployments and interactions through a wallet like Metamask in a inexpensive and seamless manner, but what can they deliver in terms of the community?

The much ballyhooed Binance Smart Chain, with the backing of Changpeng Zhao and the behemoth Binance exchange, has been getting quite a bit of traction by virtue of the visibility and interoperability with the popular Binance exchange and Trust wallet. Ease of use, as with all things in computer science and elsewhere, is a considerable consideration and people ask themselves why would I go onto another layer-2 blockchain if an easier one would suffice? While this visibility has made for quite a bit of excitement, with this visibility also comes additional problems. The gas fees of even this platform are starting to creep up a la Ethereum. While nowhere near those of the Ethereum mainnet, you're still pushing through transactions costing a few cent during peak times, and the disproportionate amount of scams or "rug pulls" by decentralized applications that have found a home on BSC has turned people off. It seems like the last few rug pulls, where people lose all of their cryptocurrency from a decentralized application, have almost all come from BSE, so those serious developers that enter the space typically have to shake off the question of whether this new project is trustworthy or a scam. If you are on Telegram or Discord, you are very likely inundated with hourly BSC scam projects messaging you relentlessly promising otherworldly returns without risk.

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Another Layer-2 blockchain, Polygon, has impressively been able to swiftly and effectively craft strategic partnerships with large projects. Typically, for top 250 market capitalization crypto projects, this takes weeks of negotiations and walking through the details with a fine-tooth comb, but the Polygon team has shown an ability to affectively manage these partnerships and gain visibility on some top decentralized finance platforms. This has materialized some serious traction and an impressive number of transactions done in a typical 24 hour span. That being said, most of the discussions I see on Twitter about Polygon focus on the price action and its utility appears to be more of a speculative tool outside of a few core the decentralized finance platforms.

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In my own blockchain journey, that began in 2014 and morphed into a full-time passion in 2017, I've found the most success and fulfillment surrounding myself with like-minded people that are as enthusiastic about the space, committed to learning code, and delivering value as meaningfully as possible. It's one thing to load up on a few thousand of a project's token, shill the the project in some congratulatory tweets over this course of a week, but another thing entirely to get your fingernails dirty with some Solidity code and craft something impressive for the community on a particular blockchain. I always look to the GitHub, or LinkedIn profiles, of developers that I respect and seek to mirror their dedication in my own career. With a shrewd eye on the ecosystem, I've seen a disproportional number head to the xDAI blockchain.

Founded by Igor Barinov, the technical lead for a well-regarded POA blockchain project, in 2018 at ETH Berlin, xDAI has quietly been keeping their head down, innovating with a sizable decentralized finance community of homespun projects that are materializing some very impressive results.

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While a great many projects, on other blockchains, simply fork existing successful projects on Ethereum and bring it to their blockchain and that's the extent of their innovation, when I see a project that meaningfully attempts to craft something new and deliver something that hasn't been done, either in the form of a new user interface or a novel functionality, then I take notice. They have a list of applications on the official xDAI website, with projects spanning the gamut from governance platforms making launching decentralized autonomous organizations seamless, and incredibly easy, to powerful decentralized finance applications that are bridging the gap between what traditional and decentralized finance can offer the community, to NFTs that are easy to mint on an accessible platforms, and further innovations that lived only in the minds of these developers a few hours before they were deployed. After as many years in the space as I've been occupying, it's this type of innovation and inspiration that is still electrifying and I feed off of it in my own pursuits to deliver value to the community. 

The xDAI ecosystem, as I mentioned earlier, is broad, but I think solid representative projects, that are our particular interest, are the 1Hive DAO and xDAI DAO

1Hive is an innovative blockchain studio that operates through working groups called "swarms," which brings together talented developers, enthusiasts, graphic designers, community organizers, support professionals, and reserves opportunities for blockchain enthusiasts of all stripes to deliver value to the community. Their discussions are done over DiscordDiscourse Forum, and Twitter, with the majority of the important discussions being done on the forum or Discord.

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On these platforms, people collaborate on issues related to improving existing projects or proposing new ones. This thoughtful exchange and back-and-forth is not just an intellectual exercise, but rather also has real financial implications. For those active users that are keeping the conversations or development flowing, the platform's HNY token is awarded through a process called SourceCred, helping to make members of the community feel as participants and, through these tokens, absolutely do have a meaningful stake in the project's success.

