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AI systems are breaking an internet that was designed at human-scale — by making it cheaper than ever to coordinate, transact, and generate voice, video, and text that are increasingly indistinguishable from human activity. We’re already beset w
Fahad Saleh (University of Florida) provides an economic model of the interaction between a Layer-1 (L1) blockchain and an associated Layer-2 (L2), showing that, even when the L1 hosts value-generating decentralized applications (dApps), its onchain investment and cryptoasset market value can both converge to zero. These results arise because, when transaction activity migrates to L2, onchain L1 investment (e.g., liquidity provision) endogenously follows the transaction activity to L2. A decline in L1 onchain investment then leads to a decline in the L1 cryptoasset market value. Crucially, he finds that sufficient L1 development can overcome the described issue by ensuring that sufficient transaction activity remains on L1, thereby implying sufficient L1 onchain investment. Ultimately, the results establish that, even if L2s are intended as the primary vehicle for scaling, developers must nevertheless continue to improve the L1 to avoid an adverse outcome for the L1.
About the presenter
Fahad is the Emerson/Merrill Lynch Professor at the University of Florida. He is also Director of the Cryptoeconomics Initiative at Columbia University’s Center for Digital Finance and Technologies and a research fellow at the FinTech Initiative at Cornell University. He holds a PhD in Finance from New York University and MSc and BSc degrees in applied math from Columbia University and Cornell University respectively.
About a16z crypto research
a16z crypto research is a multidisciplinary lab that works closely with our portfolio companies and others toward solving the important problems in the space, and toward advancing the science and technology of the next generation of the internet.
More about us: a16z.com/2022/04/21/announcing-a16z-crypto-research
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