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I often do the weekly Discord call with project leadership and I marvel at the host of developers from all around the world, many of whom are doing full-time work just for this, and other, DAOs and are completely committed and serious about helping the project gain as much traction as swiftly as possible as the residue of their good works. Many of these platforms have the benefit of sensational coders that give generously of their time in a collaborative effort to ensure that the group continues to churn out quality code, but they also they do themselves great favor by securing the opportunity to profit from the token.

In the world of blockchain, valuations out are high and if there's a profit to be made in some recurring way on the blockchain, then there's also the ability to have the project exit and have one's representative tokens amounts to a sizable amount of value one could put away for retirement or be a cushion permitting them to, down the road, take on the work that they are passionate about, rather than one that just pays the bills. For many of these skillful coders, they've put in their 10,000 hours of training and on-the-job experience, but haven't been met with an abundance of local opportunities that one may become jaded from in Western Europe or California. Through this DAO governance model, extended to the entire internet-connected world, they are finally seeing the fruits of their labor in a way that can support their lifestyle, which can ignite a redoubling of their efforts to stay committed and further refine these finely sharpened talents.

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There's also an interesting phenomenon of projects acting as incubators expressly for the development and encouragement of a specific blockchain. An offshoot of this is a fund of fund, most common in the hedge fund world, that does due diligence on other funds. They are constantly on the lookout, much like a venture capitalist might be for an individual company or founder, for a talented fund and fund manager that is able to materialize market beating returns and then passing along that value to their investors. It's difficult to replicate success over and over, but for those that have had a track record of success, and continue to defy the odds and repeat that success in the face of different sets of market conditions, these individuals must be looked at especially closely when they commit to a new fund or project. Success often begets further success.

XDAI DAO isolates projects that are making a meaningful push into the space and provides baseline capital, technical expertise, and private equity know-how to help these very focused engineers be able to find clarity in the lifecycle of their project, at every step of the way, ensuring that the rudder of the organization doesn't run off-course. Loss of focus or direction has been the death knell for many projects that started out exceptionally strong and squandered a market-leading position by losing their singular focus and discipline.

Accelerators, like xDAI DAO, have done exceedingly well as a business model, from a return-on-investment standpoint, because when you can start an organization for next to nothing and help it grow, you'll be owning an asset with a multiple of whatever yearly income you can muster. That's the beauty of owning a business versus being employed by a business. When you own the project, and coupled profits, you now have a meaningful asset that investment managers would pay handsomely for. When you are paid yourself as the end of the funnel, you are due the salary shown on the W2 and that's the extend of it. So, as long as a project is judicious with its expenses, you're going to see a considerable multiple off whatever actual cash you put into a project. This happy phenomena can handily offset a whole host of bad projects that may have fizzled out for one reason or the other. Sometimes bad market conditions can thwart an ordinarily exciting enterprise.

As all organizations operate with imperfect information and must act despite at all. Being able to look at every conceivable scenario to best prepare to navigate the stormy seas of crypto and the blockchain is an imperative to traverse these frothy waters. Those that have been so bold and made it to the other side have been handsomely rewarded with a king's fortune. Based on what I've observed, if executives can embrace a historical perspective to the current situation and are able to be nimble and contextualize these new situations in the face of minute-by-minute scrutiny by Twitter trolls then the rewards are sizable.

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One of the positives of this great froth and instability are the opportunities for earning a profit in decentralized finance. When you "go long" Bitcoin your return is infinite, because you're buying an asset with an asset that could be anything above $0, but when "short" Bitcoin you know that the maximum that you're going to be able to profit is about $45,817, roughly the current price. For most crypto currencies, with possible exceptions into projects that have considerable inflationary minting models, the imbalance between the desire to go long versus go short tilts towards going long a project. The way that you can profit from this is simply too short, or lend out, a cryptocurrency so that if the crypto goes to zero then you're covered against the US dollar that were given when you lend it out, and that if that Bitcoin continues to go up to $100,000 then you will owe $55,000 on your short position, but you will have a $100,000 asset to keep you nicely collateralized. 

If you look at the biggest high-fliers in the blockchain space--FTX, Binance, and Gemini-- you're seeing that a lot of their profit is from the price speculation. The beauty of decentralized finance is that projects like Uniswap have made this profitability more widely possible. One of the reasons why RobinHood was so profitable is that they were lending out shares of GameStop, and other stocks, where there was an incredibly high thirst to borrow the shares to go short, or profit from when the stock goes down. While Vladimir Tenev, and the RobinHood team, was getting in upwards of 60% or more on an annual basis on all of the value of those shares held by their users, the actual holders of those shares were given nothing. The real push is for the communities in blockchain to distribute to a community as a whole and have everyone benefit over a few well-connected individuals. This egalitarian spirit is deeply ingrained in the decentralized autonomous organization movement that seeks to supplant horizontal organizations as the norm from hierarchical and return the power of a project to the community over a tiered organizational elite. 

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In the last few days, xDAI DAO has had projects that utilize NFTs to do crypto trading, typically requiring a sizable amount of technical understanding of exchange mechanics, and created perpetual funding liquidity pools that make complicated market-based process seamless and profitable for the individual user. 

Anyone that enjoys going to a dinner party and explaining blockchain topics in a convoluted way does a disservice to the ecosystem, because the growth of mass adoption and utilization by members of the public that are struggling to understand with they're seeing on CNBC and reading about in the Wall Street Journal necessitates a baseline level of understanding. If someone's having difficulty understanding what Bitcoin is then the prospect of trying to do a deep dive into Ethereum and its complexities is all the more daunting. So projects that streamline the process, with a pleasing user interface and non-technical guides, will be the winners of the day and will see the type of growth that by Binance, FTX, and present market winners are enjoying in spades.

If you're enthusiastic about the ecosystem, I would encourage you to check out 1Hive and xDAI DAO as means to getting a more thorough understanding and perhaps help position your own career trajectories or investment pursuits towards organizations innovating in a space that is still on the bleeding edge.

I caught up with one of the project leads for xDAI DAO to discuss the ecosystem and their organization's place within it.

xDAI DAO Logo: RxDAI

Q: Time for the hot seat, Scarlett. There are 8806 cryptocurrencies and tokens listed on CoinGecko.com. Why does your organization deliver value above and beyond that which is already available in the ecosystem?

A: xDAI DAO is a decentralized autonomous organization operating in support of the xDAI Layer-2 Ethereum Virtual Machine and supporting xDAI-specific platforms. We are an accelerator or incubator, of sorts, helping new projects to scale and scooping up a sizable chunk of the project's tokens to benefit from the decentralized application's traction. We provide technical assistance, capital infusion, and strategic assistance to help their projects materialize into something impressive, often beyond their expectations,

Q: What value does your organization have over a Pantera Capital or a large institutional crypto fund?

A: It takes a lot to move the needle for these organizations so they have to pick opportunities that have to scale to at least a certain size to be able to tick up the ROI at least a percentage point. We have the ability, and patience, to see through a project that is fledging and may occupy a use case that is modest in scope, but still important to have coverage on. Also, these organizations, with their sizable coffers, surprisingly often have scant due diligence professionals and, as a community, we have 550+ members of our DAO so we're able to do exhaustive research with a team community leaders that already have several years of experience in the space and can be savvy with their investment decision making on the fly, based on a wealth of these experiences.

Q: Who comprises your DAO's leadership team?

A: Members intimate with the founders of the xDAI chain, private equity professionals, Solidity developers, university instructors, and coders with decades of experience and a sharp eye for the swiftly changing ecosystem. Many are also active traders and come from the world of finance, bringing that passion for decentralized finance.

Q: What are the 3 most exciting aspects of your DAO?

A: 1) The RxDAI Liquidity Program:

We're bringing the centralization to complicated trading pools that profit from exceptionally low-risk trading strategies: cash-and-carry, futures/calendar squeezes, and token lending with perpetual futures coverage. Our native token, the RxDAI, was termed as such because we're a DAO based on the xDAI Reddit community, is a stablecoin pegged 100:1 to xDAI, such that 1 RxDAI is worth 0.01 xDAI, which, of course, is worth $1 USD, as a fiat peg to the United States dollar set by MakerDAO.

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2) We invest in quality projects and content

We isolate projects that seek to take an aggressive stab at an exciting use case and help them along, with investments of capital and expertise, to the extent that we can be helpful. For not a lot of resources, due to our coming in at the project's infancy, we help scale the projects and see tremendous token price appreciation in the process. We're also investing in content, in the form of written technical books, investigative journalism, and niche articles, which has been a satisfying exercise that offers a nice ROI and benefits the quality of writing that comes out of the blockchain space.

3) We're championing DeFi

We're investing in any ways that xDAI projects can embrace the wildly popular decentralized finance movement through staking, pools, or prediction market platforms. These projects are straight-forward from the standpoint that they can almost immediately earn a profit and accelerate the speed of their own growth by using these resources to scale.

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Q: How do people participate in your DAO?

A: They act as liquidity partners, by buying RxDAI or being airdropped it--as a reward for participating in the xDAI subreddit, and stay part of the conversation in the xDAI subreddit. The free-flow of ideas is the lifeblood of a vibrant DAO and these discussions are imperative to facilitate its growth.

Q: If a fund-of-funds manager approached you and said how can I make the highest return on my capital through my investment in your project, what would you tell them?

A: Acquire RxDAI in bulk and hold onto it. Our platform doesn't have a volatile token tied to the value of our project, rather, dividends are distributed proportionally to RxDAI holders. Presently, we're doing some very ambitious things and only have a few thousand dollars worth held in RxDAI held by the community, with the rest held in the DAO's treasury, so it's a prime time to get involved.

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Q: Of the DeFi projects you have your eye on, which do you think have the most potential to be transformative?

A: The Omen prediction markets platform because the applicability of categorical markets, with their Yes/No binary and set closing dates, eliminates the problems associated with Augur's "invalid markets" and closes the loop on problems experiences en masse by other platforms hanging their hat on their ability to deploy prediction markets. I see prediction markets being used to act as cryptocurrency options, predicting sporting events, and essentially every other bet, with the community ultimately determining the odds, as opposed to a bookie. We're doing some campaigns, with them, to build out their use case, creating options for smaller capitalization cryptocurrencies.

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Q: Why is it important to seek out small funds, such as yours, over going with a large and more established player?

A: With the large guys, they're coming in with billions staked or already poured into the token so even if you come in with 6-figures, it's going to be a drop in the bucket and your representative control or influence will be almost zero. The quality of these fund managers or blockchain experts is often high, but they're not 100x the quality of the people running growing funds. Oftentimes they just have a better ability to market or network, while the little guys are plugging away at earning handsome returns for their partners. Also, with a large pool, it's incredibly difficult to earn a high rate of return consistently. You're squeezing projects for a lot of resources to earn a few percentage points, and that's an exhausting exercise that is difficult to sustain. Best to pin-point a more nimble operation.

Q: How can new users deposit into xDAI DAO?

A: Just to streamline the process, we take Ethereum, or any EVM-platform token--xDAI, BSC, etc, and pay dividends, in USD-linked DAI to the depositing wallet address. For many, just operating their Metamask wallet is challenge enough so we're trying to facilitate mass adoption howsoever we can.

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Q: What would you tell someone that has zero understanding of blockchain tech at all about what xDAI DAO does?

A: We invest in financial and computer science-focused companies that seek to offer solutions to problems. Most of this problem solving can most effectively be done on a blockchain, an online accounting ledger, of sorts, that keeps both sides of a transaction honest by distributing the same, immutable information to a community of computers.

Q: What do you hope for the future of xDAI DAO?

A: We hope to grow in visibility and "total value locked" of our project, allowing us to make strategic partnerships, gain larger positions, and scale our operations faster. This growth will be to the benefit of the community of blockchain developers and enthusiast that comprise our DAO, hopefully displaying another visible example of how this governance model can work well.

Q: How can people follow you or get in touch with you?

A: I'm advisor@xDAIDAO.com@xDAIDAO on Twitter, or ScarlettBurgan on Reddit.

Q: Thanks for sitting down with the Altcoin Author Newsletter today, SB!

A: Much appreciated.

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Remember to listen to the audio version of the episode from last week's newsletter on YouTube or Spotify.

Check out my book DAO: the Time is Now, which discusses a dozen weeks of prior weeks newsletters, and contextualizes them in light of what's happened since!

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